Monetizing Service Provider Platforms: Holy Grail or a Case of Chasing a Chimera

It has been nearly two decades since I first started observing the technology industry as a bright-eyed and bushy-tailed young analyst. The one thing that has stayed constant in these years has been the service providers’ quest to bring nonlinearity to their revenues. Providers understand that hiring young engineers and staffing them on repeatable client projects quickly can be profitable, but costs are increasing and margins are shrinking. At that time, nonlinear revenue streams, which keep the costs stable even as revenue grows rapidly, will protect the operating margin of the provider and enable it to move to a new trajectory, as highlighted three years ago in our research byte – Leading with Products: The Next Stage in the Evolution of IT Service Providers.

The holy grail for this nonlinearity has always been having a set of licensed software products. Leaders in service provider firms have looked on wistfully as product companies deliver stellar results quarter over quarter with exceptional margins. They then go on the quest to see how they can also build some product/platform revenue streams.

I have seen this story play out quite a few times at different service providers:

• • While executing a client delivery, a smart delivery manager identifies and automates a repeatable set of actions.
  • This automated set of actions is then shared with other delivery teams, and very soon, it is pulled aside into a solution accelerator.
  • The solution accelerator matures further, its functionality expands, and more people within the provider are trained on it. It starts appearing in the firm’s RFP responses and presentations to prospects.
  • The firm’s leadership identifies this accelerator as a good candidate to convert into an external product in its quest for nonlinear revenue. The accelerator is branded as a product. There might also be a launch event and press release.
  • And then the client push-back begins against any effort by the provider to directly ask for a license fee. It might happen with a few first-time clients, but large, long-standing clients invariably do not change their commercial arrangements with their service providers. The reason being it would be too complicated to get internal approvals to move to a license plus service pricing model. Provider account executives and BU heads also develop cold feet when they see perceived risk to their ongoing client revenue. Thus, the product gets bundled into delivery, with monetization coming in the form of slightly increased rates and better productivity. This is the “soft monetization” stage; most provider products stay here.

Of course, I am generalizing. In fact, there is one category of provider products/platforms that transcended the soft monetization stage and reached the nirvana of product revenue. These products, then, generally morph into separate subsidiary companies that operate differently from the parent services company.

Service Provider Product/Platform Categories

Let’s look at the three main categories of service provider products/platforms:

i. Horizontal platforms: These are products and platforms that focus on broad-based processes and technologies, typically around infrastructure and application management. These can be platforms for application monitoring, automation, cloud migration, cloud optimization, cybersecurity, data management, and so on. Some examples include TCS ignio™, MasterCraft, Infosys Nia, IBM watsonx™, Capgemini ADMnext, Genpact Cora, and Coforge Quasar.

ii. Industry-specific platforms: These products and platforms focus on the core business processes in an industry; for example, TCS BaNCS™, Infosys Finacle, Accenture Life Insurance & Annuity Platform (ALIP), Capgemini’s Retail Foundry, Cognizant TriZetto® CareAdvance®, Oracle FLEXCUBE, and DXC Assure.

iii. Program and change management platforms: This is a relatively new category of products/platforms being introduced in the market, especially from consulting firms now foraying into system integration work. These non-technical products/platforms focus on the tactical processes associated with any large transformation, such as change management, regulatory and audit, ESG reporting, and so on. Some examples include McKinsey Wave, EY Canvas, KPMG Clara, and IBM Engineering Workflow Management.

The monetization approach and success vary greatly among these three categories.

The Monetization Conundrum

The horizontal platforms mostly follow the path mentioned earlier in this paper. There are, of course, some exceptions where the product reaches the direct license revenue stage. Some examples that come to mind are Infosys’ EdgeVerve and HCLTech’s suite of products acquired from IBM. Most platforms contribute to soft monetization and help the service provider in the following ways:

• • Increase client stickiness: Once a product enters an enterprise’s business-as-usual workflow, it is extremely difficult to replace it without significant effort and cost for employee retraining. In fact, this reluctance to change to a different product has been a common phenomenon in all our change management projects across client sizes, industries, and geographies.
  • Improve rates and margins: This is the fundamental tenet of product monetization as the same product can be implemented at multiple client sites with nearly zero incremental cost of product development.
  • Help move toward more outcomes/output pricing models: Platforms help increase the acceptance of the definitions of outcomes and outputs by enterprises and their outsourcing partners. This is the first step, and usually the most contentious one, when nonlinear pricing models are discussed between both parties.

For industry-specific platforms, the monetization journey is typically more direct. These platforms compete head-on with established core process platforms. They are pitched and priced as license offerings. Typically, providers win deals with existing customers because they understand the enterprise’s processes, can customize the product for the client (more than the established product companies), and present a cost advantage. As these products see market success, they are generally converted into separate legal entities with dedicated teams for sales and product development. At its core, a product company’s DNA differs from that of a services company, and the provider leaders realize this and separate the entity to preserve its success.

Program and change management platforms provide an interesting hybrid monetization approach. Monetization strategies for these platforms include subscriptions or integration into broader consulting service packages, offering both direct and indirect revenue streams. These platforms are still emerging. Some niche ones, such as Envizi (acquired by IBM), which focuses on ESG reporting, have seen good direct-license traction. Other broader platforms like McKinsey’s Wave, which is a program management platform, have seen more success as part of a consulting engagement. Thus, at this stage of evolution, it is better to look at the monetization approaches for platforms in this category individually than as a one-size-fits-all approach.

Should Service Providers Continue to Invest in Products/Platforms?

The quest for nonlinear revenue for service providers is important and critical. Most service providers struggle to clearly articulate their differentiation from other service providers. This is becoming even more pronounced in the era of generative AI, where it has become even easier to automate noncore functions that form a big part of provider revenues. Providers need a moat to protect their business and ensure enterprises cannot switch service providers in an ever-downward spiral of price reduction.

Products and platforms, even if they only contribute to soft monetization, are critical to ensuring clients stay with a provider. Once a client gets used to working on or using outputs from a particular system, there is a natural inertia against moving away from the system. This is where the platforms play a significant role.

Service provider differentiation when approaching a new prospective client is very real and is often the first question that enterprise leaders ask us when they are beginning to choose a provider to outsource to. At that point, the platforms the provider has developed and can include in the proposed solution often play a big role in the provider’s inclusion in the consideration set.

Thus, it is imperative to assess the success of a platform development strategy not only in terms of direct license monetization but also as a means of differentiation and client retention.

By Swapnil Bhatnagar, Partner, and Vishal Garg, Lead Analyst, Avasant Research