Tapping the service revenue opportunity through the cloud

Commentary - In the last 10 years, software has transformed completely. The epic rise of SaaS and its subscription model has sped innovation, deployment and time to revenue, while a similar wave of reinvention is upon us within the support and subscription renewals side of business. Recurring maintenance and service renewals can represent 40 percent or more of a technology company’s total revenue stream but are among the most poorly executed top line business processes across industry. Now, as software companies work diligently to stabilize and maintain their support and subscription revenue streams, the service revenue management category has emerged as a way to leverage the latest innovations in technology, collaboration and hybrid business models to achieve new, predictable recurring revenue growth and customer retention.

In the early 2000s companies like Oracle made strides in identifying and capitalizing on this revenue opportunity through strategic acquisitions of software with robust service revenue streams. Today, Gartner estimates the market for recurring hardware and software service revenue has reached to $169 billion dollars. But, despite the growing focus on services, there are few benchmarks or established practices to guide technology companies in executing flawless, machine-like efficiency of this lucrative function. Many technology-based companies are still missing the mark, leaving revenue, profits and earnings on the table every quarter. A significant gap has emerged between companies adopting the latest service revenue management best practices and those lagging behind with a “business as usual” – or a “business as 10 years ago” – approach.

That said, I have found three best practices that are essential for leading technology organizations to both optimize profitable recurring service revenue and improve installed base customer relationships and loyalty:

1) Service Revenue Prioritized - In addition to maximizing revenue potential, the renewals side of the business is a growing and is a more profitable and strategic priority for the entire company.

2) Customers Valued - A keen understanding and focus on recurring service revenue as a key access point for building on customer relationships, growth and satisfaction, leading to a culture of treating each customer relationship as a highly valued asset.

3) Performance Analyzed - Service revenue management is measured with structured, decision-ready data and business intelligence in order to have real-time visibility, control, and the ability to use predictive models in order to optimize service contract renewal rates.

The organizations that aren’t governed by these three rules are leaving revenue on the table – and in most cases, they don’t even know it. These businesses are likely preoccupied by product development and the rollout of new features, stuck in the version 1.2, 3.0, 4.1 cycles. In this environment, maintenance and subscription renewals revenue is deprioritized and under resourced, relegated to low-touch, auto-invoicing technologies and poor insight into the renewals ecosystem. Similarly, companies operating larger-scale, in-house support or subscription services often believe they have healthy renewal rates – say, 90 percent – but when properly calculated with a clean service revenue dataset, they are only middling (with performance gaps of 15 percentage points and on average lower than the targeted 90 percent renewal rate).

For an aggressive new breed of technology company who prioritizes recurring service revenue growth, the service revenue management category is set to transform renewals performance. New cloud-based models have opened markets to more vendors, more choices, rapid implementations and lower costs. Now, the best and brightest SaaS vendors are further differentiating themselves by tying their “as a service” offerings to tangible results. Pay-for-performance models have already emerged like the Google advertising pay-per-click model. What’s behind it? Purpose-built cloud technology, decision-ready data and people with deep expertise.

The key to unlocking service revenue potential for enterprise technology vendors follows the Google model, leveraging purpose-built cloud applications, combined with decision-ready data and business intelligence, tied together with expert human insight (or managed services). Technology analysts are calling this market service revenue management and it’s the winning recipe to streamline and standardize the maintenance, support and subscription renewals business process, while improving customer experience, and dramatically growing profitable, recurring revenue.

Ultimately, this mash-up of cloud applications, specialized managed services, and robust business intelligence is enabling forward-thinking companies to grow their recurring revenue ecosystems, while better managing relationships with global resellers, end customers, and internal service units. With the advent of the services cloud, companies can finally activate and maintain their recurring service revenue stream, and continue to drive new business through product development. This is a huge lever that sales and finance executives can pull in order to achieve higher revenue, profits and earnings, and it promises to be the second iteration of the cloud-based business model.

biography
Mike Smerklo is the CEO of ServiceSource.