Shifting to as-a-service offerings can drive new value creation for digital industrial transformation—but can also potentially complicate those efforts. This article, sixth in a series, discusses how to align XaaS with transformation.
Is your company shifting its offering portfolio toward anything-as-a-service (XaaS)? If yes, are you prepared to transform your business capabilities to market, sell, deliver, support, and manage these types of offerings at scale? Once you have undergone the process of defining your strategic guardrails, business model, capabilities, and operating model requirements—no small accomplishment—it is time to fuel the transformation engine and put in place the people, processes, and technologies to scale with XaaS in the market (see figure 1).
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Getting the execution right is critical for an XaaS transformation. A transformation strategy, as explained in our previous article on how to set a digital transformation north star,1 becomes meaningless if the organization fails to carry it out with intention, urgency, and commitment. Many companies struggle with decisive execution given the unique complexities of XaaS transformations that proliferate in this phase of the digital industrial transformation journey. These complexities make companies less than optimally prepared to overcome operational inertia. In a recent study, only 20.7 percent of manufacturing executives rated their companies as “highly prepared” to address the emerging business models that the Fourth Industrial Revolution demands.2
What is driving this complexity—and the common sentiment of feeling unprepared? Based on our experience working directly with industrial technology companies in transformation settings, there are five main characteristics of XaaS transformations that must be addressed for successful execution.
By definition, transformation efforts are a process rather than a discrete project seeking one-time incremental improvements. They represent an iterative and dynamic execution journey focused on continuous improvement and feedback loops.
Many companies look to improve and streamline their current processes before moving to introduce large-scale innovation. A recent Deloitte study7 found that the desire to improve current processes is a more significant driver of digital transformations than the desire to innovate (see figure 2). The momentum gained from starting with improve can be a powerful lead-in to innovate down the road.
Figure 3 offers a visual depiction of the journey that we propose companies go through to successfully execute XaaS transformations. The concept of crawl, walk, run, fly illustrates how companies gain momentum during the journey via iterative design testing.
The benefits of steadily progressing along this digital maturity curve are multifold:
Based on our work in this field, we estimate that most organizations take three to five years to move from the crawl to the fly phase and complete their transformation to an XaaS business. This timeline depends upon factors such as the complexity of XaaS offerings, company size, appetite for change, and XaaS revenue growth projections. For example, Adobe’s transformation to cloud-based subscription models took approximately five years. The company’s legacy business model relied on offering customers’ physical products on a perpetual license, but it struggled to either attract incremental customers or compel existing customers to upgrade. In 2012, leaders made their transformation efforts official by announcing the release of the subscription-based Creative Cloud.8 By 2017, Adobe had transitioned to a software-as-a-service (SaaS) business model, with around 95 percent of all Creative Cloud revenue coming from subscriptions.
Each phase of this journey presents unique challenges and opportunities. Figure 4 summarizes the four maturity phases and companies’ typical behavior in each phase across the dimensions of XaaS offering maturity, organizational readiness, transformation priorities, people, process, and technology.
When a company’s transformation journey is in the crawl phase, funding and budgeting conversations are prevalent, since leaders are focused on proving the ROI and market adoption of the new XaaS offerings. Characteristics of companies operating in the crawl phase:
XaaS offering maturity. XaaS offerings have just been launched (low sales revenue); portfolio is small (one or two offerings) with limited routes-to-market/geographies.
Organizational readiness. Change management adoption is low, characteristic of companies early in the transformation journey. An organizational mindset shift is necessary for employees to understand and embrace XaaS offerings and their impact on how business is transacted.
People. Existing skill sets and talent may not be aligned to new business models.
Process. Processes for transacting XaaS are neither documented nor standardized (instead highly customized on a deal-by-deal basis).
Technology. Highly manual execution based on spreadsheets.
Companies operating in the walk phase have ignited their transformation journey and are beginning to make investments in process improvement. Characteristics of these companies:
XaaS offering maturity. Active pipeline for new business models in limited markets.
Organizational readiness. Low to medium. Companies have clear XaaS transformation mandates and revenue targets that are well understood, but day-to-day actions and behaviors remain unchanged.
People. Select employees involved in transformation efforts to develop siloed knowledge of the new business model. The rest of the organization still needs to be brought along on the journey; significant talent upskilling is needed.
Process. Foundational processes are documented, standardized, and optimized for XaaS business models. Figure 5 shows priority areas across the XaaS transactional value chain.
Technology. Selective automation via configuration of existing systems. Priority areas for automation include offering configuration, pricing, quoting, billing, invoicing, and revenue recognition.
One of our clients was launching new IoT/XaaS solutions and had set bold volume and revenue targets for the next fiscal year. We helped the client identify 32 process “breakpoints” across the end-to-end value chain, representing obstacles in legacy processes that prevented the company from transacting XaaS offerings at projected volumes. Leaders wanted to strive for walk (with a strong process/policy foundation and only selective automation of existing systems) before the commencement of the next fiscal year. We referred to leaders’ goals as a proof-of-concept foundation for their transformation ambitions that could be scaled to run and fly phases in the future.
To achieve the proof-of-concept ambitions, the organization focused on process standardization and optimization across the value chain to address the key breakpoints for areas such as sales incentives and enablement, customer contract management, CPQ standardization, usage-based billing, revenue recognition, and customer success. Some configuration work was done in existing systems for areas such as lead and opportunity tracking, contract repository and authoring, quote and proposal generation, and order fulfillment. The client stitched together new processes and systems end-to-end as part of operational readiness efforts to test and validate the combination of manual and automated steps.
Leaders are planning efforts to achieve run status and are confident that the process standardization work completed in the walk phase will serve as an accelerator to their transformation objectives.
Another client, a large security software company, was looking to efficiently deliver security-as-a-service offerings while addressing declining revenues and overcoming a history of transformation failures. This new transformation had to be undertaken in a very complex environment—hundreds of products and services and more than 8 million price points. We aimed for a smooth, lean transition to the walk phase that minimized organizational disruption.
As a first step, the focus was on designing a simplified, digitally enabled customer experience for B2C customers in the cloud route-to-market, followed by the design of end-to-end capabilities, policies, processes, and systems required to enable that experience. The process design work was founded on the principles of simplification and standardization, resulting in a lean set of processes that could be automated into a more streamlined system architecture.
The architecture design was heavily focused on automating the quote-to-cash process area demanding choice points around:
Because of these efforts, the digital customer experience was simplified and operating costs for quote-to-revenue were reduced by 99 percent. This work served as a launching pad for the organization’s full E2E transformation to the run phase—and additional routes-to-market.
Companies operating in the run phase of their journey are operating as mature digital organizations with advanced/automated capabilities for transacting XaaS. Characteristics of companies operating in the run phase:
XaaS offering maturity. Healthy XaaS business revenue from two or more XaaS offerings across multiple routes-to-market/geographies.
Organizational readiness. Typically, one to two years operating as a digital XaaS business. The organization has shifted mindset to embrace and understand new business models, with most employees adopting the change in their day-to-day routines.
People. Majority of the business is trained on the new business model; talent levels are elevated across all enterprise functions.
Process. Processes have been documented, simplified, refined, and automated across all process areas, applied consistently to XaaS deals.
Technology. Full systems automation is enabled via an interconnected digital business architecture. There is little to no manual touch involved in end-to-end (E2E) XaaS transactions.
A US$2 billion software and hardware company was executing its transformation agenda to achieve run maturity. The company had just launched its first XaaS product and was striving for rapid market growth. Leaders quickly realized that their existing business and technical capabilities could not deliver the new business model at scale.
The company took the approach of moving quickly from crawl to run by choosing to make large systems automation investments early in its transformation journey. The firm had the agility and investment means to make this transformation leap.
As a first step, leaders defined a target business architecture for XaaS enablement. This architecture included plans for the implementation of a new subscription billing platform, customer account management console, and usage mediation platform.
The company is currently leveraging agile development methodologies for systems activation and addressing process improvement in parallel. The implementation phase is still ongoing, but leaders are seeing early outcomes with improved customer experiences and reduced operational costs.
Making the leap from crawl to run is challenging, but it can be done if leaders are ready and willing to embrace the associated risks and disruptive organizational change.
Companies operating in the fly phase are making bold investments to drive disruption. Characteristics of such companies:
XaaS offering maturity. Global reach, with a large and sophisticated XaaS portfolio that is available for all viable ready-to-market products.
Organizational readiness. More than three years operating as a digital business. All employees embrace the XaaS business model and champion the change that the business model shift has driven.
People. Talent levels and retention of high-potential employees are elevated across the enterprise. Talent profiles and incentives are aligned with XaaS selling.
Process. Processes are highly advanced, and 100 percent documented and standardized across the enterprise.
Technology. A sophisticated systems architecture is enabled to transact digital offerings.
Salesforce is an example of a company born in an XaaS model. Leaders built the business on the premise of XaaS, enabling the company to achieve rapid digital maturity and redefine what it means to fly as a result of continuous modernization.
Salesforce is a services-oriented organization that places the customer at the center of its strategic choices, with the overarching goal of making customers more efficient and productive. One of the company’s three strategic growth levers is “speaking the language of the customer,” enabling it to form deep and value-driven customer relationships.
The customer success team plays a significant role in building these relationships by providing prescriptive, data-driven business advice to help maximize customer value on a continuous basis. The team also continues to adapt to customer demands and market innovation by ramping up R&D investments in Einstein AI, analytics, mobile, Quip, communities, and IoT services.
In a recent earnings call, Marc Benioff attributed the success of the born-XaaS model to the company’s customer focus: “Every CEO is thinking about their digital transformation. And, every digital transformation begins and ends with the customer … We’re the No. 1 customer company in the world. No other company in the history of the software industry has been as focused on customer relationship management.”9
Reflecting on experiences and case studies, there are core lessons that are important to keep in mind for executing an XaaS transformation:
Launching a successful XaaS transformation begins with having a clear understanding of capabilities, gaps/breakpoints, and aptitude for change. This understanding will determine the path of the execution journey—and how quickly and adeptly an organization navigates the crawl, walk, run, fly curve to XaaS digital maturity.
In the next article, we will talk more about the specific challenges and complexities faced when transforming the quote-to-cash process for XaaS models.