I found an interesting piece, a paragraph really, in the NYT while reading some of the Xerox/ACS post-deal coverage.

The services shift is driven by both financial and strategic motives. Services businesses tend to be steadier sources of revenue and profit than product businesses, which move more closely in line with economic cycles. Services businesses also foster closer relations with corporate customers, and often yield higher profit margins.

Although services can yield higher profit margins than physical products, they definitely have lower margins than software. As an enterprise software vendor, we have to watch our revenue mix pretty closely to make sure that our margins are not reduced by a large services revenue stream.

However, it is necessary for enterprise IT companies to have a services arm that provides coverage of the product portfolio. The NYT understates this as “Services businesses also foster closer relations with corporate customers.” The enterprise IT market is driven by partnering, deal-making, and face-to-face schmoozing and sales. This is why enterprise IT companies have well-compensated salespeople and business development personnel on staff. By having persistent services personnel at your client’s physical location, you have a cheaper source of sales revenue.