Power subscription-based models with cloudby
The move to subscription-based services presents new challenges for finance teams central to the success of the ‘as-a-service’ revolution.
If there was a phrase that defined the way business changed in the 2010s, it would be “there’s an app for that”.
Experiences of the pandemic suggest that the defining concept of the 2020s will be “there’s a service for that”. The rise of subscription services will be even more transformative for businesses than the app revolution of the last decade, opening up the possibilities of new, ongoing revenue streams and enabling new business models.
But they also present challenges for finance professionals accustomed to a more traditional approach to selling products and services. How do finance and accounting need to change to support businesses’ transformation from sellers to service providers?
An accounting revolution
While the ‘as-a-service’ model long predates this decade, the pandemic has given it new momentum. With lockdown preventing consumers from visiting the high street, subscriptions for digital media and entertainment, education, software, and consumer goods have boomed.
Since April 2020, the market has experienced weekly growth of 85%. This popularity shows no sign of diminishing, with 70% of business leaders saying subscription services will be key to their company’s success, and the average subscription-billing vendor growing 30-50% annually.
The transformation in business models requires a similar accounting revolution. Given the profound strategic shift involved in embracing subscription models, it’s critical that finance teams are involved in evaluating lines of business, geographies and products. Yet it’s common for the finance function to be frozen out of these discussions.
Finance should always be at the heart of business strategy. With the move to subscription-based services, however, it must also develop a new set of metrics and KPIs. While traditional products are based on the product’s attributes - for example, what it can do and how long it lasts - items provided ‘as-a-service’ are far more focused on what the customer wants to achieve with the service. And that requires a radically different approach to accounting.
From product to performance
Subscription-based services entail a shift in metrics away from items’ inherent attributes and towards the offering’s overall performance.
The most obvious change is in time to value. With physical products, the upfront capital costs incurred in development are built into the price consumers pay at the till. With a service offering, the time to value is much faster; this means that expenses must be spread over the entire subscription period.
But costs are only one side of the coin. Accountants must also consider how subscription services subtly (and not-so-subtly) change customers’ expectations and their relationship with the business. For example, subscription services depend on customer satisfaction. Finance therefore needs to keep track of a new set of metrics, including annual recurring revenue (ARR), customer churn, renewals, and customer lifetime value.
Finally, finance teams also have an important role in assessing customer behaviour. This is especially important given the iterative nature of service-based offerings, which must be able to adapt to meet customers’ real-world behaviours and needs, enabling the business to pivot quickly in response to unused features or missing capabilities.
Making your data count
The success of any subscription service depends on having reliable, up-to-date data on everything from customer behaviour, usage patterns, changes in demand and much more.
If data is locked away in silos across the company, it becomes incredibly difficult to extract the necessary value and insight, and almost impossible to do so in a timely fashion. This is where cloud-based enterprise platforms, including ERP, are proving their worth. Because they collect data from across the organisation, cloud-based platforms give team visibility across the entire value chain, from suppliers to customer sentiment and behaviour.
It also makes it far easier to share the resulting insight with every team and every department, ensuring that everyone is working from the same sets of harmonised, up-to-the-second information.
Finance teams need a platform with specific sales and ecommerce functions, support for configure-price-quote, order and supply chain management for product-as-a-service offerings, and subscription management capabilities. More complex subscription offerings will also require functions such as revenue management, and potentially field service and logistics support.
Every company’s service offering will be different, so it’s impossible to provide an exhaustive list of the different accounting functions they will need. What’s more important is that finance teams - and the organisation more widely - understand that subscription-based models involve much more than flipping a switch. Success depends on embracing a completely new way of measuring success and harnessing the power of the original “as-a-service” offering: the cloud.
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Nick leads Oracle’s business strategy teams focusing on deploying Oracle’s Cloud solutions to drive innovation within finance operations, strategy and performance management.
Prior to joining Oracle, Nick held senior operational roles within UK central government, and was a management consultant with EY and Capgemini, helping local and...