Business model transformation — from services to products

Case of software development companies — but can be applied to any company out there

One of the leading software development companies from Switzerland struggled with transforming its business model from services to products for more than a decade. During the period they launched more than 10 different own products before one of those products finally started to show traction and before the company was able to start benefitting from its business model transformation.

Another Swiss software development company started with transformation efforts already 15 years ago, but to this date it still generates the vast majority of its revenues with services and not with its products.

Transformation is hard

Their stories are not unique. Services driven companies find it increasingly hard to transform to more scalable products driven business model.\

In another example, a software development company from UK launched more than 5 different products during a period of 7 years, but in the end gave up their transformation intention. The interesting thing is that during the period the same company helped several of their customers successfully launch couple dozen different products.

Types of software development companies

In order to better understand, how to approach transformation of a company from services to products, you need to be aware, that there are only 2 types of software development companies:

  • The first type has a services business model and generates vast majority of their revenues with custom software development services, which means that their customers tell them, what they want developed — and they deliver the respective solutions to their customers
  • The second type has a mixed business model — part of revenues comes from custom software development services (as described above) and the other part of revenues comes from software products that the company develops and sells itself
  • You would probably expect that a third type of a software development company should be mentioned — namely the one that generates vast majority of their revenues with products they developed — but you need to understand, that such a company is not active anymore in the software development industry as such, but rather in the respective industry the company’s products are generating revenues in

The above is important, because it helps to indicate how to transform your company from services driven company to product driven company.

Business models are fundamentally different

Here, I need to explain that based on experiences I gained from leading various companies in software development industry and in other industries, I have learned that you can only transform from one business model like services to another like products, if you realize that they are not the same and they need to be set up separately. Although they use similar resources, their approaches are fundamentally different.

I can provide an example of the above with a software development company from Slovenia, which started to develop own products internally. When they saw, they are not successful at internal development of products, they began to spin out individual own products as separate companies. This enabled them the necessary separation and helped them successfully launch several own products.

Blueprint for business model transformation

While complete separation of activities does make sense in certain cases, I do not believe you always need to go down that path. Based on decades of my own experiences and based on various examples I was able to learn from, I can recommend using the following blueprint for such business transformation:

  • Products are separate businesses — you need to treat them as such, even though they can be organized as part of your company
  • Keep services focus within the services part of the company — it is hard to change company’s culture
  • Services part of the company can support products — just make sure this is done with at arms’ length principle
  • Firmly dedicate resources both to products as well as to services — do not optimize for short-term gain, unless your company’s survival depends on it
  • Enable individuals to transition between the “bubbles”, between products and services — this can increase attractiveness of working for your company
  • Do not underestimate properly setup marketing and sales — the right marketing and sales organization can support both products as well as services and can decisively enable the transformation of the company

I also need to add, that the above blueprint is not valid only for companies in the SW industry. Services vs. products business model decision is not limited to SW development but is part of strategic business decisions in practically every industry. And the above guidelines help to implement transformation from services to products in almost any company and in almost any industry.