Frictionless Enterprise - how the XaaS Effect transforms customer engagement
- Continuing our series on the journey to Frictionless Enterprise, Phil Wainewright reprises the XaaS Effect and explores how digital connection has transformed customer engagement.
The golden rule of customer engagement in the digital era is to make the most of your connection to your customers. This may seem obvious at a time when people talk incessantly about digital engagement and customer centricity. But this is not just a digital upgrade to the existing relationship. As with every aspect of the journey to Frictionless Enterprise, digital connection transforms and extends the customer relationship in unexpected ways. Realizing its full potential demands a complete rethink of processes, operations and culture.
Experience shows that the scale of this transformation is rarely evident when you start out. At first glance, going digital looks like a straightforward enhancement — adding a new online channel, offering subscription-based payment options, perhaps opening up new geographies or segments that weren't reachable before. But every industry that's been through this journey has undergone massive transformation — just look at publishing, music and software, who came first — with huge disruption to incumbents. Every industry now faces similar disruption, while those who started earlier are still on the journey, as the technology continues to evolve, along with the new business and operational models it enables.
Continuous connection - SaaS and the XaaS Effect
Why is the transformation so great? The history of Software-as-a-Service (SaaS) gives us an answer. When the software industry first started moving to the cloud a quarter century ago, most participants massively underestimated the impact. The SaaS model, in which providers ran the software on behalf of customers and charged them a monthly usage fee, appeared to be simply a mechanism for amortizing costs, speeding implementations and achieving economies of scale. But this overlooked the significance of the continuous digital connection that the SaaS model creates between the software provider and its customers.
While other industries including publishing and music were also drastically changed by digital connection, it proved to be particularly powerful in the case of software. This is because a SaaS provider can continue to update the software throughout its lifecycle, while constantly gathering feedback and data on how users interact with it. The digital connection thus becomes a channel for building a relationship with the customer over time, focused on their ongoing use of the product, as we'll explore in more detail in a moment.
While this began with SaaS, today the same phenomenon touches all industries, as every product, service and experience is becoming infused with software and connected to the cloud. Manufacturers instrument their products with sensors and smart functionality, service providers continuously track performance and outcomes, retailers provide an omnichannel experience. That is why we have named its impact the XaaS Effect, where XaaS (pronounced 'x-ass') stands for Everything-as-a-Service. Understanding this context is essential to making the right choices in adapting to this new paradigm.
Engage, monitor, improve - the virtuous cycle at the core of the XaaS Effect
The key element is the continuous digital connection to customers and their experience as they use the product or service. This transforms the previously disconnected relationship, in which there was little or no contact once a sale had been agreed and a product or service delivered. In its place, the XaaS Effect sets up a three-stage virtuous cycle, which iteratively adds new value to the relationship over time, as we first explained four years ago:
- Engage. The customer is directly connected to the business every time they use the product or function.
- Monitor. The business can see how all of its customers are using its products or services, and proactively fix any problems.
- Improve. The direct connection allows the business to update its software or offer new capabilities.
So instead of throwing a product out into the market and only realizing there's a problem when it starts coming back — or never knowing until one day the customer stops returning your calls — a digital connection makes it possible to spot problems and fix them right away. This fundamentally transforms how businesses operate and engage with their customers ... [They] shift their attention to the customer experience and helping them achieve better outcomes.
This is better for businesses, because it's a more efficient way to build better products and services, and deliver them faster to their customers. And it's better for customers, because businesses are more engaged in ensuring they continue to get value from the products and services they're paying for.
Five enabling ingredients of XaaS
This expansion of the customer relationship from a sporadic transaction to continuous engagement requires a new technology infrastructure and a transformation of how the enterprise manages its internal operations. Four years ago, we published the first edition of our d·book The XaaS Effect to provide some practical guidance to CXOs navigating this shift. First of all we identified five core technology-enabled elements that need to be in place:
- Digital connection — the customer has on-demand access to the provider’s services, while the provider is able to monitor the customer experience, or to perform maintenance and updates.
- Powered by software — the provider’s service includes some element of software automation to help deliver and enhance the customer experience.
- Networked resources — the provider co-ordinates networked data and other shared resources to provide services to all its customers.
- Constantly evolving — the provider constantly monitors its services and customer experiences to find opportunities for improvement.
- Usage-based pricing — a part or all of the provider’s revenue is related to usage and is billed on a recurring basis.
Note that every one of these is an essential component. XaaS is much more than simply adding a digital connection and switching to subscription billing. What matters most is how the provider uses that connection to enhance the customer experience throughout the product lifecycle. In a discussion of XaaS with two fellow analysts last year, Jeff Kaplan of THINKstrategies hit on a succinct example:
Many businesses misinterpret the XaaS model as simply a matter of changing the payment model, much like leasing a car instead of buying it outright. But as Kaplan pointed out, 'When you lease a car, you take it off the lot, and nothing really improves unless it's a Tesla.' And why is Tesla the exception? Because it's a digitally connected product whose manufacturer remains engaged with its customers, monitors their usage of the product, and improves its functionality and performance over time by upgrades to its software.
Yet even with all of these elements in place, the transformation has barely started. Culture, processes and the underlying IT infrastructure all need to change significantly to be successful in the XaaS world.
Getting the culture right
Former product businesses that have made the transition to XaaS bear witness to the huge gulf that exists between the old transactional, product-centric culture and the new mindset of XaaS. As Oracle executive Doug Kehring explained in a presentation on this topic four years ago:
It’s tempting to imagine that once the technology is in place, the job is done. But that’s just the starting point. The technology fuels new engagement models, delivery models and business models, but these won’t crystallize unless the people and the organization are ready to deliver them.
Kehring cites several aspects of this transformation across the organization. The sales motion changes from a focus on closing deals to one that emphasizes renewals. Customer service and support is no longer incentivized to close tickets as quickly as possible, but instead refocuses on solving issues effectively. People management is impacted too, as the company has to look after its employees to ensure they're in the right frame of mind to help customers.
At videoconferencing vendor Lifesize, Chief Customer Success Officer Amy Downs explains that changing from products to XaaS required a complete shift in mindset:
We had to redesign the entire company. Customer support was like a complaints department. [A customer-centric approach] was not in anyone's DNA at the company in any way. We had to shift the attitude and culture of the company to think with the end user in mind first.
The culture of XaaS sees the initial sale as merely the first step towards demonstrating value throughout the lifecycle of the customer relationship. As we summed up in The XaaS Effect, this puts the focus on customer outcomes:
When you put all of these different elements together ... what you get is an engagement with the customer that’s all about what they’re trying to achieve, rather than what you succeeded in selling to them.
This is a continuous relationship where businesses have to keep delivering value to earn a renewal, and where they’re constantly getting feedback and metrics they can use to enhance and improve the service they’re providing.
Making every process as frictionless as possible
This new focus on customer outcomes has repercussions throughout the organization, not just at the point of engagement with the customer. As we elaborate in the d·book:
In the XaaS model, the vendor engages with the customer to help achieve an outcome. It's no longer a one-off transaction but instead it's a continuing relationship. The effect of that change in emphasis ripples back throughout the entire business, requiring a fundamental change in how it operates — not only its IT systems but also its processes and people — to deliver results in a far more joined-up, responsive and iterative pattern.
This is why XaaS is closely aligned with Frictionless Enterprise, which shapes the digitally connected framework in which it operates as the preferred engagement model. XaaS demands joined-up data and processes because every enterprise function — from product design and sourcing through customer service and payables — touches and shapes the customer experience.
The XaaS virtuous cycle of engagement, monitoring and improvement also provides a template for how internal operations behave. As functions including HR, finance and IT itself become digitally connected, many routine processes are automated or become self-service, with the ability to track how they're performing for users. Meanwhile, domain specialists find their time is freed up from mundane tasks and instead they become available to offer advice when something unexpected comes up, or if additional help is needed to achieve the desired outcome. Information, know-how and agency becomes more atomically available within a collaborative canvas of cross-functional teamwork, as we'll discuss further in the next chapter of this series.
Mapping the right IT architecture
The enterprise IT architecture also has to change to support this more connected and adaptable operating model, which we'll write more about in a later chapter. Instead of the rigid tiers of data, function and engagement that characterizes traditional enterprise applications, this new, API-first architecture makes every component equally available:
The new model is tierless — an open network ecosystem in which any function or resource becomes available through APIs to any qualified participant. Whether those functions and resources are data stores, microservices, system resources, serverless functions or SaaS applications and processes, the API layer makes them equally available as autonomous multipurpose composable services. They connect up to produce results and then present the outcomes to the end user through an engagement layer. This combination of headless engagement with serverless functions and resources defines the new architecture.
Enhancing the digital connection
The richness of the connection to customers continues to evolve along with the technology. There have been several notable developments in the years since we first published The XaaS Effect. Perhaps one of the most intriguing is the rise of video, spurred by the need to provide alternatives to face-to-face conversations during the pandemic. Some organizations are starting to use real-time video communication to improve customer service interactions, while recorded video is increasingly prevalent in both marketing and support. This is part of a broader trend to utilize visual and audio sources to speed data collection and monitor behavior, supplementing or replacing earlier text-based channels.
At the same time, the rise of digital messaging provides a platform for bringing together formerly discrete communication channels. Customers can interact across email, voice, chat or video and the history of their interactions flows across these formerly separate silos. As enterprises expand their partner ecosystems, they are beginning to learn how to bring other participants into these conversations while respecting privacy and consent. We'll have much more to say on these emerging trends in digital experience in a later chapter.
XaaS not SoXaaS
One of the lessons from the history of SaaS is that many of those who want to ride this new trend will jump on the bandwagon without making the fundamental changes that the model demands. Software vendors in the early days of SaaS would often redeploy their existing products in the cloud without adapting them to the new environment, a phenomenon that I named SoSaaS — Same old Software, as a Service.
Today we are seeing a similar failure to grasp the XaaS model. Businesses are connecting their products and charging a subscription without committing to enhancing the value of the offering over time. In a corruption of the model, some even use intellectual property laws to lock customers into predatory maintenance contracts. I gave my take on this last year:
There is no sustainable market for vendors who simply package up their Same old 'X', as a Service (SoXaaS). Adding a digital connection and a subscription model isn't enough to create a true XaaS proposition. It requires real engagement with customers to understand the outcomes they're aiming to achieve, monitoring how your product, service or experience contributes to that, and a real commitment to continuously improve the offering so that it supports their success in those goals. This is the secret sauce of XaaS and it defines the next 25 years of digitally connected business.
In contrast, others are racing ahead with the model, but there's still much to learn as it matures. My colleague Jon Reed observes that effective measures of customer success remain elusive. I think that's because most organizations still look at the customer relationship as a transaction rather than a collaboration.
For example, very few providers are yet in a position to monitor aggregate data across their customer base in order to suggest benchmarked improvements. Spend management vendor Coupa is a pacesetter here with its Community.ai initiative, which uses AI to help maximize the value of the customer ecosystem's shared data and knowledge.
We'll continue tracking this emerging space in the coming year and beyond, and we'll have much more to say about it. In most sectors, the tools for discovering customer goals and measuring outcomes are still in their infancy. In my view this all goes back to the virtuous cycle at the core of XaaS, rephrased to focus on the customer's goals:
- Engage — what does success mean for your customers?
- Monitor — are they experiencing success?
- Improve — how can your business, product or service help them be even more successful?
This is the second chapter in a series of seven exploring the journey to Frictionless Enterprise:
- Principles of Frictionless Enterprise, a framework for digital work and business
- How the XaaS Effect transforms customer engagement
- Digital teamwork and the Collaborative Canvas (1/2)
- Digital teamwork and the Collaborative Canvas (2/2)
- The Tierless Architecture of composable IT
- The evolution of the digital user experience
- Atomic talent and the employee experience
- Distributed ecosystems and decentralized trust systems
You can find all of these articles as they're published at our Frictionless Enterprise archive index. To get notifications as new content appears, you can either follow the RSS feed for that page, keep in touch with us on Twitter and LinkedIn, or sign up for a free download of The XaaS Effect d·book and join the mailing list for our fortnightly Frictionless Enterprise email newsletter.