Case study: Order to invoice
A large enterprise hardware company, having failed to keep up with market and technology changes, was undergoing a tumultuous operational crisis. Its lead-to-cash business processes were resource-intensive and bespoke, and revenue growth had flattened. It needed a new business model to survive in the Industry 4.0 era.
To penetrate new market segments, leaders looked to transition from a traditional purchasing model to an XaaS model. Over the course of eight months, the company designed and defined the key blueprints to iteratively becoming a digital business; it overhauled its legacy processes and adopted agile capabilities that supported its ambitions toward scaling in the cloud. Specifically, it standardized its pricing and configuration rules by offering preconfigured bundles. It also simplified its quote approval hierarchy to process deals faster (less than 10 minutes versus five days) and significantly enhanced its contract management life cycle. Standardized product offerings shrank the average contract length from 150 pages to 11 and reduced order processing from three days to 15 minutes. This enabled its services organization to focus more on what is important: nurturing the customer relationship.
Invoice to cash
This is the ultimate stage in the cycle yet requires a complete overhaul in most cases to support XaaS models. Subscription billing and invoice management are critical capabilities of this process that is required to enable any XaaS business model, demanding more than just deploying a subscription billing platform. Enabling these capabilities requires a fine balance of flexibility and standardization, operational efficiency, and customer experience. Key considerations such as customer account hierarchy, invoicing flexibilities, finance reporting structure including fixed assets management, and revenue recognition should be embedded as early as possible in the entire lead-to-cash life cycle.
Usage management is another critical capability in which organizations with traditional business models typically lack maturity. However, one-third of the XaaS adopters in our survey cite usage optimization as a critical feature.7 Traditional products were never designed to meter customer usages and communicate back to the provider. Further, the provider infrastructure was never set up to collect this data, analyze it, and charge the customer based on usage. There are no industrywide standards available to enable this process. As a result, each product and business unit created their own method for usage collection and management. This strains the overall billing capability, causing expensive errors such as incorrect invoicing. Organizations can best address this issue by deploying a centralized usage management platform on which all usages are collected, analyzed to generate customer insights, and fed into billing and customer service capabilities.
The other focus area of this process is revenue recognition. Revenue recognition8 and accounting processes for XaaS solutions are fundamentally very different than most legacy solutions have in place. For a license or a one-time purchase, revenue recognition is done once, when payment is received, in contrast to XaaS, for which revenue is recognized based on usage through the term of the contract. Changing an existing financial process geared toward legacy solutions to cater to XaaS solutions can be surprisingly complex. Ancillary processes around intercompany accounting and financial reporting would need corresponding updates.
Finally, the overall finance reporting structure needs to be evaluated. As discussed earlier, XaaS business models require a new revenue attribution policy as this transition will drive changes in finance reporting structure. In XaaS business models, the provider retains ownership of some hardware, such as servers; these will require changes in fixed asset management capabilities. Further, the AR systems and payment reconciliations will need to be tuned up to manage the influx of high-volume periodic invoices. Thus, engaging finance early in the conversation is critical to enabling a sound XaaS business model.