Companies of all sizes are experiencing a shift in the composition of their revenue streams, transitioning from traditional one-time product sales, to business models where products are provided “as a service” via subscription-based purchasing plans.
Today you can buy jet engines, razor blades and even bacon as a service for a monthly fee. This shift has been driven in part by cloud technology and SaaS (Software-as-a-Service), but also by investors’ desire for “sticky”, recurring revenue. Chief financial officers now need to adjust their business systems and monitor new key performance indicators to succeed fully in recurring revenue-based businesses.
CASH V RENEWAL
In the traditional product or transaction-based sales world, a product or service is purchased, delivered and cash collected in what is commonly called the opportunity to cash process. In the subscription world, companies need to think longer term because customers can leave before selling costs are fully recouped. This has caused businesses to shift from an opportunity to cash mentality to a longer-term opportunity to renewal approach, where customer relationships are closely monitored.
Because customers can leave at any time, the success rate of customers and the likelihood of renewal are now leading indicators for chief financial officers to predict cash flow, revenues and long-term profitability. Never before has customer satisfaction and their ongoing success been so directly tied to business results.
CUSTOMER-CENTRIC ERP
For chief financial officers, this has led to the rethinking of enterprise resource planning or ERP systems. According to Ray Wang, principal analyst and founder of Constellation Research: “Success depends on a system of intelligence. Digital business models require a real-time view of everything from receivables, utilisation, support ticketing, analytics and revenue recognition. It’s no longer about how great your sales pipeline looks, but rather whether your customers are happy and your renewal base is robust.”
Most companies are hard pressed to achieve this comprehensive view of their customers. Traditional ERP systems were designed years ago before the Everything-as-a-Service economy took hold. Businesses often cobble together a disparate mix of subscription billing apps, revenue recognition spreadsheets and traditional accounting solutions. They try to marry up a separate customer relationship management system to monitor customer health and services. Unfortunately, this creates a myriad of customer records, multiple versions of the truth and poor audit trails. This is hardly a system of intelligence.
A new breed of systems is available that blends the traditional role of ERP (system of record) and CRM (system of engagement) across the opportunity to renewal process. They include subscription billing and revenue recognition capabilities built around a single customer record where every interaction with the customer can be seen across sales, services, billing, receivables and revenue recognition. Not only does this position the company to manage the customer experience more effectively, it gives chief financial officers the intelligence they need to predict future cash flow and revenue based on customer success intelligence.
CUSTOMER-CENTRIC CFO
For many chief financial officers, Everything-as-a-Service business models can instigate a different mindset and focus. In a study by CFO Magazine, 70 per cent of chief financial officers reported that more than half of their revenue is now coming from services of different types, and 95 per cent also believe the chief financial officer’s role must adapt to this new services model.
Financial managers need to be more customer facing, more in tune with the disposition of customers in this environment. The information that investors want to know, such as renewal, customer attrition and net expansion rates, lie across the opportunity to renewal process. Chief financial officers will need to scrutinise service levels and customer issues more than they have in the past.
With the right tools and mindset shift, chief financial officers can understand the health of their customer base and, consequently, their own businesses. In the Everything-as-a-Service economy, the lines between chief financial officer and chief customer officer are blurred.
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