How Businesses Can Adopt the As-a-Service Model

Customers in many industries are demanding flexible consumption options, and the benefits to product and service providers are significant. The move to a new business model is full of challenges, but here are some paths forward.

Many businesses have embraced flexible consumption, the subscription-based and pay-as-yougo IT services model, because it gives them more control over their overall spending. This as-asservice model also offers substantial benefits to vendors, particularly those in the technology, media, and telecom sectors. Software-as-a-Service (SaaS) and other cloud-based services can give vendors recurring revenue streams driven by sticky customer relationships that ultimately translate into higher margins.

Customer demand, however, is perhaps the biggest reason for IT and other vendors to move their products to a flexible consumption model. As a growing number of customers ask for flexible deployment, consumption, and payment options, traditional business models are threatened. Vendors that ignore the consumption-based model may soon be obsolete.

The move to becoming a flexible consumption vendor is full of challenges. For most companies, it represents a fundamental change in the way they do business. Established firms with a traditional sales model may not have the in-house sales expertise needed. In addition, vendors making the move will likely feel a financial pinch, as shifting from an upfront to a recurring revenue stream often results in a short-term revenue dip. A company’s move to flexible consumption may mean sacrificing short-term performance for long-term success, and that can be challenging, particularly for publicly traded companies.

In deciding whether to make the switch, vendors may want to determine how much flexibility is required to win new customers and retain existing ones. There’s no one-size-fits-all answer, and a move toward flexible consumption can spark heated internal discussions, but a company’s survival may depend on this decision.

In this article, the second in our series on flexible consumption, we examine the ways vendors can move toward the as-a-service delivery model.

Vendors can take four paths toward flexible consumption:

Burn the boats

Some vendors may choose to commit to proactively and rapidly converting most, or a strategic part, of their portfolios all at once. This path may work best for organisations with leading positions in their markets and limited (but growing) competitor offerings. They may be receiving clear signals that their existing model is threatened and have limited time to shift their customers to a new model. The “burn the boats” strategy, which usually involves a oneto three-year time frame, poses the highest risk of the four approaches and requires a willingness to sacrifice short-term gains.

‘For many vendors, the decision to offer their products in a flexible consumption model will not be an easy one. The move is not for the faint of heart.’

Straddle

This path may appeal to vendors that see value in giving customers a choice between flexible and nonflexible offerings and want to transition with care. Organisations choosing this path often believe giving customers a choice can be a competitive differentiator. Although they see a need to explore flexible consumption, they can proceed with caution and convert their products more slowly. The “straddle” path is lower risk than a full transition, but it requires vendors to maintain both flexible consumption and legacy versions of the same products. This can be expensive and can also cause an organisation to become more reactive to market trends.

Protect and grow

This strategy may suit companies that want to offer flexible consumption services while protecting and growing their current businesses. It involves selectively and gradually converting the customer base to as-a-service offerings based on an understanding of which customers are likely to remain with the traditional sales model and which are seeking to move to flexible consumption. Companies that follow the “protect and grow’ strategy build or buy discrete flexible consumption offerings to run alongside legacy products. This approach poses less risk than the first two strategies, typically resulting in less disruption to cash flows and requiring less integration of operations. It also avoids cannibalisation of existing products.

Companies choosing this option use flexible consumption offerings as add-ons to legacy products or as a means of cross-selling them. While their main objective is to protect legacy products, these companies keep their options open by rolling out discrete consumption-based offerings based on niche market demand.

Wait and see

Some companies may decide not to offer flexible consumption for now, particularly in markets where it is unclear whether customers will embrace the new model. For most companies, this is an increasingly less viable option.

For many vendors, the decision to offer their products in a flexible consumption model will not be an easy one. The move is not for the faint of heart. But the potential benefits—including continued relevancy in an ever-changing business landscape—may be worth the risks for many companies. For more information, please visit www.deloitte.com/mt