Much has been written about how cloud computing changes the way businesses source their software and services. For software companies, instead of being installed inside the company, software like business applications run on a computer installed at an external site. If the external site is not shared with any other business, this is called a private cloud; if it is owned and operated by a third party and supports more than one business, it is called a public cloud. In the case of public clouds, users access the applications via the Internet, and increasing they can do this while out of the office, using laptops or mobile devices like smartphones and tablets. The main advantages of this model are that companies don’t need to invest in hardware or support staff to install and maintain hardware or software like these applications, the vendor handles system updates and users can work anywhere (including on the move) by logging in through a Web browser or an application designed specifically for mobile technology. Our research confirms that the overall importance is overall important in more than half (57%) of organizations.
With cloud computing and a shift to pay for what you use approach, it is not surprising that the billing model changes. Companies no longer pay an upfront license fee, followed typically by annual maintenance and support fees but pay on some type of usage basis. These can include a regular “license to use” fee plus charges based on the number of users, the amount of use, the volume of transactions and other factors depending on the supplier’s model. Such a model also changes the relationship between the supplier and the company into a subscription billing process. The parties typically agree on a contract for a fixed period of time and in many cases with an auto-renewing basis. The cloud vendor’s aim is to optimize usage (and the fees accruing from it) and if not auto-renewed, persuade the customer to renew the contracts and perhaps extend it by adding additional services; for its part the customer company wants support and maintenance taken off its hands during the life of the contract. This is complicated when customers want to use more support channels, such as self-service and mobile apps, and the supplier has to not just support them but continue to develop and build for evolving technology.
In any case the cloud model creates billing issues for the vendor that must be managed properly within commerce processes. For cloud vendors billing becomes more complex than in the old on-premises model. It now is based on recurring revenue, calculated by usage over a determined period but billed in intervals. The vendor has to produce invoices that include both regular periodic and event-driven usage charges; for the latter companies have to collect usage data from multiple devices. They also must include charges for packages of services (such as fixed-line telephones, mobile phone and data access and television). Charges may vary depending on events (more or less users), and the billing system must recognize discount periods, premium rates if usage goes beyond agreed levels and other factors. Invoices and payments likely will have to be enabled through online channels, and account management has to recognize the current state of the contract – for example, recognizing free offers at the beginning of the contract and special offers later to entice the user company to extend the contract.
For the cloud vendor, customer service also changes. It becomes a continuous, proactive process that has to blend with marketing, sales and commerce processes to achieve contract extensions and up-sales; because of this business units that have tended to work separately and keep their data in silos need to cooperate more. Customer service must be provided through more channels, and responses must be consistent regardless of channel. Customer engagement should be personalized and take into the current state of the relationship; for example, at the start of a contract there will more emphasis on advising on how to set up the system, whereas during the life of the contract, the vendor should try to up-sell as well as resolve issues. To meet users’ growing expectations, vendors are likely to have to support a wider variety of self-service such as capabilities to self-administer the software, and access to support services and invoices via the Internet and mobile devices. All-in-all these new recurring revenue models offer the opportunity to extended the active customer relationship and increase customer value, but they also generate new invoicing and customer relationship challenges.
Along with its advantages the cloud model also creates challenges for businesses that use it. There are technical issues such as security, scalability, performance and integrating cloud-based data with on-premises data to, for example, create a complete view of the user company’s customers. There are also relationship issues such as expected levels of support, extending the contract or, in the worst case, terminating the contract and moving to another supplier.
The cloud model is enabling more businesses to adopt such potentially lucrative revenue models. Consumers already subscribe to video rental services and pay for what they download. Photographs can be uploaded to the cloud, processed and shared online, and charged for by volume. Hardware can be rented in the cloud and paid for by usage, size and services. Looking ahead, purchasing a car might become obsolete as more people choose to lease cars or subscribe to a service that allows them to rent a car on demand and pay by miles driven and/or days hired. With a broadening set of devices and technology on the Internet from wearable computing to transportation vehicles that is classified in the new term called The Internet of Things. This will open up further opportunities as more devices become connected through cloud computing and companies offer to provide services through them or by connecting with them. Our research finds that cloud computing delivers a wide array of benefits from lowered costs (40%) to improved efficiency of business processes (39%) and within specific line of business areas and processes even more specific benefits as the adoption and utility of it becomes a standard method for organizations.
Recurring revenue is a rapidly developing market, and although issues are emerging, so are solutions. Ventana Research is seeking to understand current and emerging practices for billing and customer engagement for these business models and the changes such models are generating. If you already offer such services or are planning to do so in the next couple of years, please visit our benchmark research on recurring revenue. We will share the results to help guide you to business success in this business application and process category.
Richard J. Snow
VP & Research Director