How Should CFOs And CIOs Prepare For The Recurring Revenue Tsunami?

Back in the 2000s, when one of my first clients started dabbling in subscriptions, I realized that a sea change was underway in the billing sector. I saw first-hand the pain that companies experienced when they made the move from selling "products" or "units" to the new model of subscription-based pricing and selling.

The pace increased in 2008-2009 when Salesforce changed the rules of the enterprise software business. This was followed in the last decade by the emergence of digitally native companies and products that could sell directly to consumers and base their business on modern accounting and revenue recognition systems. For established, asset-laden companies, the transition to a recurring revenue model posed a real hurdle because their legacy systems simply could not address the complexity of selling services instead of products. For many companies, this hurdle still exists — the need to shift to recurring revenue models is even more apparent.

As we begin a new decade, we're witnessing the second wave of the recurring revenue tsunami, in which large manufacturers are embracing this new revenue model. Think of all the companies that design and sell cars, dishwashers, industrial machines, diagnostic healthcare equipment and so on — it's a huge array of established companies that are wondering how "the end of ownership" will transform their business.

To evolve and stay relevant, CFOs and CIOs must contemplate the broad variety of new billing and revenue recognition models. A challenge that the business and IT sides of the house will face is that the ERP software that underpins their businesses is often designed to sell products that people own, not outcomes that consumers want to pay for. (Uber might be seen as a transportation outcome company, for example.)

As we look into 2020, what are the triggers that will drive change? I see three important trends: billing automation, revenue recognition complexity and pressure on ERP vendors.

1. Icebergs lie ahead for companies that have not automated billing.

As enterprises gear up to tackle recurring billing, they should focus on automating their billing processes. This is essential in order to keep up with the accelerating pace of billing speed, scale and compliance. in today's market. Just as other parts of enterprises have adopted advanced tech to augment processes, technology can assist humans with the validation of billing and invoicing.

Surprisingly, I continue to see old-school processes such as human review and validation of invoices prior to sending them out. CFOs should consider automating invoice generation, and once that's done, they should consider automating the process of review and validation.

2. Revenue recognition will become more complex due to a wider array of subscription-based services. 

One of the most compelling elements of subscription billing is that pretty much anything can be defined as a basis for an invoice. Companies increasingly need flexibility in order to create new pricing mechanisms to build and retain their competitive advantage. In particular, usage-based billing is increasing.

In 2020, CFOs should think about how they will handle things like event-based pricing, and potentially prepare for multidimensional pricing mechanisms (i.e., the pricing of a product or service using multiple factors). In this practice, price no longer consists of a single monetary amount (e.g., the sticker price of a car), but rather consists of various dimensions such as monthly payments, the number of payments and a downpayment. There are some important drivers of this increasing complexity: IoT signals (which entails exponentially more data points) and the competitive pressure to "productize" new ideas into services.

3. The pressure to solve XaaS problems will increase.

The pace of innovation in the conception of new products and services is accelerating rapidly. As businesses embrace the trend and transition from selling things to selling services, they may realize their ERP system cannot accommodate the new business model because these systems are typically designed to capture "things" (i.e., a product and maybe a service contract).

Many large ERP vendors recognize that there are critical gaps in legacy billing capabilities and will move to solve these XaaS requirements. This also applies to the vendors of specialized billing software — they, too, are struggling to keep up with big data and analytics requirements of the expanding service economy. These vendors will experience increasing pressure from customers interested in digitally transforming their billing processes.

How can the C-suite prepare for the XaaS wave?

CFOs at many companies are realizing that XaaS revenue recognition and billing capabilities are now crucial business drivers. This means that digital transformation, which has already touched so many other corporate functions, is now looming over the revenue department as it responds to this need. For CIOs, this will mandate the addition of new capabilities to their current ERP system and the need to embrace software solutions that can support both legacy systems and power the new business models of this decade.