Originally published by WY Partners.

Service businesses have a long history of developing proprietary tools and technology to address business challenges.  Some have technology as their primary differentiator.  Some address highly technical tasks and incorporate aspects of data science or machine learning to create business value directly for their clients. 

More commonly, service firms develop technology and IP to address workflow and maximize accuracy and efficiency across their delivery teams.  If service firms see necessary but repetitive tasks or tasks with a potential for errors, they may start building point solutions to address these business challenges.   

With the rise of low-code/no-code tools like Airtable and Bubble, increased usability cloud services like AWS, Google Cloud and Azure, and more access to fractional technical talent from resources such as Upwork, the technology barrier to entry is lower than it used to be. 

A low barrier to entry, a scalable means to reduce cost and a means to increase accuracy.  If that’s truly the case with internal technology, why is it so often the case that service firms executives are frustrated with the results and return on investment and why does that frustration increase over time? 

The Technology Hurdles 

It All Starts with a Roadmap 

The root cause is typically the lack of a clear product roadmap and prioritizing short term over long term.  The symptoms of a roadmap void are a high rate of technical debt and difficulty monetizing or establishing a viable commercial model.  Technical debt is the amount of time, money, and resources that are spent supporting legacy technology instead of those same assets being applied to innovation.   

A viable product roadmap will incorporate best practices such as quality product discovery, detailed planning and prioritization, and accountable development.  These will help ensure that your resources are focused on innovation and not simply maintenance and support.  Most importantly, adherence to good product management principles will empower you to say no to bad projects so that you can say yes to projects with meaningful outcomes. 

Put Stakeholders Front and Center 

Even firms that are great at creating and adhering to an innovative roadmap find themselves in another challenge.  They may not have a good sense of how to differentiate and communicate the value of their tech.   

Everything you build should be thought about in terms of the key stakeholders.  Typically, the employees and the end clients.  Even if technology is meant to serve the employees, the impact on the external clients should be thought through, quantified, and communicated.   

Thinking with a flywheel mindset, every touchpoint with your technology should help attract, engage, and retain.  Even if external clients are indirect beneficiaries of your technology, your employees should be able to incentivize and communicate the value to the client.  Even if clients don’t directly license your tech, they should understand the value it brings.  That can help justify premium fees, or it can simply help win or retain a few incremental clients per year. 

The Opportunity 

Potential Direct and Indirect Impact on Valuations 

One would think that simply having proprietary tech puts a company into a whole new universe of valuations.  While possible, if there is a unique fit with competitive buyers, there is a more practical justification for adding discipline to technology development. 

Let’s assume that a company without technology makes $20M in revenue and $2M in EBITDA.  Let’s say that’s worth a 7x EBITDA multiple, resulting in a $14M valuation. 

Now let’s take that same company with the following technology assumptions: 

• Two incremental clients were gained and two clients retained due to results afforded by technology and the communicated value proposition, which brings revenue to $22M and baseline EBITDA to $2.2M

• Efficiency and accuracy increases from the technology increase profitability by 15%, bringing EBITDA to $2.5M

• $500k in incremental tech fees derived from the clear value proposition and roadmap communication to new and existing clients, which drops to the bottom line, bringing EBITDA to $3M

• New growth rates and differentiated profitability create a higher 7.5x EBITDA.

• $3M * 7.5 = $22.5M (60% increase)

My biggest piece of advice is that if you are developing tech and tools, think about the long game.  Make the steps early to create sound product development.  Your employees, clients, and overall business value will thank you.