I had breakfast with a good friend the other day and we covered a wide range of topics including this one – the difference between software product companies and service delivery companies. 

Service delivery companies use technology (their own or 3rd party) combined with some type of service or expertise (supply chain, brokerage, billing, payroll, ediscovery, etc.) to deliver value to their customers.  Those customers appreciate the technology being used because it enables the service but the technology "product" itself is not the star of the show.  Sort of like an iceberg in that what you see above the surface is a fraction of what is really there. 

Making the change from service delivery to product company can be dicey because all those customers that love you for your service and expertise may not be the same ones ready to embrace your product platform and roll their own as they may lack the resources, in-house expertise, or desire to do it themselves.  The path the other direction is not as perilous but still means rethinking your target customers and distribution channels as well as the impact on valuation.

Also interesting was a discussion of market dynamics and how winners are different in service delivery vs. product markets.  Product markets end up with 800lb gorillas who dominate.  The goal of any product company is to get that momentum and "win" the category.  Service delivery markets are defined by kings vs. 800lb gorillas.  These are definitely dominate players but there is still plenty of room for others as the expertise and service of the company can serve to differentiate them from even the largest player.

Software-as-a-service (SaaS) is the intersection of service delivery and software product where, in some cases, products alone work while in others it is the combination of software plus services that will define the future winners.