The Blog

  • May 7, 2014
  • A Sub-Ledger for the Hybrid Enterprise

    Transaction_3D-512There is a business problem that comes up in the life of every company and these days, it seems that a lot of companies face it at once. It’s the question of how to transition from one business model to another without clobbering your current revenue flow. Even if a company’s executives really want to change their model the reality is that the current model, as clunky and outdated as it might seem, is still generating revenues and profits so there is always a faction that says, not yet.

    You know where this goes. It’s the story of the boiled frog. It starts with the animal sitting in a pot of tepid water when the heat gets turned on and the frog slowly fades into drowsiness rather than realizing the danger and hopping out. Or so it goes. I have never run the experiment.

    We pride ourselves on our large brains and all that they have created. In the last several millennia we’ve built tools and intellectual constructs that give us ways to think about all sorts of things. We’ve been so successful that according to some scientists by some point in 2014 human knowledge will be doubling about once every eleven hours.

    Regardless, we still have a challenge when it comes to shifting business models and there’s nothing more trying today than figuring out how to shift from a model that makes and delivers things for a price, to a model that makes things but delivers them incrementally over time, a.k.a. the subscription model. That’s because collecting the money in the second transaction looks nothing like collecting it in the first. Along with the basic act of collecting goes a long list of other important issues like continuously nurturing customers so that they continue to consume what you are delivering.

    There’s also accounting for the revenue flow. And then there’s the kicker — most businesses in this situation have decided to branch out into subscriptions while still maintaining their tried and true accounting systems. But the finance and accounting systems in place don’t “do” subscriptions very well, and that might be an overstatement.

    But according to a recent study by The Economist magazine’s Intelligence Unit, the issue of collecting the money involved in subscription transactions was only the fourth biggest worry for executives surveyed. Number one was lack of internal co-ordination and second was the technical aspect as in how do we integrate these seemingly disparate ideas so that we can have a single, integrated, and accurate view of the business?

    How indeed?

    Well, the simple answer is that you need a system for that. Sometimes our big brains, inventiveness, and the sheer joy of tinkering prevent us from taking on solutions right in front of us. I am of course talking about the all to human propensity for using spreadsheets to plug all kinds of business problems instead of biting the bullet and getting a real system.

    Many years ago companies used spreadsheets in lieu of CRM systems because they were readily at hand and enabled smart people to model sales processes within them. Alas, a model is not the thing itself and too often a model won’t stand up to volume, which is what happened with spreadsheets in CRM. Among their many shortcomings, spreadsheets don’t have databases and the models they represent are ill equipped for high volume operations.

    Fast forward to the subscription economy and you can see the same trouble. Companies getting involved with the subscription model sometimes use spreadsheets as their sub-ledgers feeding into the company’s general purpose ERP system. This tends to work well enough for the company’s first few subscription customers but if the subscription model becomes successful, the spreadsheets can represent a not so happy, happy problem. At least the auditors aren’t happy.

    This is preventable. The initial impulse to use spreadsheets as a sub-ledger perfectly models the situation many businesses find themselves in when they adopt subscriptions and they should be applauded for this. But no business can stay in spreadsheets for very long because it turns out that the subscription model is not simply a new way to bill customers.

    Subscriptions, really are a business model meaning they have to be accounted for throughout the customer lifecycle including first discovery of a business problem, evaluation, the sale, product use, customer nurturing and bonding, and, most importantly, customer advocacy. It does no company any good whatsoever to do the early stages of the lifecycle well only to fall down on bonding — which too many companies do.

    Subscribers expect their vendors to be with them in their moments of truth throughout their lifecycle journeys. The penalty for not being present is attrition and churn but the benefit for doing things right is renewal and advocacy. Luckily, subscriptions throw off a great deal of data that subscription vendors can analyze so that they can meet their customers within those moments of truth. But a spreadsheet won’t catch that data. A spreadsheet can contain today’s data but without a database it can’t tell you about yesterday so that you can predict tomorrow and successful subscriptions are all about predicting demand and meeting it.

    This is where lifecycle subscription management systems come in. These systems started out as simple billing and payments solutions but the gap is widening between them and more advanced systems that provide a range of financial, accounting, and database services that make them appropriate for enterprises beginning the transition from conventional models to subscriptions. A system like Zuora, for example, provides the technical integration with popular ERP to enable an organization to co-ordinate its subscription business with its conventional model. That’s why I am advising my clients to evaluate solutions like Zuora as they take their first steps into the subscription economy.

    Published: 4 years ago


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