Rating PS Attach Rate

Last week, I again found myself discussing PS attach rates. Unfortunately, the conversation didn’t move beyond the basic observation: “Companies X, Y, and Z have an attach rate of a%, while ours is b%.” The truth is, even when comparing companies in a similar market space, you cannot accurately compare PS attach rates without taking other factors into consideration.

Definition

PS attach rate in the enterprise software business typically refers to the ratio of professional services a software company sells, compared to licenses.

PS attach rate is usually defined as follows:

PS Attach Rate (%) = Total PS Revenue / Total License Revenue * 100

In other words, If a company has $1b in software revenue and $150 million in professional services revenue in a given period, the PS attach rate would be 15%.

This is the most common definition because the revenue figures are readily available, making the calculation easy for any company. However, the incorrect assumption is that this metric is comparable across different companies.

What does this metric tell us?

What does a company’s PS attach rate tell us? Generally, the metric provides insight into the following:

1. Customer Success and Retention: A higher attach rate suggests that professional services are critical for successful customer adoption, which often correlates with lower customer churn and higher satisfaction.
2. Product Ease of Use: A higher rate can indicate that the product requires significant services during implementation.
3. Partner Ecosystem: A lower rate may suggest the company has a mature partner base that provides these services.

From an investor or C-level perspective, a high PS attach rate can be seen as a sign that more effort is required to ensure customer and product success, and that a robust partner ecosystem may be lacking. For this reason, a higher PS attach rate can often negatively impact a company’s financial valuation.

IS IT THAT SIMPLE THOUGH?

Adding some more context

Here are some key context items when evaluation PS attach rates:

• Company maturity: As your company and product mature, PS attach rate will typically drop.
• Other financial metrics affect attach rate. The PS attach rate definition “PS revenue / license revenue” is cleary dependent on pricing and discounting strategy.
• The role you have assigned to your PS department also affects PS attach rate. Not every company decides to use Professional Services in the same way. Your PS Strategy will however affect your PS attach rate.

Let me explain this in a some more detail.

PS attach rate and time/maturity

An important element to look at when evaluating PS attach rate is the maturity of your company and product. When comparing PS attach rate, companies tend to look at a similar company they look up to, and see what their metrics are. Rather than looking at that company TODAY, you should look at the company when it had a comparable size/maturity as you have today. Why? As your company grows, the PS rate tends to (!) drop for the following reasons.

• Over time your product becomes (hopefully) more user friendly and PS attach will drop. As time passes and you understand your customers better, you’ll design/improve your product in such a way that you’ll conduct your customers to successful usage. In the early days, you often lack the insight into how your customers use the product and PS fills that gap.
• Over time your footprint in your existing customer base grows. Customer that only have 1 implementation of your product will not invest too much in building in house skills on your software and rely on your PS team to help out. Once a customer is heading for the 3rd or 4th implementation round of your product, they’ll start to have an internal skill set that makes them less reliant on your PS team.
• Building a partner network takes time. Typically in the early days of your software, potential partners are still trying to understand how popular your software is going to be. You’ll have a small partner network and your PS team will pick up relatively more work. Over time, as your software becomes more popular, you can (not will) attract more partners (that is a topic for a different blog post) and reduce the reliance of your customers on your PS team.

PS attach rate and financial metrics

Here are the revenue statements of two companies. Company A has an attach rate of 20%, whereas company B has a 6.67% attach rate. At first sight, company B seems to be very efficient and the product does not require a lot of PS.

If we look in more details at the financials though, we’ll see that both companies are treating PS in a different way financially. Company A has decided they want to make a positive margin on their PS, whereas company B is using services as a Loss Leader.

Company A runs a 40% positive margin on their PS, whereas company B runs a -80% margin on their services.

If you’d recalculate the PS attach rate, using the COST OF SERVICES (rather than the revenue which is polluted by the pricing/discounting strategy) then you’d see these companies actually run exactly the same PS attach.

The beauty of fake examples is that the numbers always nicely add up to what you need them to be, but the truth is that PS margins can have a very wide range (from 40% to -40% according to this Deloitte research). Ignore that aspect and you might draw some incorrect conclusions from PS attach rate numbers.

PS attach rate and the role of your PS team

Finally, PS attach rate will also be influence by the role you have given to your PS team. Since this topic deserves it’s own article, I’ll limit myself to some simple examples that will show how your organisational set-up can impact attach rate:

• Do you have technical resource within your Customer Success organisation that provide advisory or even hands-on advice to your customers? If you do, then that will limit the role of your PS team to other work and will reduce some of the work that ends up with PS.
• What is your strategy with regards to Proof of Concepts? Are they paid for engagements where your professional services team has a key role, or are they solely done by your pre-sales resources. As in the above example, your strategic decision on how and where to use professional services, will impact your PS attach rate.

If you want to know more about the various roles professional services can play for your company, read this blog post. I hope that the above examples do explain how your PS strategy will impact attach rate.

Conclusion

Notwithstanding the fact that PS attach rate has a very clear (financial) definition, I would argue that without clear context, the metric can lead to complete misinterpretation of the actual importance of professional services in your company.