If you are not using a XaaS at work yet, you will be.
By XaaS (pronounced zahs), I mean a cloud-based service, outsourced and used on demand, that was previously bought, hosted, staffed and maintained internally. A 2015 Gartner article describes cloud computing as “a style of computing where scalable and elastic IT-related capabilities are provided ‘as a service’ to external customers using Internet technologies,” and listed five attributes that support these services:
- Service based: consumer concerns are separate and distinct from provider concerns; connected through service interfaces
- Scalable and elastic: services scale on demand to add or remove resources as needed
- Shared: services share a pool of resources to build economies of scale
- Metered by use: services are tracked with usage metrics to enable multiple payment models
- Internet technologies: services are delivered through use of Internet identifiers, formats and protocols.
IaaS, Infrastructure, the setup and maintenance of platforms, applications and software to cloud infrastructure, is forecast to grow to $56 billion in 2020. Examples include Amazon Web Services and Microsoft Azure.
- PaaS or OaaS, Platform or Operations, often used in software development, a third-party service to design, build, maintain and monitor the infrastructure. Forecasted to hit $200 billion by 2019. Examples include many of the IaaS companies, as well as Long Jump, Cloud Foundry and Open Shift.
- SaaS, Software, cloud-hosted software with subscription license. Forecasted to reach $113 billion by 2019. Examples include Salesforce, WebEx and most enterprise/corporate performance management services.
- EaaS, Energy, including strategy, supply, usage, assets and the energy program. This is a new area with minimal sales today, but Navigant Research forecasts the annual global market could reach $221 billion by 2026. That is the equivalent of 38 percent growth of today’s U.S. energy industry (not discounting the time value).
Why this is a big deal for FP&A
This is a big deal for cost management, investment options and structuring product offers (translation: revenue). FP&A needs to be aware of this trend and how to internalize it. First, let’s review the strategic attraction from the cost side. By allowing companies to quickly obtain world class software and infrastructure, they can focus on the core capabilities and service offerings rather developing up internal support services:
- Low start-up cost/faster start-up times. Their hardware, software or corresponding set-up is handled by the vendor, minimizing or eliminating on-site set up. Depending on the service purchased, it may be available to end users in a matter of minutes or days. Also, most systems require configuration rather than customization which reduces start-time.
- Low maintenance cost. Upgrades are generally included and occur on a set schedule and delivered to the entire user population; no need to make upgrade decisions.
- Scalable. Users can buy just the number of seat licenses required, and modulate depending on need.
- Expertise. For example, can your internal IT team match the expertise and resources that Amazon Web Services devotes to protecting their servers, redundancies, and adding new capacity?
- Web interface. Since many XaaS services are delivered over the web they are accessible from any location and any web-enabled device.
In addition to focusing on XaaS from a consumption perspective, FP&A needs to consider XaaS as a service it can provide to customers. In the simplest form, rebooting your product as a service can provide a different revenue stream. More substantially, XaaS services are a recurring revenue business—a customer signs up, receives the service for a set period, and then is automatically billed for the next period as the service is automatically delivered.
Subscription revenues are generally valued higher than transactional sales because the recurring revenue streams and customer stickiness form an ongoing relationship with the customer rather than a series of repeated transactions. In contrast, transactional revenues must be replaced, the customer must be convinced to purchase again, which requires additional marketing spend.
Consider what this means from the lifetime value of a customer: XaaS services have relatively high customer retention rates at lower re-marketing cost. That means higher LTV, or perhaps a higher permissible cost per acquisition, which can change the equation for how the company allocates marketing spend and forecasts sales.
In future articles, we will explore further the XaaS economy and what it means to FP&A, including risks, key metrics, and accounting differences that need to be factoring into the forecast.
Bryan Lapidus, FP&A, is a contributing consultant and author to the Association for Financial Professionals. Reach him atBLapidus@AllegianceAG.com.