Software

White PaperLooking Behind the Cloud

JAN 2014How Subscriptions Impact the Way Software Companies Operate

Better Relationships

We make it happen. Better.

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Introduction

The emergence of the Cloud reshaped technology years ago, with promises of greater efficiency and compute power capturing the enthusiasm of global business. The impact, however, is being felt far beyond these benefits: it is changing the way that consumers approach their purchases and, in turn, how companies design their offerings.

This fundamental shift of taking product to the Cloud comes with incredible opportunities for customized solutions, extended customer relationships, and flexibility to create recurring revenue streams.

Barriers to entry have crumbled, and software providers across the industry are replacing traditional boxed product delivery with subscription services. Under this umbrella, smaller players can leverage a nimbler delivery model to stand toe to toe with traditional giants of industry – and those giants are adapting to compete.

Of course, changing business models is never as simple as flipping a switch. There are relationships that must be addressed that go beyond technology; interactions among customers, the supply chain, accounting processes, and within the C-suite itself must all evolve to ensure a successful leap.

Each of these relationships is key to servicing the customer, with whom most of the power rests in this environment. On demand services permeate all corners of the market, from media and entertainment all the way into enterprise IT preferences. In fact, a recent study by the Economist Intelligence Unit (EIU) notes the influx of subscription or rental based technology in the workplace. “Thirty-seven percent say that their business units increasingly prefer to rent goods rather than purchase them, while 35% say that they prefer to access goods via subscription,” the study found. “As a result, over one-half of companies (51%) are changing, or in the process of changing, how they price and deliver goods and services.”

Customer preference is a major driver, but companies also recognize the more predictable and renewable revenue generation that accompanies subscription payments. While companies will experience increased R&D expense and cash flow bumps as they transition, the short term pain is outweighed by the low cost of Cloud infrastructure and the expansive opportunities in the Subscription Economy.

Leveraging renewable and expandable revenue streams is the key to business growth, especially in this nascent era of customer centricity. The path is far from easy, though; implementation begins with a move to the Cloud, then sends ripples through the organization.

Customers as Advocates

“Thirty seven percent say that their business units increasingly prefer to rent goods rather than purchase them while 35% say that they prefer to access goods via subscription.”

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Enhancing the customer experience

Relationships with the customer

The subscription model increases customer touchpoints tenfold, allowing for relationships that penetrate beyond the “big sale” and into incremental growth opportunities. Strong relationships, however, do not come to pass without thoughtful strategies and the processes to back them up.

Unlike the retail box model, when a customer signs onto a service the burden of activation shifts to the provider. Companies not only have to determine how to onboard new users, they must nail down a process that is as seamless and effective as possible. Time to market is critical; the faster companies can bring the customer online, the sooner they can recognize revenue.

When customers are up and running, companies then take on the responsibility for customer support – another area that in many cases was traditionally provided by buyer IT departments. As with most touchpoints, support interactions yield data that can be critical to the long term relationship. Software companies that capture that data can create analytics that better predict when a customer might churn and when they may be open to new modules or additional solutions. Software companies need an enhanced focus on the customer experience, providing tools to enable self-service and scale customer support processes.

“Time to market is critical; the faster companies can bring the customer online, the sooner they can recognize revenue.”

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One of the main benefits of moving to a cloud-based subscription model is the flexibility to bring different packages of solutions to market, with varied contract terms and (potentially) bundled capabilities tied to the offering. That gives tremendous selling power to an organization, but it also necessitates custom pricing scenarios, operational processes, and systems that support the resulting complexities.

Product Owners and Sales Leadership want the flexibility to create multiple pricing scenarios to respond to the varied demands of the marketplace. Pricing creates a competitive advantage as companies go to market, but also determines the downstream complexities of billing and revenue recognition. Software companies need the flexibility to create custom pricing scenarios, and operational processes and systems that support the inherent complexities that result from that flexibility.

Price execution becomes critical as well – CFOs need the right checks and balances to ensure customers are acquired under terms that meet company objectives. In a Subscription world, the terms at the point of sale can live across the life of the customer, and are reinforced every month that customer is billed.

Managing the “persistence of complexity” that results from custom pricing terms can be a significant challenge. As services and subscribers increase, so does transaction volume. That means more pressure on real-time operations in the business and greater complexity across the organization. Systems need to be “re-simplified” and automated where possible to minimize the risk of falling behind customer needs.

Adding further to the challenge, a bill is no longer indicative of a final sale; it is instead a gateway to interacting with customers on a more frequent basis. Such opportunities to introduce new offerings and provide efficiencies can boost revenue, but they also feed even more layers into the billing cycle.

That complexity leads directly to revenue recognition. While the rules around VSOE are (relatively) straightforward in terms of recognizing revenue in a subscription business model, the processes and systems that support this activity need attention in order to provide the transparency CFOs require. Customer agreements in a recurring model change over time, and complexity compounds as those agreements change.

The move to Cloud delivery and subscription simply cannot be made without an adjustment to accounting. Without relevant, automated systems in place, traditional manual processes will fall behind; companies will suffer from lack of visibility, increased opportunity for errors, and ultimately compliance setbacks.

Relationships with accounting and compliance

Better Relationships

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Supply chain and the path to market present fascinating opportunities; they are in effect turned upside down when companies move to the Cloud. Those that historically sold through a box retailer had a complex manufacturing and supply chain to negotiate. From product development to packaging to delivery to point of sale, each relationship was a critical part of the equation. Selling on subscription brings the relationship directly to the customer, effectively eliminating the supply chain altogether – along with its costs.

While that represents an exciting opportunity, it also necessitates a new go-to-market strategy. The traditional retail model allows companies to piggy back on the marketing of distributors, an advantage that disappears along with the supply chain. Cost savings derived from the dis-aggregation of the supply chain must be rolled into new go-to-market strategies and channels in the form of alliance programs and direct selling activities.

This is no doubt a contributing factor to Gartner’s recent prediction that by 2017, the marketing organizations at high-tech companies will spend more on IT than the IT organizations themselves. Subscription services require companies to capture users and eyeballs without the partnerships that accounted for much of their visibility in the past.

Relationships with supply chain and marketing

Relationships in the C-suite The switch to the customer-centric subscription model does not just impact operations, it impacts the way that successful leaders interact within the company. CIOs in particular will become the primary owners of product infrastructure, leading to critical changes between:

CIO and CEO: Product delivery brings CIOs directly into the customer facing and support arenas. When they become an integral part of the customer experience, CEOs are likely to forge a tighter relationship. CEOs, after all, have an obligation to protect the customer and a fiduciary duty to protect shareholders, and the CIO has a direct influence on both those all-important audiences.

CIO and CFO: CFOs keep a close eye on the delicate balance between revenue growth and product development costs. Especially as the change is made to subscription services, they must try to create a financial ecosystem that can manage the influx of transactions and the delivery of services. The CIO and CFO will need to work closely together to keep costs in line with the expansion of the customer base.

CIO and CTO: While CTOs have traditionally managed product strategy, roadmaps, and the supporting architecture, they will now rely on CIOs to provide cost effective, scalable infrastructure that can deliver product capability. Flexibility, reliability, and responsiveness will be the words of the day as the CIO and CTO keep the evolution of the infrastructure in lock step with the evolution of the product.

Companies must not only embrace selling through the Cloud, they must understand the impact it will have on their organization. Barriers to entry are low on the product side, but customer acquisition costs are high in terms of attracting, retaining, and upselling subscription services. Firms will find that shifting the mindset and product model to subscription-based is the easy part – creating operations and go-to-market strategies to support that shift is the real challenge.

Leaders that re-tool their processes to support such a move will see near-term benefits and be better equipped to make new leaps from the Cloud down the line. Without advancing and strengthening key relationships, however, their journey will be a short one.

Conclusion

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About Hitachi Consulting CorporationAs Hitachi, Ltd.’s global consulting company, with operations throughout North America, Europe, the Middle East and Asia, Hitachi Consulting is a recognized leader in delivering proven business and IT strategies and solutions to Global 2000 companies across many industries. With a balanced view of strategy, people, process and technology, we work with companies to understand their unique business needs, and to develop and implement practical business strategies and technology solutions. From business strategy development through application deployment, our consultants are committed to helping clients quickly realize measurable business value and achieve sustainable ROI.

Its client base includes 35 percent of the Fortune 100 and 25 percent of the Global 100, along with many mid-market leaders. With offices throughout North America, Europe, the Middle East and Asia, Hitachi Consulting employs approximately 5,000 professionals across 12 countries with delivery centers in India (Bangalore, Pune and Hyderabad), China (Guangzhou) and the United States (Fargo, North Dakota) to offer global delivery scale. For more information, visit www.hitachiconsulting.com.

About the AuthorDrew Naukam Senior Vice President, Software Industry Practice

Mr. Naukam leads Hitachi Consulting’s Software Industry Practice, including client leadership, solution development, revenue generation and people development. Mr. Naukam has 20+ years of consulting experience covering technology, organizational change management and practice leadership covering industries including Software, Telecommunications, Media and High Tech.

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Hitachi, Ltd. (TSE: 6501), headquartered in Tokyo, Japan, is a leading global electronics company with approximately 326,000 employees worldwide. The company’s consolidated revenues for fiscal 2012 (ended March 31, 2013) totaled 9,041 billion yen ($96.1 billion). Hitachi is focusing more than ever on the Social Innovation Business, which includes infrastructure systems, information & telecommunication systems, power systems, construction machinery, high functional material & components, automotive systems and others.For more information on Hitachi, please visit the company’s website at www.hitachi.com.