How the subscription paradigm flips the cloud financials market

Profile picture for user David.Appel By David Appel July 30, 2019
Summary:
The shift from orders to subscriptions might not sound earthshaking on the surface, but as Sage Intacct's David Appel explains, it's changing the entire cloud financials market.

fish jumps

The cloud financials market has flipped. It all comes down to one simple reason: to build a recurring-revenue business, finance teams are rapidly transitioning from processing orders to managing subscriptions.

Based on the many customer interviews we've conducted, it's apparent that a pattern has emerged showing this shift from orders to subscriptions and the underlying differences between the two models - think Blockbuster versus Netflix.

For early software and SaaS companies, financial systems for order-based were invaluable. These companies sold discrete products-core editions, users licenses, and additional modules. To renew, you simply sold another order. Everything was separate and you managed revenue recognition through vendor-specific objective evidence (VSOE) to satisfy auditors.

The subscription economy is about lifetime customer value

The new subscription paradigm changes all of that. In the subscription world, you must understand the lifetime relationship with the customer - all the upsells and renewals and how they all build on one another. You also must understand the revenue, billings, and cash derived from those-again, over the entire lifetime of the customer relationship.

In an ASC-606 world, you must track all performance obligations, which is a fancy term for your promises - both the ones explicitly written in your customer agreement and all those pesky side terms that your sales rep slipped into the free-text field on the quote. You must also know all the implicit promises that people make in the deal or that have become ingrained in your business processes.

Equally importantly, you need to know these over time, across all orders, all tied back to original performance obligations. Each additional renewal and upsell must be made in the context of the original order's performance obligations. But outdated order-based suites that rely solely on the order master record are too monolithic to make this shift to subscriptions.

G2 is now tracking subscription revenue management software companies

We now have enough momentum in subscription revenue management to consider it a software category. G2 offers a grid to track this transition. It compares leading vendors of subscription-revenue-management software based on customer reviews.

They asked finance executives to submit feedback about how well a solution tracks sales and revenue information for subscriptions and plans, how it manages revenue recognition and match invoices and payments, and how it delivers reports, dashboards, and KPIs to track sales and revenue performance.

See: G2 Grid on Subscription Revenue Management

Here is where the puck is going: a subscription-revenue-management system that offers one quote-to-financial-forecast across the entire subscription lifetime, natively integrated with the item catalog in Salesforce and Salesforce CPQ. Older order-based systems have tried to react by bolting an add-on product for revenue arrangements outside the order process. But users are telling G2 that this only complicates the reporting process. It makes it much harder to link everything together. You certainly cannot generate the SaaS metrics that investors want to see. And you can't do deep dimensional analyses it because it's only looking at the revenue arrangement, not the original general ledger entry.

Diginomica has posted two great stories of companies growing as subscription businesses, how their needs were different, and also what their challenges were as they made the transition. One is of a leader in the HR SaaS space, Jobvite, where the head of finance, Lisa Schulz, shared:

We are shifting effort from 80 percent bookkeeping/transactional focus to 80 percent analytics and business-focused.

Another is on a leader in using AI in the healthcare market, Welltok. John Fowle, the VP of Finance, communicated their transformation:

We're still doing a ton of work, but, now, instead of spreadsheets and data and so forth, we can really run through our full cycle much better and, then use that time to do more meaningful support of the data.

The new cohort of companies with subscription models

There is a cohort of new subscription-based companies that are rapidly emerging and growing. These firms will be going public in five to seven years. To support their land-and-expand B2B business models, they're buying an entirely different product to solve a different problem. At a recent ASC-606 workshop, I asked many of the customers of older order-based financial systems about their reporting using their financial systems. Guess what? They're having these exact problems. They're finding it difficult to superimpose an order-based process and infrastructure onto a subscription-based business model. The result? They're buying third-party tools to manage revenue or billing.

It is no longer only about the order.The more important issue is missing the next technology wave that will help you prove and scale your B2B subscription business model. Fortunately, a path has been laid, with successful stories of peers leading the way, for you to make that transformation.