Companies that don’t offer subscription-based products and services are fast becoming a rare breed. B2C and B2B customers alike are today accustomed to the subscription model for everything from entertainment, coffee and consumer goods to mission-critical cloud software applications that run multinational businesses.
Yet, while subscription business models are on the rise, traditional one-time transactions are not going away any time soon. In this new world of hybrid business models, customers enjoy choice, flexibility and simplicity in how they buy products and services. Sellers benefit with predictable recurring revenue and customer stickiness — but they also face new complexity that’s prompting a re-evaluation of how billing is managed.
Billing is the thorn on the hybrid business model rose. Software and professional services companies in particular are confronted with daunting challenges in managing billing across hybrid business models that can involve subscription- and usage-based pricing, traditional transactions and multiple variations.
Consider an IT vendor that sells software and services. It may have a customer that licenses several cloud software packages, each with various numbers of seats and usage privileges. That customer may also have several on-premise applications from the same vendor under perpetual licensing models.
Across that cloud and on-premise landscape, the customer may depend on the vendor for implementation and support, with different tiers and schedules that involve billing by time and expense, fixed fee, milestone and percent complete. To deal with that complexity, the vendor needs visibility and flexibility that standalone billing applications struggle to provide.
Billing as a Strategic Imperative
At the same time, companies are facing a huge shift in how customers want to buy products and services. Customers, not vendors, are increasingly dictating the terms of purchasing. Amid these changes, progressive companies view billing as a strategic imperative that can adapt quickly to changing market conditions and customer expectations.
To effectively move from a singular billing method to a hybrid model that bills for transactions, subscriptions and usage simultaneously, a billing system must have real-time visibility into the business transactions that generate the invoices, and ensure accurate and compliant revenue recognition — sometimes even before the invoice has been generated.
Standalone billing systems inherently can’t handle this change because they’re simply too far from the action. They’re too far from where the customer is acquired, contract terms established, and where products and services selected and delivered. In fact, the increase in M&A activity in the billing space over the last several years suggests that point billing solutions will soon be extinct.
Standalone billing systems will give way to business management software systems with billing at their core. Here’s why:
#1. Support for hybrid business models with complex billing requirements. Point billing systems generally focus on one part of the billing picture: subscriptions, project management, one-time purchases or expense management. But today, customers often buy all of the above — all at the same time and in the same sales / purchase order — from more vendors.
So, it’s not just about subscriptions anymore. It’s about subscriptions, usage and transactions. Point billing system software that focuses on subscriptions and subscription management leaves companies totally exposed when managing other billing models in the “everything economy.”
#2. Revenue recognition. Getting out of sync with revenue recognition is a really bad idea, and point billing systems aren’t designed to keep up with evolving revenue recognition standards like ASC 606. They lack the data necessary to establish the correct revenue recognition at order time and to keep it up to date as elements change over time.
In terms of establishing the correct revenue recognition with a point billing system, organizations have two choices: 1) They can purchase another point revenue recognition system, which is costly, often hard to integrate and keep in sync or 2) They can establish manual processes to continually audit subscriptions and orders and to keep everything in sync manually, which is inefficient and risky and prone to human error.
Getting revenue recognition wrong is simply put, a risk no executive wants to take. Intentional or not, incorrectly stating revenue goes down a very bad path with potential consequences including restating revenue and / or legal ramifications. Again, no executive wants to risk this.
#3. 360-degree view of all customer billing. Since point billing systems can only handle part of the billing/business model, customer relationship data becomes fragmented. You’re either adding a data warehouse to pull the data together, or perhaps just dumping data from multiple systems into Excel and manually joining them together.
That’s equally inefficient as the revenue recognition problem, wasting valuable time and resources while adding little visibility and depriving the organization of the 360-degree view needed to deliver a superior customer billing experience and drive retention.
#4. Synchronized data. Whether synchronizing account data, subscription/order data or invoice/payment data, the bottom line is that moving any kind of data between disparate systems is tricky and dangerous. Point billing solutions rely on data being synchronized back and forth to operate. Even if the billing systems and core applications are written in the same language, they can and do get out of sync if they aren’t part of the same suite.
#5. Total cost of ownership. Implementing multiple systems/platforms is expensive. Working with one vendor across all billing and financial management needs will yield better value than negotiating new relationships with point solution vendors, especially in areas where there is overlap.
For years, “billing” (especially recurring/subscription billing) was considered a specialty area and application. Now that hybrid billing is mainstream and there are solutions with hybrid billing and business models built into their financial management core, there’s simply no reason to ever consider a point billing solution again.
William Schonbrun is Senior Director of Product Marketing of Oracle NetSuite. Pioneer of the Cloud Computing revolution in 1998, Oracle NetSuite established the world’s first company dedicated to delivering business applications over the internet. Today, NetSuite provides a suite of cloud-based financials / Enterprise Resource Planning (ERP), HR and omnichannel commerce software that runs the business of companies in more than 100 countries. For more information, please visit http://www.netsuite.com.