5 Reasons Why Your Company Should Become “As-a-Service”
An unexpected consequence of the pandemic is the number of Companies shifting to “as-a-Service”. Here are five reasons.
“As-a-Service” is a proven successful model since the rise of Cloud computing. It has expanded beyond the IT infrastructure and the software industry to increase across all industries in B2C and B2B. According to Forrester Research, “76% of CEOs think their current business model will be unrecognizable in 5 years, they think recurring, they think subscription”. Between now and 2028, the XaaS* market is expected to grow from $349B to $2,4T at a staggering 28% CAGR!**.
Most brands will likely develop at least one BaaS practice within the next decade. See how Netflix has dethroned Blockbuster or how Spotify has outpaced iTunes Music. Companies in all industries, IT and beyond, which have yet to take the plunge, may wonder whether they could become the next target on the line. Besides the threat, there are excellent reasons why companies should leap.
The Times They Are A-Changin
“While new product transactions can stall during an economic slowdown, services can prove resilient since they provide lower entry costs and greater flexibility as well as offer easier customization to one’s needs”***. Globalization has enabled crises to expand worldwide at light speed without notice. Who could have predicted Covid lockdowns in January 2020? Or the war in Ukraine in January 2022?
“As-a-Service” businesses demonstrate a much better resilience to resist the severe turbulences of our economies. Even better, the stunning rise of new SaaS customers during the pandemic has strengthened the opinion that most buyers are willing to join the “usership” society.
Subscribing to a product “as-a-service” does not imply a long-term commitment, and mistakes are easy to correct. In addition, the model’s scalability lets customers adjust their consumption to the lows and the highs of their economies. Cloud Computing has risen in the middle of the 2009 financial crisis for a reason.
Increasing Your Business Value
In a way, this is the sum of all other reasons. But the main valuation driver is recurrence. Private Equity companies tend to value recurring revenues at a high multiple (7–15x) compared to one-off gains (1–3x). As one-off transactions are generally higher than their recurring equivalent, it is reasonable to assume that shifting from one-off business to recurring may multiply the company’s valuation by a factor of four on average.
Of course, many other factors are to be considered, but whenever we would be wrong by half, that is still a significant breakthrough.
Higher valuation is not only for the silver generation owners to retire and enjoy a paradisiac chapter three of their lives. It eases mergers and acquisitions as well as investment loans. Uber and the likes demonstrate that a recurring business with hopes of profit is worth higher than a non-recurring profitable business.
Building Intelligence
In a traditional business, once the product is sold to the customer, it vanishes from the supplier’s view. How the customer uses the product and which features are favored is none of its concern anymore. Sellers are blind. Some contacts may sustain through the assistance team or with the installed base. But customer feedback is sporadic and unstructured.
Instead, a fundamental element of a Business as a Service is the link that connects seller and buyer. It is often an application or a customer portal that captures and monitors the product’s actual usage. This link lets the buyer get a real-time view of the user behavior and derives valuable intelligence. In return, suppliers can offer custom services that match each customer’s desire, such as the intelligent playlists proposed by the likes of Spotify.
This always-on link enables companies to create Slack or Discord communities with their users where this intelligence is shared and allows development teams to react swiftly to customer behavior and feedback.
Faster Innovation
We can only be amazed by the speed of innovation of Zoom and Microsoft Teams during the Pandemic lockdowns. They proposed new features almost by the day.
Let us project back to the times of on-premises software. We would have purchased a license with the listed components and would require an upgrade to access the new ones. It may have led us to delay the implementation and wait until the additional benefits would be substantially worth the incremental spend.
Those involved in introducing new technologies know how frustrating it can be to wait in line until your installed base has amortized the products you had sold them sometimes ago. With the new model, we do not have to ask even, and the enhanced features reach your customers as soon as there are ready. It allows you to increase market stickiness and prevent your fierce competition from taking it away.
Sustainability
In 1994, John Elkington coined the Triple Bottom Line concept. It is an accounting framework proposed to companies for balancing economic, social, and environmental performance. The problem for traditional hardware businesses lies in the antagonism between economic and environmental targets. In other words, financial success depends on the ability of the seller to increase the number of products sold either by reaching new customers or by getting existing customers to renew their purchases often. It needs to comply better with environmental goals and may lead to perverse concepts like planned obsolescence.
Take the automotive market as an example. Privately-owned cars spend 95% of their time parked somewhere. In large cities, at commuting hours, about 20% of street traffic comes from car drivers looking for a parking slot.
In contrast, Business-as-a-Service reconciles economic and environmental performance. Average Recurring Revenues of Vehicle-as-a-Service companies highly depend on their ability to maximize usage by sharing each vehicle between more people or increasing the assets’ duration.
However, the risk for hardware assets may be to slow the innovation pace. It is why some vendors are introducing the exciting concept of built-in enhancements. Mercedes just launched its subscription service dedicated explicitly to increasing horsepower — $1,200 a year will allow one to reduce the car’s acceleration time from 0–60 mph by about 0.8 to 0.9 seconds. Theoretically, we can expect users to extend the car usage duration by unleashing the extra power when needed instead of looking for a new one.
This approach is quite controversial, though. When BMW proposed to activate built-in heated seats in return for a subscription, the user community accused the car manufacturer of trying to generate recurring revenues abusively.
Intel has recently introduced a similar approach with Intel On Demand that offers flexible consumption capabilities and the ability to scale performance and capacity in response to real-time demand. Once adopted by desktop manufacturers, we can expect them to propose evolutive devices sold under subscription with the possibility for the users to opt-in to higher power based on their needs.
The post-Covid period is not as exhilarating as many would have expected. Massive layoffs, frozen investments, revenue shortages, and all the subsequent news are generating anxiety. Many companies tend to work with blinders and focus on short-term goals until the storm is gone. While this is perfectly understandable, an alternative way is to rethink how we operate the business to make it more scalable with a lower cost of goods sold.
More with less.
There has never been a better time to explore the Business-as-a-Service option.
Please comment:
- If your business is already as-a-service, would you share how it benefits your business?
- Otherwise, what roadblocks prevent you from ou have yet to arrive?
(*) Everything or Anything as a Service
(**) Source Fortune Business Insights
(***) Sudhir Mehta is the Global Vice President, Transformation Solutions at Lexmark in Forbes Magazine
Laurent Glaenzer is CEO of Lemon Operations.
laurent.glaenzer@lemon-operations.com
Lemon Operations assists companies in setting their Business-as-a-Service practice end-to-end. We work with ~1000 companies annually in 80 countries and 20 languages.
