According to a new survey released by Deloitte, the shift to what it calls the "flexible-consumption model" of XaaS (Everything-as-a-Service) when buying enterprise IT is now firmly established. The 2021 edition of the firm's Everything-as-a-Service (XaaS) Study of US-based XaaS adopters in Q4 2020 found that three quarters are spending over half their enterprise IT budget on XaaS — and almost half (47%) expect that to rise to a 75%-or-above share of the IT budget by 2025. But what I found most notable about the report is not the finding that XaaS has gone mainstream, but its emphasis on characteristics that go far beyond how it is paid for.
Like Deloitte, I've been tracking the XaaS phenomenon for several years — and its antecedent SaaS for more than two decades. I've always emphasized how fundamentally the model changes the relationship between sellers and buyers. It's good to see that view confirmed by the Deloitte study, although I think its authors have neglected the digitally connected nature of how it's delivered. This is a big part of why it changes the customer relationship so dramatically.
The digital dimension is also why I define XaaS far more broadly than the Deloitte authors, for whom the 'X' stands for any form of IT, from infrastructure and platforms to applications, security and emerging tech such as AI. I argue that the addition of a digital connection allows businesses to apply the XaaS model to literally any product or service that can be bought and sold (and I pronounce it 'x-ass'). Therefore what we can see happening with XaaS in the tech industry today will become relevant across all industries - which puts the tech industry at the forefront of the proliferation of XaaS.
On the changing relationship with customers, the Deloitte report's authors advise that:
To succeed with XaaS, it’s critical for technology companies to foster deeper engagement with their customers and help them achieve success with their as-a-service solutions.
Software AG on a journey to XaaS
A briefing I recently attended with Software AG provides evidence of the impact on IT vendors. The veteran software tools vendor is currently in the midst of a five-year transformation from a traditional perpetual license business to a recurring revenue model. Its experience highlights that this journey is much more than a shift in how it collects its revenue, although there are financial challenges involved. The shift from sporadic product sales to continuous service delivery has a fundamental impact on the customer relationship. Software AG CEO Sanjay Brahmawar explains:
There is a constant engagement between us and the customer around deployment and the value that the customer is getting out of that software and how to use it, etcetera. That motion is different from going in selling once in four years. This is a constant motion of engaging with your customer.
Brahmawar was speaking to media ahead of the company's Capital Markets Day with financial analysts last week. He and CFO Matthias Heiden gave an update on its ongoing business transition, typical of the journey so many technology vendors have traveled on the road to XaaS. The change affects many different elements of the business — here are five examples.
- Changes to the P&L. Software AG expects operating margin to dip to a low of 16-18% this year before recovering in 2022 and 2023, says Heiden. There are two factors here. One is the difference in how revenue is recognized compared to traditional product sales. A SaaS contract signed mid-year will deliver just 50% of the revenue in the current year, while boosting the following year's revenue by the same amount. So as sales shift from traditional products to XaaS, there's a drop in current revenue but a boost to future income. The other factor is the extra investment Software AG is making to facilitate other changes to help accelerate the transition to XaaS.
- Changes to the sales force. The switch to continuous engagement requires a different kind of account management from traditional enterprise IT sales. Software AG is building up a customer success team to provide that ongoing engagement and help ensure that customers are getting value from their use of its products. This is a competitive recruitment market at the moment, with people who've built up experience at SaaS leaders such as Salesforce and ServiceNow very much in demand, says Brahmawar.
- New systems and processes. To do their job well, customer success teams need data about how customers are using the company's products. Like many SaaS vendors, Software AG has implemented Gainsight to help collect and analyze data about customer interactions.
- Changes to the company culture. The focus on customer outcomes and renewals that comes with the XaaS model can't be delivered by a disengaged workforce. An important part of Software AG's transformation program has been an emphasis on company culture along with a focus on improving customer satisfaction. Its net promoter scores (NPS) have risen from the low 30s before the program started to a high of 54 in 2020.
- A faster pace of innovation. In an XaaS relationship, customers expect the vendor to keep on improving the product throughout the lifetime of the contract. As Brahmawar puts it:
It is unacceptable in Software AG to deliver innovation once a year. I want innovation delivered every quarter, every month, to our customers, because that is the way to keep them satisfied, both in quality and innovation.
Deloitte on how to succeed as a XaaS vendor
The Deloitte report portrays a similar array of XaaS characteristics that go far beyond flexible consumption. Indeed, a declining number of respondents see XaaS as a way of cutting IT spend, while most emphasize transformational benefits instead. Over four-fifths say that their adoption of XaaS contributes to business agility and operational efficiency, as well as improving their experience as customers. XaaS also boosts innovation, according to respondents:
Eight in 10 agree that adoption of XaaS has led their organization to reinvent business processes, develop new products/services, invent a new business model, and even change how they sell to customers — and for each of these, a bit more than a third strongly agree.
Success as a XaaS vendor therefore depends on investing in the success of customers in their use of the vendor's products. But the research suggests that this is still poorly understood by much of the industry, finding that there's still much room for improvement in this area. The authors recommend stepping up commitment to customer success, with advice that's reminiscent of my own description of a virtuous cycle of engage-monitor-improve in XaaS. The report concludes:
The most successful providers are likely to be those that become trusted partners committed to their customers’ outcomes. Providers should consider more carefully analyzing organizations’ usage of their services, continually learning and improving their offerings. And as they understand how a particular customer uses a service, they should give advice on how that organization can improve their use — for example, educating them on helpful functionality they may have overlooked or suggesting other services. Winning XaaS providers are likely to be those that consistently help their customers overcome challenges, advise them how to maximize the value of the solutions they use, and help them keep a competitive edge by bringing new, advanced technologies to market as services.
This is excellent advice from Deloitte, but it could have gone much further had it not confined the definition of XaaS to the technology industry. It's clear from the report, and borne out by Software AG's experience, that excelling as an XaaS vendor depends on more connectivity to customers, better access to data, and more effective automation. That happens to be a pretty comprehensive summary of Software AG's proposition to customers. Or as Brahmawar puts it:
Only a truly connected enterprise can flourish in the new data economy opening around us.
Therefore in not only learning to excel as XaaS vendors but also as vendors of tools that contribute to XaaS success, technology vendors can become enablers of their customers' journeys to XaaS. The Deloitte report provides helpful advice on the first step, but I would argue that the potential XaaS opportunity for the tech industry is far greater. Tech vendors should not only learn to perfect their XaaS skills. Helping their customers succeed also means being ready to pass on those skills to their customers.