Transitioning from traditional on-premise IT systems to cloud-based services presents several impacts on daily business for you and your clients. While there are many benefits for a customer, you must also consider the impact it may have on your current processes and stakeholders. You want to be sure that you have enough cash to float the business during the transition period, as well as the correct metrics in place to gauge success.1
The method to understand the profitability and future earnings with cloud computing
In addition to cash flows and predicting future revenue, there are six areas to address in your business to achieve financial mastery. To successfully transition to a monthly recurring revenue model, be sure to understand and have plans in place for the following:
Transition From Capex to Opex
This is probably the most common disruption mentioned in regards to a shift in financial models. Instead of spending a large sum of money, or capital expense (
capex), software is an operational expense ( opex) where it’s a smaller dollar amount every month. This presents a huge opportunity to provide enterprise-grade software solutions to SMB clients for a low monthly fee based on the number of employees. It also affords your clients the flexibility to scale up or down the number of users without forfeiting pre-paid licenses.
Change Order Frequency and Values
This is the most obvious change, but it affects several supporting departments including finance and accounting. You’re now required to finance a customer every month for their subscription or consumption-based cloud service and take on any risk if a customer is not able to pay. Furthermore, accounting is required to process invoices each month and subsequently collect payments. This was previously a one-time event every three years for one client. Now your accounting specialists have to repeat the process 36 times in the same time frame. Educating supporting departments is important, as well as providing automation tools to help alleviate the increase in invoice frequency.
Manage Complex Invoicing
Depending on the cloud service/offering, invoices from vendors can be difficult to decipher. If the service is Infrastructure As A Service (IaaS), this is typically billed based on actual usage or consumption (like your electric bill). These invoices don’t always specify which client or product. If you’re leveraging Software As A Service (SaaS), the invoice may have different subscriptions, pro-rate charges, and no indication which subscription is for which client. This can be hard for accounting to process and a nightmare for auditing. In addition to unclear invoices, you receive multiple from all vendors from which you purchase. This may be alleviated by partnering with a cloud solutions aggregator or distributor, or a company offering a service mentioned in section 4 – Change in Billing Models.
Vary Billing Options
Terms like “bill on behalf,” “billing-as-a-service,” “billing platform-as-a-service,” etc. are popping up everywhere. As cloud subscriptions demand partners to adopt a monthly (or flexible) billing regimen, you have to adjust your systems to accommodate the influx of invoices or find a new system to help you. You may want to offer monthly, quarterly, or annual payment options for your clients. In addition to your own billing system, here are two billing programs you may also find today:
“Bill on behalf” is where you leverage a company to bill your client directly, and you’re issued a rebate check. Instead of upfront margin, you would only receive a back-end rebate check. If you’re considering this option, you need to understand the frequency of rebate checks and commission structure for sales, as the timing of cash flows is slightly different.
“Billing platform-as-a-service” is where you would use a third party platform to manage any metered or monthly recurring invoices. In this instance, you’d integrate your existing payment gateway system and tax systems. These services offer support for partners, as well as pre-populated product catalogs, reporting/monitoring tools, customizable invoices and the ability to bundle in your own services. This option would not change the timing of cash flows, but you would need a person to own generating invoices and managing the portal.
Adjust Compensation Models
This one is the most difficult. If you choose a “cloud-first” sales model, then an overhaul of incentives, training, customer engagement, and performance management is critical to success. Reinforce the right behavior by finding the right balance on compensation structure, incentives, and motivators. This can come from transforming the current sales team to the “cloud-first” model or creating a separate sales team only focused on cloud solutions.
Focus on Customer Lifetime Value
Success with cloud subscriptions requires continuous client engagement and communication. You can expect a decrease in revenue as the smaller order size takes three to five years to break, even compared to an on-premise deal (this is why having short and medium cash flows are important). Renewals are no longer a huge focus as the subscription is evergreen. Sales representatives should focus on up-sell and cross-sell opportunities, excellent customer service, and meeting client business needs in other ways.
These business areas require major commitments and changes to adapt to selling cloud services. Finding the right partner(s) to transition your business to cloud ready is important to a successful strategy. Tech Data can offer guidance on making the transition to the cloud, along with access to a robust portfolio of products and services to make it easier. Contact the Tech Data Cloud team at 800-237-8931, ext. 87663 or email@example.com to speak with a specialist and see how we can help take your business to new heights.
1 Concerto Cloud Whitepaper “Transforming On-premise Offerings to a Cloud Model” http://www.concertocloud.com/docs/default-source/documents/concerto-tranforming-on-premise-offerings-to-the-cloud-whitepaper.pdf?status=Temp&sfvrsn=0.36760208402976324
2 Pope, Robert “The Rule of 78 – how cloud adds up”