Author:* Veit Brücker is Vice President Central Europe at Zuora..
The IoT business model is cloud-orchestrated subscriptions
From the idea to the implementation of a digitisation strategy, companies have major technological hurdles to overcome, if only to design the edge logic in your devices, machines or plants. But just as complex is the answer to monetizing this transformation in the best possible way. Today, it is clear that it usually results in a subscription that offers customers added value in the use of their devices. The challenge is to orchestrate this in such an agile and efficient way that a seamless end-to-end solution is created.
According to studies, companies that base their business models on agile subscriptions are growing almost five times faster than their traditionally operating counterparts that rely on pure product and service sales. The subscription economy is rapidly gaining importance in all industries – regardless of whether it is B2B or B2C business, because the new paradigm is B2H business: people (human beings) and their needs and positive user experiences are at the centre of all considerations. It is completely the same whether he has these experiences as a private person or in the context of a business operation.
The “German fear” of loss of control is unfounded
But in Germany, there is still a great deal of scepticism about a comprehensive digitisation strategy using an agile subscription cloud. The “German fear” of loss of control and data protection problems is immense and paralyses the innovation potential of the German economy, while internationally more and more companies are driving a cloud-first strategy. They are installing cloud-hosted subscription management platforms, AI analytics tools and business intelligence (BI) solutions that link data from different sources to gain a holistic view of customer relationships. As a result, they then achieve immense growth, as for example the Subscription Economy Index collected by Zuora has clearly demonstrated for many years.
The benefits of such agile business IT, which should be able to be modelled
according to demand, are therefore immense. At the same time, the fear of no longer being able to host data in-house ‘on-premises’ is unfounded: After all, there are supreme court rulings that even German authorities are allowed to use US clouds such as Amazon, Microsoft or Google – if the providers guarantee that the data will be processed in Germany . And IT, if it is not operated completely isolated as an island, can be hosted and maintained much more efficiently in secure clouds. A paradigm shift is therefore the order of the day if you don’t want to be one of the dinosaurs who have only observed the digital transformation for too long instead of actively driving it forward.
In times of crisis, you have to be agile!
The current situation is also a prime example of the fact that skills for comprehensive modelling and orchestration of agile business relationships are essential: Logistics and supply chain problems, commodity and energy crises, inflation and climate change are huge challenges for companies in Germany as well as all over the world that imperatively require fast action. Companies of all sectors and sizes are similarly affected by the resulting, increasing global uncertainty. However, this situation is now being compounded by the inability of many companies to react quickly and to put together new offers. The prime example of an attractive subscription offer for customers is certainly the option of no longer having to buy products, but only paying for their use. This reduces the acquisition costs (CAPEX) and converts them into variable operating costs (OPEX), which in turn frees up capital for the customer. With this capital, for example, further innovations can be driven forward or materials can be purchased more expensively in order to remain able to deliver despite the crisis.
The backlog of orders inhibits innovation
The full order books are also an immense obstacle to innovation. They, too, are paralysing companies from wanting to break new ground. Why should they, when they are already unable to meet current demand and have delivery times of many months? All the effort that has to be put into procuring and allocating the limited resources in order to be able to maintain production at least to a certain extent and to serve the most important customers also reduces the potential of an appropriate management intention to implement a sustainable, agile and scalable digitalisation strategy. There is hardly any time or resources left for the large-scale transformation of one’s own company.
It’s not just about a fancy front end
their goods and services in the future, and how they will evaluate and control the flow of information about them. But even if entrepreneurs have recognised this, the question of “how?” still remains.
Wrong understanding of ownership and property In many executive suites, there is a serious resistance to cloud-based digitalisation of their own business model, which is fatally reminiscent of the attitude of German companies in the 2010s. At that time, a study by the OECD, among others, confirmed that German companies were too hesitant in tackling the opportunities of digitalisation. Because at that time, many companies, whether SMEs, large corporations or hidden champions, were of the opinion that all software and IT had to be kept ‘on-premises’ in order to be independent. This reluctance was also felt by cloud pioneers such as Adobe, which was one of the first software providers to switch from the licence to the subscription model and at the beginning of this new era had to struggle with incomprehension on the part of customers, but also analysts, as well as declining sales . But after three years, the tide turned: sales rose again and today reach 4.4 billion US dollars in the second quarter of 2022. For comparison: in 2008, it was 3.5 billion US dollars – per year.
Not wanting to manage everything yourself
Today, the cloud is a standard tool in almost all companies and it seems incomprehensible why many people in charge have hesitated for so long to get involved in cloud technology, even when it comes to digitalisation. But the arguments sound similar then as now: they range from “We’ve never done that before” to “We don’t need that” to “We can manage all that ourselves” or “We’ll wait until our ERP provider provides us with a corresponding module”. The example of Volkswagen shows how quickly one’s own company can get into trouble with such an attitude. The recently dismissed CEO Peter Diess got so bogged down with his digital and software strategy that the delayed completion of the software architectures developed by the subsidiary CARIAD is likely to lead to additional costs in the billions. All this because their completion is delayed by years and planned new models cannot be brought to market as planned . The automotive giant now has to search desperately for technology partners like Amazon to help with the development of important software modules. This means turning away from the ‘on-premises’ strategy of wanting to do everything in-house and reflecting on its own core competencies. Competitor Ford made a similar mistake a few years ago by moving the group’s newly founded digital unit to Silicon Valley, more than 4,000 kilometres away from the company’s actual headquarters .
Holistic strategies instead of piecemeal
These examples impressively show that it is often also large companies that pursue a disjointed and ultimately unsuccessful digitisation strategy and thus produce massive losses that can endanger their future viability in the long term. It is therefore not surprising that under these conditions, according to a study by the management consultancy McKinsey, only 16 percent of all companies are able to complete their digitisation projects . The dangerous tendency to want to develop their own solutions instead of relying on the expertise of established providers has a negative impact on the innovative capacity of the companies concerned.
Fortunately, a study by the industry association BITKOM e. V. from the beginning of 2022 shows that 83 percent of the companies surveyed now have a digitisation strategy. However, this value should be treated with a certain degree of caution, because it includes both companies that have a central strategy for digitisation (33 percent) and companies that only implement it in individual company divisions (50 percent). Since these figures were still 38 and 39 percent respectively in 2020, the share of those companies that rely on a holistic digitalisation strategy has actually declined. Overall, since 2019, there has been a pleasing increase of 10 percent of those companies that have such a strategy . No wonder, since 95 percent of those who participated in the survey associate digitization predominantly or exclusively with opportunities for their company.
A new corporate culture is indispensable
To successfully seize this opportunity to generate more revenue and drive new business with the monetisation of digitalisation, more than a new IT infrastructure is needed. It is about establishing a new corporate culture. It is no longer the product that is the focus of operational activities, but the subscriber. This is accompanied by a move away from linear process structures in development, production, sales and administration. Instead, these areas are grouped around the needs and wishes of the customer in an all-encompassing 360-degree view. Products are no longer an end in themselves, sold to all customers as they are (one-fits-all strategy), but should guarantee a custom-fit coverage of the respective, current needs. And if the “as-a-service” services do this, they result in recurring revenues that are easier to forecast and plan and thus help the company achieve more financial stability than the rather randomly occurring individual sales of traditional linear management.
IT structure must be broken up
The continuity of revenues, coupled with a long-term subscription model, also makes it possible to monetise additional services, for example in the maintenance area. However, this flexible and agile sales and product approach can only succeed if the typical, linear IT structure, which also has hardly any networking, is broken up. The order-to-revenue process must therefore be put to the test. The rigid structure from the company’s own CRM system to the fulfilment of the order to the billing with the ERP system dissolves in the context of the subscription economy and requires a kind of “middle office” to cover the dynamic and agile processes from sales to customer account management to invoicing, incoming payment posting and customer account balancing.
The key points are not only procedures with which the products and services, which are often billed per consumption or per use, are recorded simply and precisely and can be billed and booked compliantly at any time, but also data analyses which, thanks to their informative value, in turn lead to feedback effects on new offers. Finally, with the help of usage data collected in real time, the development of new products or the adaptation of existing services to the constantly changing customer wishes can take place much faster than was ever possible in the traditional model. Faster reaction times with dynamic adaptation of one’s own portfolio to the changing market are the result, making it easier to control and optimise both sales and turnover.
Data analysis increases sales
This new and highly precise form of business intelligence offers traditionally managed companies the opportunity to more easily complete a steep learning curve within their digital strategy right from the start, because in the case of undesirable developments, countermeasures can be taken quickly thanks to sophisticated forecasting procedures. A/B tests for specific customer groups reveal alternative options for offering and pricing and empower the company to optimise sales and revenue in the medium term. This new source of knowledge, which is created with the implementation of a subscription model, ultimately enables an optimal orchestration of the offer to serve a wide variety of customer needs.
Corporate strategy = digitalisation strategy!
However, the monetisation of digitisation by means of subscriptions requires a new mindset at the management level, which investor and founder Fabian J. Fischer, among others, points out in a LinkedIn post. In his view, the paramount role of digitalisation requires not only a transformation of corporate structures, but also of the management level: According to Fischer, CEOs will be in demand in the future who previously brought “profound practical experience directly from the engine room of digital business models”. As a result, according to the expert, this means that CDOs are the new CEOs. Even if this thesis seems a bit pointed – in essence, Fischer is right: the digital transformation turns a company completely upside down. However, this process has to start at the top before it can permeate the entire company step by step. However, this does not mean that companies should wait until their entire product portfolio and all employees are completely ready for the digital transformation. Such a state will only be reached much later. In the current turnaround to the new reality, it is much more important to seize the new opportunities immediately and go to market with small, immediately implementable projects that can be managed with a handful of enthusiasts and early adopters in one’s own company. Learning by doing is the motto, which not only leads to a constant improvement of the subscription portfolio, but also gradually convinces sceptics. This is also immensely important because, according to current estimates, 30 to 40 percent of the companies currently represented in the German share index DAX will no longer be listed in five years or may even no longer exist, as a rapid structural change is currently taking place, not only because of digitalisation. The question that therefore arises is this: Which group do you want to belong to?
Author:* Veit Brücker is Vice President Central Europe at Zuora.
Veit Brücker has many years of experience in technology sales and consulting, where he held positions at companies such as Oracle, Siemens and Salesforce. He has spent the last 8 years focusing on Customer Experience Management, most recently as part of the Salesforce Germany management team, where he was Country Leader Austria and responsible for managing the mid-market business in Germany. Today, as Vice President, he is responsible for the development of the subscription management platform provider Zuora in Germany, Austria and Switzerland (DACH).