Covid-19 and its economic impact have sparked a massive sales transformation for many companies that realize they need to add on or boost recurring revenues to create stability along with growth. For manufacturers, this is really expediting a trend that started when they dipped their toes into recurring revenues. For example, a tractor manufacturers selling a software package to help farmers improve crop yields, or a medical device maker offering subscription-based digital image transmission or storage of MRI or x-ray results.
Most manufacturers use SAP to manage contract configuration, finance, production and supply chain – the “back end”. Many manufacturers use Salesforce to configure, price and quote (CPQ), meaning the “front end”. And for making large, complex equipment, these two programs work well together. There is a clear handoff between the front end and the back end. Both SAP and Salesforce are optimized for the manufacturing environment. But adding subscription revenues requires change throughout the front and back ends and how they connect.
Another way to think of it is that in traditional manufacturing, the front end and the back end are siloed. But that doesn’t work when you add subscription or recurring revenues to an existing traditional manufacturing offer. A subscription model requires a single, cohesive system. A recurring revenue solution should serve as an orchestrator, defining a process that helps the front and back office work in unison.
The pitfalls in growth
Without proper forethought and planning, businesses that add on a recurring revenue model often follow a similar pattern. At first, recurring revenue grows, income is more predictable, and the business can better plan and forecast. This straightforward initial stage allows many businesses to support the model using existing processes.
But what happens in the next stages? Unfortunately, as the recurring revenue offering grows, so does the complexity. Businesses must support complicated calculations during the quoting process and enable contract alterations such as upgrades, add-ons and swaps. Existing processes and tools across Sales and Finance, which often rely on manual intervention, cannot support the volume of activity, and create a ripple effect across service, delivery and the customer experience. The model then becomes inefficient and costly, hitting revenues and eating away at profits. What worked to drive business forward is now a hindrance. The only way for the recurring sales to grow profitably is to transform the business process.
In a typical, more predictable business environment, it might take years for companies to get to this point, but Covid-19 has accelerated the process. Businesses experiencing strong growth now face the very real risk of eroding profits through disjointed processes, tools and technologies across the front and back office.
Unfortunately, when companies think about big transformations like this, they see this as only a problem with their sales process. They just think about how to “fix” sales and where they should invest in their sales infrastructure. As a result, they fail to work through the impact the transformation process will have on their company’s full business operations – especially finance.
That oversight can add to an already costly project. Companies that want to transform business processes to manage recurring revenues must create a new handoff between CPQ, Billing and ERP systems – and that can be very tricky. In a recurring revenue model, the sales process does not end when the contract is signed. That means you cannot simply hand the sale off to SAP, which is how most manufacturing sales processes are configured today. Billing is also more complex, so CPQ systems must allow for contract alterations, upgrades, add-ons and swaps – something that isn’t possible when back office and front office systems are siloed.
For instance, you sell a piece of machinery for $1 m. The sales team, working in Salesforce, configures and prices the package and hands it off to Finance to create contracts and invoices. The buyer also wants a $1,200 yearly contract for software that allows the machinery to communicate with other applications in the factory. But if a half a year later, the buyer wants to upgrade to a newer version with more functionality, will your system be equipped to handle that?
The most important thing any company can do is have a good think about the entire process – not just sales. Often, what happens, however, is that the company simply tacks on a new piece of software designed to handle subscription sales. That is unlikely to fix the problem.
Instead, the company should think about two things: First, how do you avoid the pitfalls that will lead to performance erosion and economic decline; and second, how do you optimize the business to maximize the recurring revenue opportunity.
The answer for both must modernize lead-to-revenue operations across the front and back office to boost growth and efficiency and create a better, stronger customer experience. The new model has to be dynamic, unifying and customer centric.
Unlike a one-time transaction, recurring revenue is based on an ongoing, evolving relationship. The recurring revenue architecture must be flexible enough to support customers no matter where they fall on the continuum, from premium subscriber with constantly changing add-on services or upgrades, to one-off sales.
From the customer’s perspective, a recurring revenue model is fluid. The subscription can be changed or canceled at any time. This means the company must be constantly working to add value. To that end, existing sales and billing processes must be designed to simplify the customer experience and reduce friction.
Change starts now
Change like this will require the support of investors, employees, partners and others important to your success. The benefits to employees, who will be asked to make many changes, and investors, who might be concerned about cost and risks, may not be obvious.
Ultimately, the toughest sell will be to customers, who must see the benefit of change and feel better served, not taken for granted. This will require strong coordination and a shared vision between all areas of management and staff but can lead to significant process optimization throughout the business, from marketing and sales to contract management, renewals, legal and customer service.
As high-growth organizations address market opportunities, they must recognize the symbiotic relationship between the front and back office. Selling, serving, delivering and managing are all related and interconnected within the customer journey. Companies that understand this and take the critical step to develop a cohesive and effective lead-to-revenue strategy, will be best positioned to operate a successful and profitable recurring revenue business – in the Covid-19 age and beyond.