I’ve gotten great feedback from my last blog, “Why the ‘as a Service (aaS)’ Model Changes Everything,” and wanted to follow that up with a deeper look at one of the things the aaS model impacts: revenue. AccuCode started down the aaS path back in 2003. I could write a book about all the challenges we have overcome in shifting from being a Value Added Reseller (VAR) and Integrator to an aaS products company. Now, we aim to become the enterprise aaS ecosystem for everyone that wants to go to market that way.
As we have engaged with partners in discussions about building aaS value propositions and taking them to market, the number one barrier for those partners to take the leap into recurring revenue is the shift in the cash flow model and associated fear that the new approach will cannibalize the legacy CAPEX (capital expenditure) project based business. These partners include hardware manufacturers, distributors, VAR’s, and ISV’s (independent software vendors). The hardware manufacturers are the ones that have the most difficult time getting their heads around it. However, it’s a big mental barrier for all of them.
The benefits of the shift are numerous, but the most important one for everyone (the customer and the solution provider) is PREDICTABILITY. Event driven business models, like CAPEX VAR’s use, are expensive because from one day to the next you don’t know what your scope of work will be. Always needing to be prepared to perform is very expensive. The same is true for the customer. Knowing what to expect and exactly what it’s going to cost is worth a lot of money in almost every business model there is. It’s not just that aaS provides higher profit margins (2-3 times average VAR CAPEX models), it’s that the cost to deliver the solution goes down dramatically when you know everyday how many customers you will have to support and how much they are going to pay for it. We have found that financing partners who understand this are willing to fund as much Hardware as a Service (HaaS) as we can sell. They get the equipment and the associated recurring revenue from the customer as their collateral base (150%+ of loan value), and I get a much more scalable and profitable business model. About 50% of our revenue, and a much higher percentage of our profits, in 2011 came from monthly subscriptions for either software, hardware, or services. The wholesale cost of the hardware is negligible in comparison to the present cash value of the recurring revenue it will generate between hardware, software, and services.
The second concern about the aaS model cannibalizing the legacy business model is just not valid. Our legacy business has continued to grow, right alongside our recurring revenue. The reality is they are for completely different customers. Adding the aaS proposition to your tool box dramatically increases the size of your addressable market. The customer who has a CAPEX budget, a qualified IT staff, and an “I need to own it perspective” is not going to decide to acquire an aaS proposition for any mission critical requirement. But how many prospects do you find that have mission critical requirements that can easily cost justify the solution, but don’t have the capital and/or the qualified IT staff to own and operate it? With aaS, every one of those now becomes a viable customer. For the most part, it is currently SMB customers that are embracing this model. There are exceptions, but not many. It will be a few years before Tier 1 companies decide this approach is right for them. In the meantime, there is a lot of opportunity in the mid-market sector. The bottom line is there is no risk here. It’s not a threat to your legacy business model, it is a complementary expansion of it.
So don’t wait. Start forming your aaS strategy now! The sooner you get your recurring revenue started, the faster it will grow. It brings with it lots of new customers, higher profits, and much greater potential for scale. Another great benefit is what it will do to the valuation of your VAR business. Recurring revenue gets valued at 3 to 5 times more than non-recurring.
Many of you have already taken this leap. How have you dealt with the shift in cash flow? What are some of the challenges you’ve faced? What has been the impact to your business? What do you need to do a lot more of?
If we can help you along this path in any way, we welcome the opportunity.
Kevin Price, Founder and CEO of AccuCodeLearn more about this topic at scansource.com >