A Sub-Ledger for the Hybrid Enterprise
There 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 Even if a company’s executives really want to change their model the reality is that the current model, as clunky and outdated as it might seem, is still generating revenues and profits so there is always a faction that says, not yet.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.
Teeing Up Aviso
A couple of industry heavy weights have pooled their talents and assembled $8 million in funding resources to launch Aviso, a new kind of analytics company this week. K.V. Rao, co-founder and CEO, and Andrew Abrahams, co-founder and CTO, are Ph.D. scientists taking on risk assessment for modern enterprises. Rao, has a string of successful tech startups including founding Zuora, the subscription commerce company. Abrahams recently retired from JPMorgan Chase where he was “Firm-wide Head of Quantitative Research and Model Oversight, reporting to the firm’s CRO,” according to Jeff Yoshimura, the company’s CMO. Believe me that’s just the tip of two rather large icebergs.
These two talents raised an A series led by Shasta Ventures; First Round Capital; Cowboy Ventures; Bloomberg Beta; Subrah Iyar, founder and CEO of WebEx; Roger Sippl, founder and CEO of Informix and Vantive; Dave Hersh, founding CEO of Jive Software; and Ron Gill, CFO of NetSuite.
So what makes Aviso special?
First off, I like the way they were in stealth mode for two years while they made version one bullet proof. They wouldn’t even give me a briefing under NDA. Second, their initial customer list reflects a bunch of thinkers that want more advanced analytics and are willing to roll up their sleeves to work on a good idea. They include: RingCentral (RNG), Saba Software (SABA), FireEye (FEYE), Damballa, Replicon, and Zuora.
Third is the approach to the product itself. While most analytics packages work with a limited dataset that has to be refined and scrubbed, Aviso takes a different approach. Reflecting the founders’ interest in a broader range of influences on business results, Aviso uses a portfolio model that can just as easily interrogate company-wide data as it can also use market data about general economic trends before it serves up its results.
So, for example, if I understand what’s going on, a sales forecast should be primarily based on sales data that a company’s sales team collects. But it ought to also reflect what’s knowable about the general economy, but often not included. If for instance, the economy is heading for the exits, say job creation is down, interest rates and inflation are up, and just for fun, new housing starts are going sideways, how secure do you think your 80 percent probability sales orders are six weeks before the close of the quarter? More importantly, which of your deals conceals hidden risk? Hmmm? That’s the kind of scenario that is totally resistant to sleeping pills.
As you might expect, gathering all of that outside data might import a great deal of noise into your analytics process and noise can be the enemy of a strong signal. This has been the bane of data scientists since the earth cooled. But it’s also a problem the founders are quite familiar with — you don’t run Quantitative Research and Model Oversight at JPMorgan Chase unless you have a strategy for dealing with noisy data.
Rao tells me that back analysis of old data plus the work they did in beta shows great promise and I believe him. The immediate goal is to focus on revenue forecasting with what they are calling Total Revenue Intelligence to provide insights into all types of revenue streams in an organization. This tells me Aviso will be useful in both conventional and subscription companies but most especially in the years ahead in companies that are supporting a hybrid business model consisting of their traditional business and a new-fangled subscription business.
Think about it, one of the hardest things in business is changing your business model especially from something that brings in whales to something that uses a big net to capture sardines. Wall Street doesn’t like downside revenue surprises of the kind that early subscription businesses can provide. So a portfolio strategy that identifies risk across a company’s whole revenue stream makes a lot of sense. We’ll see if Aviso is the tool to provide it. So far, the early promise seems to be panning out.
Using Feedback Loops to Manage Subscription Business
Measure, iterate, scale
Everyone in business claims to want to listen to the voice of the customer; it’s a non-controversial issue. But the approaches are all over the map. There is little consistency and, truthfully, many vendors do a poor job of it.
Capturing customer feedback has always been a challenge for conventional vendors because they have to generate new processes to reach out to customers. Surveys, focus groups, and even social media are useful but many of these approaches are time and resource intensive and they are not automatic in business models that make and sell things then move on to the next opportunity.
Subscription vendors are in a much better position because they can take advantage of all the customer data generated in the normal course of business. Virtually every customer action gives off data that, when aggregated and analyzed can give a business great insights into the customer base. Savvy vendors can use the information thus generated to measure, iterate, and scale their businesses.
One of the greatest built-in data sources a subscription company has is its billing data and this data becomes even more valuable when it is time stamped. Capturing billing data and its timing enables a vendor to make comparisons between periods and even between years that can reveal variations in use, uptake, and signal some aspects of satisfaction.
Measure
Subscription vendors have to measure everything, at least they should. Often a subscription business can run on an impersonal website and a decision about continuing use or changing to a competitor might come down to cosmetics like ease of use, clarity of design, and other things that a vendor can’t improve without feedback. Customer feedback does not usually come from long emails or in-depth interviews. It emanates from simple decisions by customers about how and when to subscribe. So use data can be a gold mine and analyzing this data is what ultimately drives business improvement.
Measurement provides vendors with visibility into customer behavior from initial purchase to future demand. Leveraging this visibility gives businesses the assurance of customer knowledge on which to make decisions.
Iterate
Visibility is fleeting and gaining it must become a repeatable exercise. Once you’ve figured out what to measure to gain the most useful insights, there are two steps you need to take to ensure the health of your subscription business. First, by all means, keep measuring and compare results with earlier measurements. Some businesses notice seasonal fluctuations and understanding this makes it easier to see the difference between the start of a worrying trend and normal variation. Second, use what you learn to improve your business. This might sound like common sense but some times your research will suggest doing things that are either expensive or counter intuitive. In either case, don’t reject the findings out of hand. Do more research.
The measure-iterate cycle can do more than simply tell you the health of your cash flow. For instance, it also provides a simple and economical approach to researching product demand. Customer use data can provide a quick and economical means for A-B testing as in do customers prefer this or that? With subscriptions there’s no need to guess and hope you get it right. The answers are available if you know how to set up a controlled experiment.
Pricing and packaging are two areas where subscription companies must constantly iterate and the measure-iterate cycle can be a great solution for helping a company zero in on the best pricing and packaging approach for the moment. Keep in mind that customers constantly change their minds, which is why measure-iterate is a cycle and not a one-time event.
Scale
If you analyze your customers’ use and payments data you can develop the confidence to plow good ideas back into the business. This will enable you to scale your business with confidence because you have real customer generated information to back up each decision.
When combined, measures like attrition and customer lifetime value can combine to provide a powerful picture of future revenues before new business is counted. This can give you a more precise way to build and achieve sales targets. At the same time, triangulating with measures like lifetime value and the cost of new revenue can provide insight into not just revenue but its profitability too.
Final thoughts
Every business uses some form of measure, iterate, scale and some are more effective than others. Subscription companies are fortunate because they have so much data in their possession to start with and so many ways to apply it. But some measurements are best made against outside measures. For example, you might be able to measure and accurately predict customer attrition, something every subscription business faces. Objectively, it’s easy to conclude that less attrition is better than more and determine levels that are acceptable for your business. But how does your business stack up against other subscription vendors in general and in your market? What is the best practice goal?
Historically, this kind of information has only been available through independent research; however, it could also be generated from anonymous customer data. As the subscription market continues to evolve and mature, providing this kind of information will become a necessity and I foresee a time when subscription vendors will pool their resources through a trusted third party to provide this kind of information.
We hear a lot about the customer experience these days but many prognosticators have little more to go on than their opinions about customer behavior. Subscription companies have a great advantage in the data they collect if they collect it faithfully and analyze it rigorously.
The Order to Cash Subscription Process
Subscription companies face many of the same challenges that more conventional companies face but the nature of these businesses puts an entirely different spin on the challenges.
All companies have to acquire new customers, make products and price them attractively without leaving money on the table. Also, once a product is purchased, a company needs to get the cash in house as quickly as possible. If you think of this as the order to cash process, you’d be pretty close depending on how far up the sales trail your definition of acquisition goes. But while these ideas seem familiar there are major differences between how they are implemented and supported conventionally and in a subscription environment.
Acquiring customers
Order to cash in a conventional company is relatively simple. A conventional company makes products, its sales team sells them and operations produces an invoice that finance tracks all the way to collection. A subscription company is just like a conventional company in that respect but it is different because the subscription company needs to reacquire its subscribers all the time. For a subscription company the sale is never complete because there’s always next week, next month, next year — you get the idea.
Subscription companies are always in acquisition mode, which means much more than always be selling or always be closing. Subscribers want a bit of rest from the acquisition process and they need to get on with life with the new solution they bought. So maintaining their interest moves down stream to things like being successful using a product and resolving issues — whether support or billing — efficiently.
So a subscription vendor, even in acquisition mode, needs to keep a weather eye for forming productive bonds with customers. Customers that bond well are more likely to tell others about their experience thus becoming an unpaid sales team for the vendor. Customers that don’t bond don’t advocate and may be more likely to churn, a subject for another discussion.
Pricing
The difference between conventional companies pricing products and subscription companies couldn’t be more different. A conventional company has to sweat all the details — what’s included, how much does it cost, what are the terms and conditions, on and on. They have to because they rely on research, surveys, focus groups and more and even with all that they might not get it right. If they fail it’s a big investment wasted.
On the other hand, a subscription company can harness the power of the social crowd to accomplish the same thing and it can do all this proactively. By the time a conventional company gets a product to market, its information is weeks or even months old but look what happens with a subscription vendor.
Say the vendor analyzes aggregate customer purchases and discovers that customers that buy one service are likely to buy another. Why not offer a package containing both? The same analysis can also tell what the customers pay for the combination and from there the vendor might wish to make a price adjustment to promote the combination. With this approach the probability of success is much higher and if, for some reason, the idea doesn’t work so what? The cost of the effort is practically zero and you can always try something else rapidly. Try that in a conventional company. If you are a subscription vendor already doing this, give yourself a touchdown, you deserve it.
Billing
They have a word for billing in the subscription world — heartburn. Nothing generates more of it that trying to get the bills right in a highly fluid subscription business where customers can change their configurations as frequently as they need to. The heartburn comes from trying to process bills with a billing system that’s designed to support a conventional one and done invoicing and payments process because that’s not how subscriptions work.
Just as acquisition is a never-ending process, so is billing. As a matter of fact, it’s also ever changing. The secret to successful subscription billing is, like most things in business, having a system that supports the process you have and not the process some vendor wishes you did.
The other similarity between billing and acquisition is that it is another spot where customers subconsciously evaluate a vendor and make a subliminal decision about bonding with the vendor. Was the process easy, precise, and accurate, or did I spend half an hour on the phone again? These are the things that add up to customer bonding.
Final thoughts
This is only the order to cash process; there are lots of other processes in which subscription companies engage with customers differently than their conventional peers. More than ever, these processes are governed by analysis of the data crumbs that become part of the customer record. It’s imperative that subscription vendors fully understand the differences between their chosen path and convention. Doing so will enable them to choose the right systems they need to support business on this new frontier.
Back Office Perks Up
What’s going on in the back office?
That normally staid bastion of conventional computing is perking up taking on subscriptions and cloud computing like candy. It used to be that when you thought about back office and cloud in the same thought you also thought about NetSuite. Truthfully you still do, they’ve been at it a long time and have produced a solid and well articulated suite of back office ERP, finance, and accounting software (and more) that runs a lot of companies, especially the international variety that keep books in multiple languages and currencies.
But over the last ten days other companies have announced partnerships and solutions that both challenge NetSuite’s position and point to an important new era in computing.
The new era has been percolating through all of this century. Ever since Salesforce starting selling “no software,” cloud computing and subscriptions have been stealing a march on conventional, expensive, and bloated on premise software. Each year these solutions became more powerful and ubiquitous. First they supported other subscription companies, then all sorts of companies, and now, with the advent of the platform, cloud computing has come to the development suite and the back office.
The back office! Ten years ago the mantra was “Not with my data!” but something happened. Certifications sprouted and cloud became normal and safe and with Salesforce’s leadership, kind of cool. On the back office side, NetSuite carried a similar message to the point that today cloud and accounting are no longer words that, when spoken together, sufficient to punch your ticket to a long rest in a rubber room.
The last week has seen a breakout of sorts for subscriptions, cloud, accounting, ERP, and platform computing. Zuora and Intacct announced a widening partnership that will deliver Zuora’s subscription billing, payments, accounting, and financial management solutions to Intacct’s 7300+ cloud accounting customers. Be aware that cloud and subscription are not the same. Intacct has been successfully delivering cloud based accounting services and giving NetSuite its fair share of competition for many years.
The addition of subscription power from Zuora raises the bar to enable Intacct’s conventional customers with subscription aspirations to support what can best be called hybrid business models. At the same time, the announcement also shines a light on Salesforce’s platform strategy. Zuora is a native application on Force.com and Intacct has developed powerful integration with the platform in general and the joint announcement says they’ll double down on that integration. For Zuora it means 7300 new prospects, for Intacct it means a major capability upgrade without breaking a sweat. But we’re not done.
Also today, FinancialForce, a native accounting system on the Force.com platform just announced their entry into the ERP market with FinancialForce ERP. As a native application on the Force.com platform, FinancialForce has completed the circle of front to back office solutions that began with Salesforce. With all of the available solutions, a company of any size or complexity can now support all of its enterprise IT in the cloud and via subscriptions.
I think the biggest news in all this is what will happen to conventional IT in the years ahead. Pessimists say that IT will wither as significant chunks of functionality decamp for the cloud but I disagree. IT has always been a major component of a company’s secret sauce. If garden-variety accounting systems, even those that support subscriptions, can be off-loaded to the cloud that’s fine.
As more enterprise solutions head for the clouds and budget ratios turn from capital expenses to operational, we should see a renaissance of in-house application development which will, importantly, drive new business processes, especially in mobile apps that will help users do more and better business and do it faster. That’s where the secret sauce is and will remain for the foreseeable future. Time to embrace it.
These foundational changes come at an opportune time as prognosticators think about what it will mean to have 50 billion devices hanging off the Internet in 2020. Devices will increasingly be non-human consumers of goods and services (especially for restocking) and producers of data and information. Their transactions will take fractions of a second, be automatic, and require the attention of the infrastructure we are building now with cloud and subscriptions.
So the significance of these announcements together with things that have been coming out in the last year all point to an important milestone. Conventional applications managed data but the new stuff with platforms, front and back office integration, workflow, and social media all point to building and managing better business processes. I think we’re close to the end of a long wave of technology invention and at the beginning of an era of its consolidation and application.
