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Flexible consumption transition strategies for business
Flashpoint edition 6: What strategy will get you where you need to be?
In an era of business model disruption, perhaps one of the most profound developments in the technology, media, and telecommunications world is the shift away from a model based on outright purchase or licensing to one based on consumption. But moving to a flexible consumption model is not for the faint of heart. It calls for sound strategy and a fundamentally different way of doing business. Explore the four paths that companies have typically taken to transition or expand to consumption-based models.
- Is pay as you go the way to go?
- Deciding on the new model
- Four paths to flexible consumption
- Choosing a path
- Let's talk
Is pay as you go the way to go?
In an era of business model disruption, perhaps one of the most profound disruptions in the technology, media, and telecommunications (TMT) world is the shift away from a model based on outright purchase or licensing to one based on consumption. Flexible consumption is not new. It has long been employed by utility companies, for example, but it is now expanding to other industries, sometimes taking on new meanings. Consumption-based models are having a particularly strong impact on TMT industry.
A number of trends—including the rise in the cloud, mobile, social networking, "Big Data," and the Internet of Things (IoT)—are driving demand for flexible consumption arrangements. For instance, advances in cloud-based computing have increased both the feasibility and the attractiveness of hosted solutions, ranging from software-as-a-service (SaaS), security-as-a-service (SecaaS), and infrastructure-as-a-service (IaaS), to “anything” as a service (XaaS); for all of these, payment is based on actual service or solution usage. The rise in mobile devices and proliferation of broadband and Wi-Fi access points has led to an expectation that customers should be able to conduct business from anywhere, at any time, from any device. Data analytics provides customers and vendors alike with valuable insights into how, what, and when services are being used, driving expectations for real-time, contextually aware offerings.
A transition with big rewards
Flexible consumption offers substantial benefits. These range from predictable, recurring revenue streams to higher customer retention driven by stickier, long-term relationships with customers, and improved margins. Ultimately, investors may reward companies transitioning to flexible consumption models with higher valuations if communication is clear and execution is flawless.
Yet perhaps the biggest reason for some companies to consider transitioning to a flexible consumption model is that they can’t afford not to. As more and more customers demand more flexible payment models, the continued viability of many companies, and even entire industries, is being threatened. Those that fail to at least explore consumption-based offerings may end up on the path to obsolescence.
But one that is fraught with challenges
Moving to a flexible consumption model is not for the faint of heart. It calls for a fundamentally different way of doing business. For established companies that are used to the traditional sales model, the task is that much harder because their organizational capabilities may not support a consumption-based business model. There are also financial implications. First, because there is a conversion from upfront to recurring revenue, companies transitioning to consumption-based models generally experience a short-term revenue dip. In addition, the timing of cash flow and revenue recognition can often be out of alignment with incurred costs. With non-flexible models, companies will generally expense the costs to acquire customers as incurred. However, flexible models sometimes differ from their non-flexible counterparts in that companies can elect to either expense the costs to acquire customers as incurred, or defer and amortize the costs over the period during which the service is delivered.
As a result, in instances where the costs are expensed as incurred, profitability tends to be reached later, once the organization has had an opportunity to scale its offerings. Sacrificing short-term performance for the sake of long-term success is always challenging. Success with investors depends on the company’s ability to communicate its business case for adopting a flexible consumption model, as well as to execute a flawless transition. But how does a company know if a flexible consumption business model is right for them?
Deciding on the new model
In order to determine which model is most appropriate, companies need to know how much flexibility is required to win new customers and retain existing ones. There is no one-size-fits-all answer to this question, and in fact, there is a significant amount of variability in what these models look like. Companies need to decide where along the flexibility continuum their model sits with respect to three separate consumption levers: Packaging, delivery, and monetization.
To successfully transition or expand to flexible consumption, companies need to consider each of these dimensions in addressing a few key business strategy questions:
Should we offer flexible consumption?
- Is flexible consumption essential to
winin our market?
- How much flexibility is required to win?
Where do we play?
- How much of our portfolio should we transition?
- How much of our legacy portfolio should we retain?
When do we transition?
- How quickly should we move?
- What should we transition first?
These questions are difficult and often spark heated discussions within companies. The issues they raise are so new that there is not always a clear path forward. Yet finding the right path may be essential to a company’s very survival.
Companies first need to decide where along the flexibility continuum their model sits with respect to three separate consumption levers:
Four paths to flexible consumption
Based on answers to the key strategy questions, companies have typically taken four paths to transitioning or expanding to consumption-based models.
- Burn the boats: Strategy of companies that determine flexible consumption is their future, committing to go through the painful process of converting most (or a strategic part) of the portfolio as soon as possible
- Straddle: Strategy of companies that see value in giving customers a choice between flexible consumption and non-flexible offerings and want to transition with caution
- Protect and grow: Strategy of companies that want to offer flexible consumption, but in a way that protects and propels their current business
- Wait and see: Strategy of companies that decide not to offer flexible consumption for the time being, particularly in markets where it is important to test whether or not customers will embrace the new model
Determining which strategy is right depends on both sector and individual company conditions, as well as a company’s existing capabilities and business complexities.
Path one: Burn the boats
This path is chosen by organizations operating in markets where there are clear signals that the existing model is running out of steam amid pressure to provide customers with maximum flexibility. Based on the belief that a move to flexible consumption is crucial to survival, these companies convert all—or at the very least their most strategic—products to the new model right away or as quickly as possible, usually over the course of one to three years. A “burn the boats” strategy poses the highest risk of the four approaches, requiring a full-blown transformation of the organization and a willingness to sacrifice short-term gains.
Path two: Straddle
Organizations that choose this path are under slightly less pressure to make an immediate transition to a consumption-based model. They continue to see value in giving customers the option to choose between flexible and non-flexible consumption versions of same products and services, and may even be able to use offering choice as a competitive differentiator. While there is a need to innovate in the flexible consumption space, companies have the breathing room to proceed with caution and take a balanced approach to converting their portfolio, completing a full transition to the new model over a longer period of time (three to seven years).
The straddle path is a lower-risk strategy than a full transition, but companies that choose it will need to maintain both flexible consumption and legacy versions of the same products. This can be costly and can result in cannibalization if there isn’t a clear articulation of the value-price equation between the two options.
Path three: Protect and grow
This path is for companies that look to refresh and strengthen their core portfolio with the help of entirely new flexible consumption offerings. Companies that choose this path build or buy discrete flexible consumption offerings that are run in a fairly isolated manner, separate from legacy non-flexible consumption products.
The approach poses less risk than the other two strategies, calling for less wrenching changes in cash flows and less integration of operations—and results in no cannibalization of existing products. Rather, companies use the flexible consumption offerings as add-ons to legacy products or as a means of cross-selling them. While their main objective is to protect legacy products, these companies don’t want to be completely left out in the cold when it comes to flexible consumption. They will, therefore, participate selectively, rolling out discrete consumption-based offerings based on niche market demands.
Path four: Wait and see
Some companies operate in markets where it is still unclear whether flexible consumption is required to win. In those situations, it does not make strategic sense to embrace a flexible consumption model in the short term without a good understanding of where flexible consumption offerings will be likely to pose a competitive threat.
A wait-and-see strategy is most appropriate for companies that are well positioned to capitalize on their existing strengths. This gives them sufficient time to search for the right window of opportunity to expand to consumption-based offerings and articulate their own flexible consumption strategy. Continued market vigilance is important because companies that wait too long to transition may run the risk of stagnating and being outpaced by competitors with newer technologies.
Choosing a path
There are a few criteria that companies should keep in mind as they articulate their approach to adopting or expanding to flexible consumption:
- Market growth and maturity: It is important to assess the outlook of the markets the company plays in, as well as whether they are sufficiently mature for flexible consumption offerings.
- Competitive landscape: Companies need to consider a range of factors, including the level of threat posed by their competitors’ adoption of flexible consumption; their desired short-term and long-term positioning with respect to competitors; the extent to which external factors prompt a transition to flexible consumption; and whether they have the ability to sustain competitive advantage or further differentiation in their flexible consumption offerings post roll-out.
- Risk: Companies will need to determine their individual risk appetite and evaluate overall risk implications (e.g., financial risk, cyber security risk, operational risk) across each of the four transition paths. This will help determine the approach that best aligns with the company’s individual business, legal, regulatory, and strategic objectives.
- Customer demand and relationships: Important questions to address include: To what extent do customers demand the transition? To what extent will the company’s customer relationships impact, or work in favor of, a transition to flexible consumption?
- Product portfolio: The nature of a company’s product portfolio can influence its decision to transition to flexible consumption, as well as how it executes such a transition. Factors that may impact the decision include a degree of portfolio consolidation and differentiation and the particular market for each product. Ultimately, the overall flexible consumption strategy should be informed by the individual product requirements, particularly with respect to the core or flagship products.
- Overall company narrative: Since the transition to flexible consumption may have a short-term impact on the business, companies should evaluate the extent to which they can defend their adoption of a flexible consumption model, including what strengths will help them successfully navigate the transition.
No matter what path you choose, companies must keep in mind a number of considerations as they articulate their approach to adopting or expanding to flexible consumption.
Deloitte has guided numerous companies through business model transformations towards flexible consumption, and we understand the complexity of the challenge and associated risk implications. Let's talk about what the change will mean to you.
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Deloitte & Touche LLP
Deloitte & Touche LLP
In the meantime, be sure to check back for a monthly dose of the latest issues driving the future of technology, media, and telecommunications companies. Stay tuned for more in our Flashpoints series on flexible consumption and its impacts across the organization, from business strategy through technical enablement.
Flexible consumption business model transformation: Transition to win
- Learn more about our Flexible Consumption Transformation Services
- To guide you with confidence from business strategy through technical enablement, explore our flexible consumption interactive transformation framework
- Review flexible consumption transformation case studies
Flexible consumption business model transformation allows customers the flexibility to consume and pay based on need and usage, but transitioning is complicated and challenging.