The software industry has transformed itself completely in the past decade with the rise of cloud computing and SaaS — and it is about to reinvent itself again in the support and subscription renewals divisions, which can represent up to 40 percent of a technology company’s total revenue stream.
As software companies work diligently to maximize their support and subscription revenue streams, cloud-powered services have emerged as a way to leverage the latest innovations in technology, collaboration styles, and business models to achieve new revenue growth and customer success.
State of the service market
When you think about the software revenue picture of 10 years ago, product revenue still ruled the day. The fundamental belief in the industry was that customers only cared about technology innovation like speeds and feeds, and features and functions. Software executives expected support renewals to make up only 15-20 percent of a vendor’s revenue.
Over the past decade, the software business has changed dramatically. As customers struggled with shrinking budgets during the economic downturn, they began to question software companies about the real need to upgrade to “Version 5.0.” Features and functions became less important while extracting as much value as possible from a purchase became much more important, raising the bar for service and support contracts and renewals.
Oracle raised the profile of the service market across the technology industry. In the early-2000s, Oracle began its run of acquisitions, targeting vendors with large customer bases and significant support, maintenance, and subscription revenue streams. The enterprise vendor recognized service and subscription contracts as a highly profitable and growing source of revenue and a great customer touch point, and opportunity to expand its footprint across the customer’s organization.
Now the secret is out. I’d be shocked to find a software company in business today that isn’t working extra hard to maximize its service revenue performance.
Characteristics of “best-in-class” service revenue management
Despite the fact that software vendors want to realize the full potential of their service revenue, many are still underachieving, leaving significant revenue, profits and earnings on the table every quarter. A sizable chasm separates those vendors who have deployed leading-edge strategies to maximize service revenues and those who are simply taking a “business as usual” — or a “business as 10 years ago”— approach to the service opportunity.
We see three characteristics that identify “best in class” service organizations — these companies also happen to be the most innovative, brightest, fastest-growing, and most successful software companies in business today:
- Service revenue prioritized: In addition to maximizing revenue potential, the service side of the business is a growing and strategic priority for the entire company.
- Customers Vvlued: A keen understanding persists of why service revenue is a key access point for customer relations, growth, and satisfaction and, therefore, leads to a culture of treating each customer relationship as a highly valued asset.
- Performance analyzed: Service revenue performance is measured with robust, decision-ready data in order to have real-time visibility and control on a global scale.
The companies that aren’t fully exhibiting these three characteristics are letting revenue opportunities pass them by; in most cases, they don’t even know it. I find many of these companies are still hoping for the “good old days” of the 1990s to come back. These vendors are likely to be overcommitted to product feature development and leaving maintenance sales to the product sales people — basically, auto-invoicing clients and expecting them to renew their contract.
But technology always advances — never retreats. SaaS and cloud computing are redrawing the entire enterprise software landscape. As we operate in this new world order, software vendors must realize that it’s time to adapt or fade away.
Other software companies don’t have their heads in the sand, but they’re not aware of the full revenue potential available from the service side of the business.
For example, many technology companies that perform their own maintenance, support, or subscription renewals in-house are surprised by our service performance analysis, which challenges internal assumptions on many levels. Sometimes, companies believe their renewal rates to be quite high – say, 90 percent – but when properly calculated on top of a foundation of a clean service revenue dataset, they are only middling (with performance gaps of 10 to 25 percentage points lower than the targeted 90 or more).
When ServiceSource works with clients, we find that we can partner to increase renewal rates by 10 to 25 percentage points, on average and, in some cases, up to 40 percentage points.
Disruptive impacts on service revenue performance
As software vendors recognize the importance of their service revenue streams, even more changes are occurring underfoot. Three major forces are redefining the market:
- New technology modelsNew technology means “access trumps ownership.” In the same way that consumers rarely buy physical CDs any more and don’t even need to visit a video store to watch a movie, enterprise IT buyers do not need to have their own servers, storage or software applications. Every application can be delivered via the Web — and very often, will deliver a business process integrated with it.Every day, software companies are making it easier for customers to use their services. Think about business intelligence, for example. In the past, a large enterprise application like business intellligence would involve a lengthy purchase process, high price tag, and significant impact on the organization in order to obtain meaningful data from the system and ROI for the business.
In today’s cloud and SaaS-enabled IT world, we can pull data from an unlimited number of systems into our service revenue platform, where we clean, structure, and really transform a client’s once-disparate renewals data into a decision-ready, single version of the truth. The data then is fed into a suite of cloud applications specially designed to automate the services sales process, often in a matter of weeks, through all sales channels. In the old world, deploying such a system would have involved a one-year sales cycle and a 12-24 month implementation — at minimum. Such multi-year, tens-of-millions-of-dollars software implementations are relics of the past.
- New partnering and collaboration modelsCompanies today can easily collaborate in new and more closely integrated ways. The nature of collaboration between technology OEMs, resellers, vendors and end customers is being completely reinvented.Consider footwear and apparel juggernaut Nike. Formerly known as a preeminent design company, Nike now strategically partners with the best designers in the word to extend the expertise of its in-house design team. In addition, they have tapped the collective insights of their customers through their Nike iD website, where anybody can custom design and purchase shoes. This enables the company to gather customer feedback, and see trends and preferences. So is Nike still a design company or is it becoming more of a marketing company?
In the business realm, companies have long partnered on non-strategic activities such as call center operations, payroll, or software QA and testing. Now, many firms are tapping into partnerships for strategic business processes, access external experts, and accelerate innovation and business value. Procter & Gamble — one of the giants in the R&D product management world — now sources almost half of its new product and packaging ideas from outside the company.
At ServiceSource, we have led the way in offering a strategic managed service for our clients for over 10 years. Our technology-enabled managed services are marketed under our clients’ brands. I love basketball, so, to use that analogy, we can quickly provide our clients with a team of service revenue all-stars on a global basis across 100 countries and 30 native languages. They put on our clients’ jerseys and literally become part of their team. New advances in collaborative technologies and cloud computing has turbo-charged the performance of our clients’ service revenue ecosystems.
- New economic modelsFor the past 25 years or so, software companies flourished because it was a sellers market. Fortune 2000 CIOs had to purchase on-premise enterprise software—only sold through a few large vendors—and based it on a promise of ROI seven years down the line. And after you paid $10-20 million for the implementation, you were stuck with it.Fast-forward to today. Cloud computing has opened markets to more vendors, more choices, more rapid implementations, and lower costs. Now, the winning SaaS vendors are further differentiating themselves by tying their “as a service” offerings to tangible results.
For example, take the rising star in the HR software world, SuccessFactors. Lars Dalgaard had the vision to set his company apart by tightly linking customer business objectives directly to the performance of every employee against those business goals in a single system. The right work gets done at the right time; the results are transparently visible and can be directed by managers up to the CEO in real time.
Similarly, at ServiceSource, we’ve operated an outcomes-based business model for over 10 years. We call it pay-for-performance, and it’s very simple and straightforward. Our financial success is tied directly to the results we promise to our clients. We will drive agreed-to service revenue performance and client satisfaction or we don’t get paid.
The dawn of cloud-powered services
People used to ask me, “Is ServiceSource a services company or a software company?” The answer is really, “Both.”
The cloud is enabling a fusion between easy-to-use, purpose-built vertical applications and managed services or expertise. What is iTunes? Software or service? It’s an application available for download, but people can buy and listen to music on it as well. You also can go to the Genius Bar at your neighborhood Apple store to access Apple’s expertise. What about Netflix? It used to only be a service for renting DVDs by mail. Today, it’s an application that can be used on BluRay DVD players or Wii gaming systems to stream movies over the Web. You also can call Netflix experts to enhance your user experience.
We call this mash-up of cloud applications, specialized managed services, and pay-for-performance business model, “cloud-powered services.” Especially for service revenue management, this is a high-powered solution that addresses the difficult challenge of optimizing maintenance, support and subscription renewals, while greatly reducing churn rates. Overall, my prediction is the winners who rise above the clouds will operate a business model that shows a clear and swift return-on-investment.
At ServiceSource, we want to enable our clients’ service revenue ecosystems by leveraging the latest and greatest cloud and collaborative technologies to work more effectively with ServiceSource, their global reseller community, and their end customers. Our goal is to enable a high-performance service revenue community for each of our clients to both capture every service-revenue dollar possible, and to improve customer satisfaction and loyalty. In many ways, our plan is to become the SalesForce.com of service revenue management, but offering our cloud-powered services on a pay-for-performance business model.
The time has come for technology companies to stop missing out on their service revenue. This is a huge lever that sales and finance executives can pull in order to achieve higher revenue, profits and earnings. The fusion of innovative technology, collaboration and results-driven business models means the time is “now” for ISVs to take full advantage of cloud-powered services.
Mike Smerklo is Chairman of the Board and CEO of ServiceSource.