Enterprise Business Transformation: The Shift to Digital Recurring Revenue

Enterprise Business Transformation: The Shift to Digital Recurring Revenue A research report prepared by: Publication sponsored by:

TABLE OF CONTENTS Digital Transformation is Business Transformation Four Key Challenges in the Digital Business Transformation I. Monetization of Digital Offerings II. Partnering for Digital Business III. Implementing New Systems IV. Integrating with Back-End ERP Systems Enterprise Business Transformation 1 2 7 TABLE OF FIGURES Figure 1: Four Keys to Digital Business SIDEBAR: New Systems, New Capabilities, Digital Business, Record Time SIDEBAR: Digital Partnering for Monetization 2 5 6 About This Report Saugatuck Technology Inc. is solely responsible for the content of this report. Unless otherwise cited, all content, including illustrations, research, conclusions, assertions and positions contained in this report were developed by, and are the sole property of, Saugatuck Technology Inc. The research and analysis presented in this report includes research from ongoing Saugatuck Technology research programs, including our global survey and interview work with user enterprise business and IT leaders, briefings with providers, and analysis of publicly-available market information from multiple sources. Research conducted for this report, and publication of this report, were sponsored by Zuora Inc. About Saugatuck Technology Inc. Saugatuck Technology, Inc., provides subscription research and management consulting services focused on key market trends and disruptive technologies driving change in enterprise IT, including Cloud, Mobility, Social and Collaborative IT, and Advanced Analytics. Founded in 1999, Saugatuck is headquartered in Westport, CT, with offices in Falmouth, MA, Santa Clara, CA and Frankfurt, Germany. For more information, please visit www.saugatucktechnology.com or call +1.203.454.3900. i

DIGITAL TRANSFORMATION IS BUSINESS TRANSFORMATION Business transformation drives IT transformation. And in turn, IT transformation leads to new opportunities and more rapid competitive responses. The key value is to provide efficiency, agility and flexibility, so when it s important to consider a new business offering, there are no constraints, the Director of Technology Planning and Strategy at an established large enterprise said about the transformation to Digital Business. We are always surprised where innovation comes from. As we deploy new capabilities in the Cloud to make things easier for the business, it lets the business focus on innovation. Digital delivery models are impacting traditional businesses. Driven by consumer demand for convenience and new consumption models, including subscriptions and usage-based consumption, enterprises are moving to Digital Business offerings and finding huge upside from predictable revenue streams and long-term, recurringrevenue customer relationships. Yet for any firm to take advantage of becoming a Digital Business whether a large enterprise traditionally on the buy side of technology, a software ISV in transition or a pure-play Cloud solution provider this challenge is significant: how to implement a platform to support a Digital Business model and then keep pace with the ongoing pace of change. Make no mistake about it, doing business in the Cloud means operating at a much faster pace. Not only does Digital Business increase the speed at which you have to move in general, it changes how you can support change, said the VP of product management at a well-known vendor with both on-premises and Cloud solutions in a recent interview with Saugatuck. In the ultra-competitive environments where companies are racing each other to release the next big thing, innovation is never enough. Everything moves faster, and yet there is little or no margin for error. Speed-to-market and software quality are both essential for Digital Businesses in achieving business goals and in creating and sustaining differentiation. Succeeding in Digital Business also means being agile and increasing your solution s responsiveness to customers through the Cloud. Consequently, technical problems may cost you customers permanently. Clearly, the potential upside is enormous. There's tremendous opportunity for growth, whether by extending existing business models with digital offerings or by creating new business models built around recurring revenue. Of course, that also means sustaining the customer relationship. High customer retention is without question the key to profitability in a recurring-revenue model. 1

However, for established enterprises, especially those with brittle business models, entrenched processes, legacy systems and brittle, legacy mindsets, making this work is hard. To succeed in the Digital Business transformation, established enterprises need innovative business models, platforms that enable and support business innovation, and a renewed company culture centered on innovation and on building customer loyalty. IT and the business need to think in a whole new way, and they need a whole new breed of systems to remove roadblocks to innovation and to augment their core business systems portfolio. The key competitive value is to provide Cloud speed, efficiency, agility and flexibility to the line of business leader, so when it s important to consider a new business offering, there are no constraints, said the Director of Technology Planning and Strategy at a very large enterprise in the midst of transformation to Digital Business. FOUR KEY CHALLENGES IN THE DIGITAL BUSINESS TRANSFORMATION While there are many dimensions to this transformation, and all of them will demand significant effort, four key challenges are especially critical and should receive special attention and focus: Monetization, Partnering, New Systems, and Integration. Figure 1: Four Keys to Digital Business Source: Saugatuck Technology Inc. 2

I. Monetization of Digital Offerings The potential for monetizing digital offerings is wide open, and few engaged in the transformation to Digital Business understand all the possibilities at the outset. Problems will arise when Digital Businesses grow larger, must serve new markets and launch new offerings or encounter aggressive competition. A monetization solution has to be able to meet those challenges successfully. Moreover, in today s market monetization is not an afterthought. Traditional financial accounting is backward-looking and deals with the state of the business at a single point in time. Digital Businesses built around recurring customer relationships and revenue models need to consider expected, recurring cash flows, customer retention and growth, and manage with a clear view to the future. Channel expansion is a key aspect of the Digital Business transformation that can have major impact on the way the business operates. One interesting example arose in an interview Saugatuck recently conducted with the CFO of a global media company that formerly derived most of its revenue from the broadcast business model. This Digital Business CFO observed that the impact of digital offerings has completely transformed how the media company views its decision-making on content production projects: The way we make decisions has changed. We rely on data, and you d better convince me there is a monetization model behind it and reach across any channel and devices, including wearable, YouTube, games. The challenge with media in general is still the same how do we produce as cheaply as possible? But now we can t take out any more cost, so show us how to grow revenue by driving the reach. Digital Businesses need to develop a flexible approach to monetization that can embrace new relationships, new channels, new categories of solutions and new pricing models: [Our business ] used to be 90 percent broadcast, but today it s over 50 percent digital products. It s everything from pure ad revenue to content reach on online platforms we monetize, but the bigger piece is in the shift to digital downloads and other ways of distributing video-on-demand in a combination of a la carte and subscription. [We are] on channels like Hulu, Netflix, Amazon, Apple itunes; and we are now developing content especially for digital distributors, different formats, and offshoots of our core content. II. Partnering for Digital Business There are two main reasons for partnering in the transformation to Digital Business. The media company CFO whose channel expansion strategy we discussed earlier highlighted one: leveraging indirect revenue via channel partners to expand reach into new channels, new geographies and new industries. Spotify s distribution deal with Times of London to bundle one year of the Cloud-based music service together with the newspaper s new online digital offerings is a good example of that. The other reason is to supplement in-house expertise. 3

The transformation to Digital Business brings with it many new areas outside the knowledge base of most ISVs or large enterprises. These firms learn quickly that partnering is a clear economic imperative one that enables new, supplemental internal expertise, while outsourcing non-core expertise. As the Vice President of Product Management at the major vendor in Digital Transformation recalls: We ve been happy with ability to deploy faster, increase the speed at which we are moving, by partnering and adopting an agile approach, keeping projects smaller not gigantic. Partnering with people who really know what they are doing. And there are many ways to leverage the agility, speed and expertise of partners including the following: Potential Partner Expertise Business transformation services Financial/business model consulting services Monetization/billing and payment platforms, tools, and services Compensation design, management, and services Marketing management and services Performance testing and management Implementation services Industry/Regional ecosystems Channel program development and management Cloud development software stacks, engines, tools, and expertise Infrastructure hosting and services PaaS/Cloud development tools and services User Interface design and development Service delivery When asked about how established enterprises can meet these new challenges, the Director of Technology Planning and Strategy expressed it this way: Clearly there are new service delivery challenges, especially being a provider and having to meet SLAs, and especially with a complex solution involving multiple partners. We are dependent on our infrastructure provider, our billing provider, on our Cloud platform for scaling to meet demand and need. This is harder for established players that have to change their business models and transition their customers, in contrast to a disruptive provider who comes in without any baggage. How do businesses decide which partner model to choose? Through partnering, a Digital Business can accelerate time to market, scale rapidly and extend reach across channels and geographies. There are a myriad partner revenue-sharing and billing models. And there may be an advantage in getting a partner to not just sell, but to provision, and take on the ongoing billing relationship. Should businesses let partners own the billing relationship or is it in their interest to just let partners sell, and own the billing relationships themselves? The decision is clearly a strategic one, and all of these alternative choices all should be enabled by the monetization system, an essential piece of the transformation to Digital Business and a clear imperative for partnering. 4

NEW SYSTEMS, NEW CAPABILITIES, DIGITAL BUSINESS, RECORD TIME In 2013, Touring Club Suisse, Switzerland s motoring organization, serving 1.6 million members, switched off the minicomputer systems that had run its operations for more than two decades. For CIO Ernest Gmünder, the moment was the culmination of a two-year project that began shortly after he took up his role at Touring Club Suisse at the end of 2010. The journey to rebuild its IT system began in 2011 and went live in December 2013. But this was a transformative change from traditional on-premises systems to a new Cloud-native system. The entirely Cloud-native system is comprised of six applications: Customer relationship management environment used by sales agents in the call center. Configure-price-quote processes that guides agents through questions during a sales inquiry. Campaign management, lead management and related activities such as closed loop segmentation. Commission calculations and sales performance metrics Recurring-revenue management and billing, with partner management and commission payments. Cloud-based integration platform tying everything back to remaining legacy systems. We have now an environment that offers us possibilities that are immense, and we know that it will be future-proof. We know that it will evolve with what s coming in the IT industry in general, and we can focus our organization on what is business critical rather than just following what is happening on the technology front. Achieving this in such a short time demonstrates one of the key advantages of cloud systems, he says, We have done in two years what everyone told us we should have done in four years. You can be very rapid. Gmünder emphasized the positive impact of the new billing-and-payments management system on activities such as introducing and changing products, giving more options in how members pay for their services, and improving productivity in the call center: Easy pricing, easy billing is absolutely key. We have built an environment now where the system adds a lot of value. III. Implementing New Systems At the heart of most traditional businesses are on-premises ERP systems that serve as systems of record for the organization. These systems evolved at a time when ways of doing business were far less complex, more stable and predictable. Digital offerings were rarely part of the picture. Product development focus was often more about managing cost than enabling innovation. Five years ago, the large enterprise CIO was still very busy implementing ERP systems as the IT primary challenge. CIOs in established enterprises today find that ERP systems are too expensive to maintain, change and accommodate to digital business and to recurring revenue, both of which require a nimbler, more agile approach. Changes to customer acquisition, e.g., premiums, trials, promotions and incentives that impact future revenue, and changes to billing and accounting operations both will be drastically different in the new digital offerings and require capabilities generally beyond ERP systems. New systems and platforms are needed to support the continuous cycles of innovation in Digital Business. Cloud sales and customer management solutions (CRM) and Cloud integration capability are two of the centerpiece platforms of today s Digital Business. A third is the monetization solution that manages the entire customer lifecycle from customer acquisition, onboarding, provisioning/de-provisioning, account manage- 5

ment, billing and payments, to any partner ramifications such as bundling, reselling and revenue sharing. According to the VP of Product Management at a well-known vendor, talking about managing both on-premises and Cloud solutions in a business in the midst of transformation, New systems are necessary, whether billing or revenue recognition or go-to-market, catalog, or social channels in customer care. New tools mostly but sometimes just the same tool implemented differently. The right combination of Cloud-based recurring revenue management and billing solution and provider is critical to the success of a Digital Business. You ve got to be able to turn on a dime and introduce new offerings to counter a competitor or pivot to enter a new market or do business with a new distribution channel. Some of the things that are worth considering when selecting a billing solution provider are customer account management options, service agreements, pricing models, billing plans, contract terms and rate plans. Metering capability may prove to be very important, if usage models are, or will be, part of a monetization approach. Channel and partner management capability that enable either party to own the customer, to bundle and support multi-level partnerships may prove critical to the business model of the transforming Digital Business. How complete the billing solution is may determine the provider s ability to respond competitively to shifts in the market. DIGITAL PARTNERING FOR MONETIZATION In 2012 Fairfax Media Limited, a leading multi-platform media company in Australia, embarked on a digital content model. The overall broad strategic imperative for Fairfax is to reduce our reliance on advertising both print and digital and find other ways to monetize audience relationships, according to Fairfax CIO Andrew Lam-Po-Tang. To shift from advertising to digital recurring revenue, Fairfax needed infrastructure to manage subscriptions across mastheads and understand subscriber trends and behaviors. As Lam-Po-Tang saw it, the reasons were clear: increase speed to market, minimize investment and control operating costs. Partnering was the way to go. A digital partner for monetization made that possible. The self-service Cloud platform Fairfax selected allows customers to select and store digital subscriptions, while managing all billing. Fairfax brand managers can now focus on audience relationships, product quality and pricing, rather than the mechanics of processing payments or maintaining the platform. By embracing a monetization platform partner, Fairfax has direct access to readership metrics and can focus on building revenue. IV. Integrating with Back-End ERP Systems Today s Digital Businesses require more nimble monetization and customer management systems, and they also require the ability to integrate with the business IT portfolio. Setting aside the enormous potential for synergies with systems and APIs that can be the basis for new and innovative offerings, perhaps the one certain requirement for integration is linking the CRM and Cloud monetization systems to on-premises ERP, the enterprise system of record: 6

Monetization linked to traditional systems of record, e.g., legacy ERP and CRM systems. Despite the functional limitation of traditional ERP for billing and payments in recurring revenue scenarios, especially for multi-level channel relationships, and the much higher cost profile to run a Digital Business solely on ERP, there is a need to link the more nimble monetization system to ERP for back-end accounting and financial reporting. In addition, integration to CRM can drive a better understanding of the customer relationship and how to ensure high rates of retention for recurring revenue. Monetization linked to reporting and analysis systems, e.g., dashboards, can also support this by providing visualization of key metrics that may be supported by the monetization platform, the CRM system or the ERP/financial reporting system. As the Director of Technology Planning and Strategy at the very large enterprise in transformation noted, We have a need to hook ERP environments into third party APIs, doing handshakes for exchanging sales keys. If it s not automated, you can t scale. We are leveraging new technologies for monitoring customer experience and monetization performance. And it s in real-time production mode today, as opposed to wrap it and mail it, the way it used to be. ENTERPRISE BUSINESS TRANSFORMATION Consumers and businesses today want access to services delivered how they want, when they want, and priced in a way that supports their consumption. More than ever, consumers prefer the convenience, cost and accessibility of Digital Business offerings delivered, consumed and paid for on a recurring basis. This shift in consumption preferences coupled with the rise of social, mobile and the proliferation of connected devices, is forcing enterprises to respond with innovative service delivery models. There are many questions to consider in the Digital Business transformation: How will business processes change? How will sales and marketing change? How will organization and culture change? What technology will be needed? What partnering and alliances will be needed? How will we monetize our Digital Business offerings? Business transformation drives IT transformation. And in turn IT transformation leads to new opportunities and more rapid competitive responses. The key value is to provide efficiency, agility and flexibility to business leaders, so when it s important to consider a new business offering, there are no constraints. As the Director of Technology Planning and Strategy at an established large enterprise said about the transformation to Digital Business, We are always surprised where innovation comes from. As we deploy new capabilities in the Cloud to make things easier for the business, it lets the business focus on innovation. And that s the way to manage enterprise business transformation and the shift to digital recurring revenue: Put in place the people, process, and technology that lets the business focus on innovation. 7

SPONSOR PERSPECTIVE: ZUORA AND THE SHIFT TO DIGITAL RECURRING REVENUE IN THE ENTERPRISE Driven by customer demand for more flexible ways of buying and consuming services, enterprises are rapidly transitioning from selling products to services and are developing new business models built on recurring relationships. As the market shifts to services and innovative delivery models, massive growth opportunities exist for enterprises ready to transform their businesses. To this end, Zuora is pleased to sponsor this Saugatuck research among senior finance and IT executives. The goal of this research is to uncover the primary challenges and the keys to success for enterprises in the digital business transformation. What we ve learned is that supporting this transition in the enterprise is not easy. This paper details 4 challenges among enterprises in the shift to digital: i. Monetization of digital offerings ii. Partnering for digital business iii. Implementing new systems iv. Integrating with back-end ERP systems Designing a new business model built around recurring relationships is easier for companies that are starting with a blank sheet of paper for those who aren t constrained by a legacy of product-centric business processes, mindset and legacy IT systems. For large, global enterprises that have a traditional product based business model, the transition can be a significant challenge. Large, monolithic ERP systems make it difficult for enterprises to swiftly and easily embrace alternative business models like subscriptions. As a result, enterprises seek out platforms that bolster their backend legacy ERP systems to enable continuous business model innovation centered on the recurring customer relationship. About Zuora Zuora is the global leader in subscription commerce and billing, helping companies in every industry transition to the Subscription Economy. Enterprise leaders and high-growth companies alike use Zuora's multi-tenant cloud platform to launch, scale, and monetize their subscription services. Zuora's applications work where traditional ERP applications fail: Subscription pricing, quoting, orders, billing, payments, and renewals. Built from the ground up by SaaS industry veterans from salesforce.com, PayPal, and NetSuite, Zuora services innovative customers like Informatica, Tata Communications, Box, Xplornet, Ustream and Reed Business Information. To learn more about Zuora, please visit www.zuora.com. 8

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