Have you noticed the increasing usage of acronyms that end in “aaS” in the high tech industry? “aaS” stands for “as a Service” and is being used in a host of different ways. Here are a few examples – Software aaS (SaaS), Platform aaS (PaaS), Information Technology aaS (ITaaS), Database aaS( DbaaS). For simplicity’s sake let’s refer to all the various flavors of “aaS” as XaaS.
From a high tech industry perspective, XaaS is a foundational change in the value exchange between customers and sellers. Many companies are looking for growth by migrating their existing products and services to a XaaS model. There are various ways to shift to the model from selling products to selling “Xaas”, such as creating a data center and selling services directly to end customers, creating a software that is available on the web versus requiring installation on your computer, or even partnering with existing service providers. That said, if your company is moving towards a XaaS model, there are significant operational changes required, especially if you have a well-established operations model for transacting products and associated services.
What is Different with XaaS
Traditional high tech companies sell products which are often associated with maintenance or break-fix services. The product components of the transaction are paid for up front, and refreshed with the next wave of products in several years. The services components of the transaction are agreed for a period of time using a service contract, and paid for the term life of service. Customers are faced with a large capital expense upfront and a smaller operational expense over time until the next refresh cycle.
The XaaS model changes this value exchange dramatically. XaaS customers purchase the functionality traditionally provided by both the product and service. The XaaS model means that customers sign up for a service for a given period of time and for a specific volume / usage of service. Often this volume is measured as seats or the number of people using the service, but it could also be measured by transaction count or data volume. The terms can vary, but generally the customer has an ability to increase the volume of the service that they consume. This allows them to start small and ramp up as needed. This offers great benefit to customers who are rapidly growing, since they can start using a service with minimal initial cost. Customers are also shielded from costly upgrade cycles. The customer doesn’t need to be aware of what version of hardware or software is used to provide the service; it just comes from the “cloud”.
From a manufacturer’s perspective, selling XaaS opens up annuity revenue streams which are easier to forecast than the traditional product and service model. Over time customers tend to add more services, keeping their volume high and paying more money.
While the XaaS model appears to be a win/win for both customers and manufacturers, the transition to providing operational support for XaaS business can be tricky and can have significant impact on business operations, process, policies and underlying operational systems.
Quote to Cash
Many high tech manufactures have evolved from selling standalone hardware products to selling products with associated services to selling various bundles and solutions. The products are discreet SKU’s and the services are associated with a product for a specific duration and service level. The XaaS model requires selling services which are not associated to a product. In fact, multiple customers may share the same physical products in a multi-tenant model.
Quoting XaaS requires the introduction new units of measure such as number of seats, transaction count or data volume. The unit of measure needs to be collected during the configuration or quote, passed through pricing, ordering and ultimately to service contract. Often enterprise packages provide support of various units of measure within their service capabilities. But to leverage this functionality, the quote-to-cash implementations need to be relatively out-of-the-box, otherwise requiring significant process and systems re-work.
Pricing XaaS requires a very different perspective. Product pricing is primarily based on the capabilities of the product. Customers are going to make an upfront investment and amortize the cost over a period of time. With XaaS the pricing is primarily driven by the units of measure. For example, price might be a cost per seat per month. Setting the price can be tricky since the manufacturer playing the role of service provider needs to invest in equipment up front while only collecting limited monthly revenue from customers. Over time the model can be successful, but it requires an initial investment and pricing methodology that also accounts for customer churn/deactivations.
The relationship between the customer and the manufacturer changes when transacting a XaaS service to be more like the relationship that typically exists between a customer and a service provider.
With traditional products and services, the sales process leads up to a big customer decision to spend a large sum of money on initial equipment purchase. With XaaS models, the initial investment can be much lower. This enables customers to leverage “try and buy” offers foregoing long decision cycles. “Try and buy” offers allow lower levels of the customer’s organization to make the decision on the use of the service, since the required up-front investment is low or even nonexistent.
As customers leverage the service with little or no initial investment, they will need a seamless way to change their billing to increase the volume of usage and extend or renew the duration. Traditionally, any change in service is seen as a sales event and an opportunity to see if the customer would value an upgrade to their products or increase in service level. This type of high-touch sales interaction does not work well with the XaaS model given the number of changes that can occur during the period of service. Customers expect a no-touch mechanism to renew at their current levels and a very low touch for any change in service.
High tech products generally are sold with a high profit margin that supports a high-touch sales organization often complimented with use of channel partners to increase reach across geographies and certain verticals. Often the products are technically complex and require various types of expertise to design, configure and price a solution that meets the unique needs of the customer. Transitioning a sales organization to a XaaS model requires careful planning and analysis of compensation models, sales crediting events and the balance between new and renewal sales based on true sales influence.
Traditional high tech compensation models are based on goal retirements via new bookings, and the commissions are paid upon invoicing. In a XaaS model, compensation is paid on reoccurring revenue (both committed and new reoccurring revenue) and bookings are retired based on new monthly reoccurring revenue.
As the sale event shifts from a single booking event to a reoccurring revenue model, the sales incentives also need to shift accordingly. There is not as much revenue pull-through at the time of booking; revenue is realized over time. Incentives need to encourage the on-going annuity by focusing on monthly reoccurring revenue in addition to new revenue.
If XaaS services are introduced along with existing product model, harmonization of the two different compensation models is needed. Obviously when given a choice, sales teams will emphasize whatever impacts their commissions the most. XaaS comp models can be very lucrative, but often take time to build up a base of reoccurring revenue. Another approach is to have separate comp plan for traditional products and XaaS services since there are differences in the relationship with the end customer.
XaaS models are likely to be more prevalent in the coming years, requiring high tech organizations to build flexibility, scale, and develop new measurements for operations to support both traditional products and services along with XaaS offerings. Enabling this operational flexibility will require a broad set of changes across many operations areas from sales coverage, sales compensation, pricing, quoting, configuration, entitlement, billing, reporting and customer service / support. Ultimately XaaS will provide business stability and long-term success through annuity revenue streams for organizations that make a swift operational transition. Transitioning products from one version to another are comparatively easier than transitioning the integrated business operations of a company, and thus requires very careful planning, understanding different aspects of XaaS model and its operational impact, and balancing the customer/partner experience while driving change management of sales and support organizations.