Almost all design services companies have a path to creating more value out of their services. The basic model—where most companies start—is one of “hands”: providing expert (design) hands against a value+. Here’s where regular (semiconductor) companies find resources when they are running short and/or missing the expertise to address specific parts of their design project. By delivering a number of resources and completing the specific tasks, the design services company builds its relationship with the specific customer.
As pointed out earlier, the ability to deliver quality services and complete the specified contract in time and at cost is what establishes the reputation of the design services company. No company will survive without tending to its reputation. By demonstrating quality of services as well as expertise in specific fields, customers will return and will engage the design services company. Obviously, returning business is a key priority for any business as it reduces the Cost of Sales (CoS) and, as important, it allows to build up a strategic relationship with your customer (assuming the customer is the right kind of customer – yes, strategy is what ensures you focus on the right customers).
Here’s where you, as a design services company, drive your “staircase” model which ensures that your services increase in value as you grow. The fundamental setting here is that just supplying (high value) hands is a limited model. Your growth as a design services company is directly dependent on the number of hands you hire. Most design services companies, even those without a proper strategy, determine at some point in time that this is not a long-term sustainable model (functioning as an overflow). Sometimes even your customers, concerned about the future of their services partner, will pressure you for a more reliable growth strategy and, if you fail to provide one, will search for alternatives.
What is the next step in your services model? In general, for those companies we have supported so far, we identify this model as the staircase model. The staircase model is an integral part of a design services company strategy as it establishes its ability to depart from the linear revenue growth model and creates additional revenue streams making the company also less susceptible to the volatility of its market.
Fundamentally, the staircase model is coupled with a design services company’s strategy and its customer segmentation (next post). Your ability to engage with the right customers will facilitate/enable your staircase to develop and move your business from (1) hands+ to (2) hands+ + IP royalty to (3) turn-key ASIC royalty. Climbing this staircase requires you to invest in your team’s capabilities. Specifically, to grow from purely “have gun – will travel” to a service level where the customer can trust you with the execution of a complete ASIC design project all the way to tape-out, test and qualification.
There are different staircase models, usually an extension of what the basic model described above. Variations include the ability to spin out separate startups, an often-neglected benefit of having design services company as part of a (local) eco-system.
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.