How To Start A Product Company Out Of A Services Company

8 mins read

One of the best ways to create an income as an entrepreneur is to provide consulting services to clients at some intrinsic level. There’s volumes of philosophy about how to make that kind of company a success, the least of which is how to package the knowledge and service delivery in a scalable way.

A services firm is one of the best lab environments around to start a product company. In fact, being a consultant puts you directly into the problem-solution scenario for a specific kind of company… back to the phrase I use over and over, “What specific problem are you solving for what specific person?”

The more narrow the focus of answer, the more likely you come to being able to “productize” your service offering.

However, a services firm can also be the kiss of death for any and all product ideas – no matter how good or in-demand.

So here’s a few things to take into consideration when developing a product as a consulting services group.

Build Strong Walls Between Product and Services

First, when you start a product company out of a services company, you’ve got to segregate the consulting services efforts away from the product itself. It sounds like simple, common sense – but it’s actually very complex.

When you start a product company, it really should be a completely separate legal entity with discreet accounting, employees, and so on.

While facilities and equipment assets might be shared, there really must be a distinct accounting for costing – which translates into things like paid-in capital shareholder equity for valuation purposes.

Once the value proposition is really defined and the product itself packaged in some repeatable manner, there must be a clear understanding of the difference between the consulting services necessary to identify the opportunity to sell the product – and actually selling the product itself.

The product should really be packaged in such a way that enables its sale without the service offering.

Don’t Compete With Your Reseller Channels

When you start a product company, the brands must also be distinct and separate because a product’s success relies upon widening promotion and distribution channels.

In order to attract and develop reseller channels and partners, it must be understood the competitive nature of the other resellers who will invariably be providing similar consulting services which compete with root services brand.

Nobody will resell any product when competing against the product OEM who is also building a competing service brand.

Establish Highly Defined Customer Acquisition Processes

Probably one of the most challenging differences between consulting services and product distribution is the development of a repeatable customer acquisition process.

Marketing a product is considerably different than marketing services. Selling a product is also just as radically different on the customer engagement and transaction end.

Most consulting services companies don’t have as well defined customer acquisition process, as they tend to “reinvent the wheel” with every new client.

Successful consulting service sales rely upon the expertise and reputation of the principles of the firm – meaning most of the sales involve the subject matter experts as a “consultative close”.

Successful efforts to start a product company rely upon a tightly defined marketing funnel with a highly repeatable, scalable transaction process. It’s a “sell em’ like hotcakes” approach vs. the “let’s date for a while before we get married so you’re comfortable with our methodology” approach. Very different mindsets, and very different sales process calendars.

It’s also important to recognize a product company’s core competency as marketing and sales focused vs. engineering focused.

In a services company, the combined skills matrix of the consultants represents the domains of expertise of the firm itself.

In a product company, there’s also somewhat of a distinction between being engineering-led vs. marketing-led.

Recognizing that core competency and building the right kind of business model early on in the development of the product group is an essential requirement.

Thanks To The Accountants, Services Will Cannibalize Product Development Resources

All startups present their own unique challenges – and especially so when you start a product company out of a services company. There exists a polar opposition of financial mindsets between the two kinds of business models.

In a services company, profitability comes from the labor arbitrage of cost of resources vs. the price a client is paying for the service or solution.

However, a product company must apply labor against the development and support of the product as a complete overhead item BEFORE REVENUE CAN BE REALIZED (the product must exist before it can be installed or used by a customer… which sort of impacts sales revenue).

When applying “billable resources” of a services company to product development and support, there’s always a dispute between the product team (who must produce and deliver the product before revenue can be realized) and the services team (who can only make money when people are billing against a project).

With a services company driving the product development side, there’s a tendency for the line of separation to not be as clear or true as needed to meet the product development and support objectives.

Resources keep getting pulled away from the product side to bill for short-term cash flow, which kicks the product development timeline further down the road. As with all technology, the time for any journey on any road is finite because the technology opportunity only exists for a short period of time.

Divide and Conquer

A management team must identify a strong path that allows the separation between the services and product groups, while getting the product to market and self-sustainable through additional investment rounds or bootstrapped, organic sales. If that can’t happen, it’s generally better to not even start – no matter how great of a perceived opportunity exists for the product.

And I quote the legendary rock bard, Freddie Mercury…

“Don’t do it… don’t do it… DON’T TRY SUICIDE NOBODY’S WORTH IT!!”

Are YOU trying to start a product company out of an existing consulting services company? What’s your own experience?

 

Michael Hiles

CEO 10XTS, INTJ, chaotic good, PDP/11 in '79 (THAT kid), info architect, Milton Friedman, data science, semantics, epistemology, coffee snob, OG hip hop

Previous Story

10 Marketing Rules for Business Leadership

Next Story

Become A Super Connector And Launch Your Sales Into Overdrive

Latest from Michael Hiles