By Jayson Jarmon, CEO, Lux Worldwide
I'm often asked what the difference really is between a "product" company and a "service" company. The distinction is an important one because it affects how a job is done, what sort of people are doing it, the finances of the matter all together, and indeed the nature of the work itself. This is the first in a series of entries that will try to look at all sides of the service vs. product issue.
Customers vs. Clients
A software product company works to execute a business plan that requires a certain amount of capital up front in order to develop and market a sellable item(s). The capital investment before the product(s) goes to market pays for market research, product development, marketing, sales (and ultimately support), before the product makes a single cent on the open market. The success or failure of the product is therefore determined by the sales and licensing that occurs long after the sunk cost of the development.
A service company approaches the market as an agent willing to do "work for hire," that is, work that will ultimately be owned by the client party, even if that work is one the client's product. In this sense, the service company is similar to an attorney, or a plumber, or any other kind of contractor: clients look to use the skill of the service company for a fixed period of project work to execute work that the client is not adequately resourced to execute. Often the service company is part of a product company's strategic plan, providing specific skill and sheer manpower without the overhead of taxes, human resource oversight, or payroll during lags in the development process.
While the ultimate goals of each company remain the same - namely profit and adequate cash flow to maintain and grow company operations - the approach taken, and indeed the risk taken, is different. The product company requires a significant amount of time preparing to execute on the product, the service company requires a significant amount of time acquiring marketable resources; the product company delays fiscal gratification until the product is fully marketed, the service company must muster adequate cash flow from the moment of inception.
While the companies are often doing the same kind of work, which can lead to confusion among employees and investors, the terms of engagement and the goals of the companies are different. If you are interested in moving into the technology field, it's an important question to ask. Next time, we'll discuss the environmental and cultural differences between the product and services sectors, and what you can expect to find in each of them.
