The Rise of Technology-Enabled Services
It's already here and accelerating
Services are a huge part of the economy. According to Deloitte, in the US in 2017, value-added in the services-producing industries accounted for 78.9% of total value-added, amounting to US$13.1 trillion, and 86.3% of total private employment, representing 124 million employees. These service activities are wide-ranging, including everything from education and health care services to professional business services such as lawyers, accountants, management consultants, implementation services, ad agencies, and business intelligence. As you can see below, there annual revenue and number of employees is significant.
Over the last ten years, software-as-a-service has been automating, digitizing, and optimizing some of the most mundane and painful corporate tasks. With the rise of SaaS and the dominance of technology companies, many have predicted professional services firms' demise. But that has not played out. Many services firms have thrived as the leading firms have evolved, and the markets have grown.
What is Technology-Enabled Services (TES)?
The definition of TES is amorphous. Emergence Capital wrote in 2011 an article titled What the heck is TES? They defined TES are information service offerings that technology companies develop and operate on behalf of their customers. Index Ventures in 2020 defined TES differently: Companies offering tech-enabled services bundle software and humans to provide "superhumans-as-a-service" as a turnkey solution.
The confusion arises because, on the spectrum between pure services and pure software, there is a lot in the messy middle. At times, some so-called technology companies look a lot more like services companies than they would like the public markets to believe, and sometimes services companies use and sell a lot more technology than many want to believe.
My view is the test of a software product should be how autonomous it is without the value devising from human use. It's not complicated, but the deeper the tools are in the stack's backend, the more they are pure technology. The more the software requires a skilled and trained operator to extract value continuously, the more the opportunity for technology-enabled services.
Examples of successful technology-enabled services:
Palantir. The company has a strong technical component, but also sales require heavy enablement by a front-line, client-facing service workforce.
Slalomstarted as a Tableau implementation partner and now bills itself as a data and strategy firm. It's an example of a symbiotic relationship between a technology company and its implementation partner.
Causal, a low-code tool for financial modeling, has a CFO-as-a-service line. Why? Because there is still a lot of judgment needed to get the most value out of the software.
Technology-enabled services in education is a huge opportunity that few have gotten right. Tutoring is traditionally a one-to-one, face-to-face relationship, but the most profitable tutors will be those who leverage the smartest, most dynamic learning management platforms to increase their value to students and manage their time efficiently. Similar to the opportunity for individual tutors, virtually learning software done well allows teachers to minimize administrative tasks and focus on mentoring and inspiring, the most productive part of their jobs. I know the CEO of one stealth company who understands this well.
The inflection point:
We've arrived at the inflection point, which seems more gradual than dramatic. As more and more no-code and low-code products become more ubiquitous, more digital natives reach the workplace, and software has actual, functional AI, the necessity for technology enablement will become more acute.
What does it mean for evaluating businesses?
The key to evaluating businesses that have a TES component is understanding where cost for the labor sits and how it is compensated and incentivized. I see four models for TES:
Large services firms with informal technology partnerships E.g., Slalom
Large services firms with formal and exclusive partnerships or proprietary technology. e.g., Palantir
Freelance or solo-practitioners with deep domain expertise using the best tools available
Technology firms with in-house services. Sometimes these services are embedded in sales and customer success. One hypothesis I have is that sometimes unprofitable SaaS companies embed services in their sales cost lines instead of including them in COGS. The use of stock-based compensation that is not expensed as a cost also makes the cost of labor hidden.
No matter how you cut it, there will be more merging of SaaS and professional services. But there are many open questions on what models will prove dominant. The SaaS or the Service? Who owns the relationship with the payer/customer? Who has the most competition? Which product or service is a commodity? The most likely outcome is that there will be a mix.
The critical pieces for technology-enabled services to get right.
Value-based pricing vs. hourly costing. Trading time for money is classic professional services. The best TES should be outcome-focused and priced for the results delivered.
Differentiation on culture. Culture eats strategy for breakfast. For firms that hire and train staff to perform services, corporate culture is everything. Cultures that promote continuous learning, apprenticeship-models, and constructive feedback will thrive. Those mired in petty politics without an outcome orientation for clients will struggle to prove enduring value.
Deep specialization. There is always a place for people and firms that are absolutely the best at what they do. Technology, as an accelerant, makes specialization more vital as the deep domain experts will be at the forefront of the technological development in their fields.
Know your business and match your founder and capital structure accordingly. The technology founder used to leading with the power of a software product is not the ideal operator for TES opportunities. You need to manage your talent and cost structure in different ways. Some of the companies mentioned in the Index article have already disbanded, like Atrium, the YC-backed company hoping to reinvent legal services.
When will the future arrive?
Like most things, it's both already here and will take longer than we expect. But what's obvious is that the most profitable, most enduring services will need to be enabled by the best technology.