FinancialForce is the largest ERP solution on the Salesforce platform and for the last year it’s been redefining itself to better position its products and services for a changed world. CEO Tod Nielsen previewed the results last week during an analyst briefing at the company’s new offices in Manhattan.
The principal pivot transitions the company from a purveyor of cloud ERP solutions to one that does all that but clearly aims at all companies that deliver their products as a service and especially those who want to.
The differences between product as a service and traditional product sales are profound and the importance of having specialized accounting systems that support the differences was demonstrated by Zuora’s recent IPO, which gave the company a market capitalization of $2 billion.
As a cloud ERP and Professional Services Automation (PSA) provider FinancialForce wants to cast a broader net and it expects to do so in several ways. For example, in announcing its Spring 2018 release, it is focusing on enabling businesses to define business models and create appropriate accounting infrastructures for those new businesses. It’s entirely possible, according to the company, that a single entity could have, and need to support, multiple business models that act as subscriptions though their details could be very different.
Nielsen told me:
We were looking to position ourselves as the partner that can best help our customers navigate through the complexities of digital transformation in which they embrace the many benefits of delivering products and services as subscriptions. This starts with being able to tailor back office support systems that best support new business models.
A recent McKinsey study lists three broad types of subscription businesses, including replenishment, curation, and access models, each of which has unique characteristics such as customer base stability or resistance to churn. These models run best with financials tailored to them.
For example, a business could support a straight subscription to a product as a service using an access model while also implementing a curation model for replenishing disposables or supplies in another. Moreover, a business could address the needs of different user populations in business-to-business and business-to-consumer models at the same time. FinancialForce proposes to provide tailored financials that cater to the differences.
In some cases a customer entity might also need implementation services organized and administered through FinancialForce’s PSA technology. Of course, implementation is not the only possibility either. Consider a real-life example where a maker of earth moving equipment enters the business of selling subscriptions to cubic yards of earth moved per day.
But that’s a very rough metric. Is the effort digging using one set of equipment and specialized labor or is it moving material by bulldozer or dump truck? Those different efforts might require different skill sets and thus labor by different individuals and all that has to be scheduled and accounted for. So the business of supplying products as services can become complicated quickly exposing a need for accounting systems that can keep up.
The path Nielsen is tracking makes sense but it will take more explanation. For instance, the messaging now focuses on services without clearly distinguishing between appealing to companies that provide products and services through a subscription model as opposed to more conventional services organizations.
Whether you call it product as a service, XaaS, digital disruption, or just services matters. They all converge on the subscription model but for purchasers of the solutions, it’s clearer and the sales conversation can be shorter when focusing on the root element of subscriptions.
Other terminology in use today may serve to cloud the picture. For instance, there’s no doubt that we’re in the midst of a digital disruption and that the business world is adopting the subscription business model at a quick rate. But those terms reference effects and not causes and make it possible for business leaders to ignore the trend thinking, it won’t happen here.
Nonetheless the root cause driving digital disruption is commoditization, something we don’t talk enough about. Delivering information technology as a service through SaaS and cloud computing was the original commoditization of IT and it is now spreading far beyond IT.
The effect of commoditization is to lower the cost of a product to a consumer which generally broadens the market. Throughout history, at least since the Industrial Revolution, successful commoditization has also meant cheapening the product in various ways such as using inferior materials or skimping on support because using the commodity in question becomes self-evident. At the same time, businesses make less per transaction, but the larger number of transactions makes the whole effort worthwhile.
We live in a unique time because today’s commoditization trend does not reduce the quality of the good or service in question. Customers get the same high-quality products in a shared environment. Importantly, this trend is opening markets, especially in the emerging world, where consumers can’t afford to buy items they can subscribe to.
The challenge for business is to efficiently and profitably deliver products as services and that means scrutinizing and embracing business models, and their support systems, like never before. The end of FinancialForce’s reinvention is to embrace these trends and educate its customers which it will do as it fine tunes its messaging.