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Importance of Service Revenues Brings Strategic Opportunities for CFOs | Part 1

March 9, 2017

 Driven by intensifying competition, companies across a wide range of industries are rethinking their core strategies, incorporating services to reinforce customer loyalty long after the sale of a tangible product. Such services extend beyond such familiar offerings as product maintenance and repair, expanding to include subscription-based services, software/apps delivered as a service, managed services, and usage based contracts. As products are quick to become commoditized in the marketplace, a services-based orientation can be the saving grace of differentiation, optimizing profitability. From the Fortune 500 to small and mid-sized businesses, finance leaders are finding new ways to generate recurring revenue. Customers may pay, for instance, based on how much they use a product or according to an outcome they achieve as a result of using it (factory uptime, for example).

 

Either way, the transformation to a services-oriented business model incurs additional costs and requires employees to develop new skills— including finance executives. After all, CFOs are responsible for helping senior management navigate its way through competitive marketplaces and making tough strategic decisions about how best to generate value from existing accounts through new services. It’s a challenge more and more finance executives expect to confront. In a recent Cisco survey of 625 senior executives at manufacturing firms in 13 countries, 86% cited the transition from product-centric to service-centric as a core part of their growth strategies. The CFO role has never been so vital as it is in today’s quickly shifting market. The services economy has taken center stage and competitors, new and old, are taking advantage, as it is now simple to harness cloudbased technology to swiftly swipe market share through services. By adding services into the mix, product-based companies can work to keep their customers from falling into a rival’s clutches, extending a transaction into an ongoing relationship. The efficacy of such a move assumes, of course, that finance executives can leverage the technology required to monitor customer satisfaction in order to supply the timely analysis necessary for the business to rethink its model. Whether the strategy means capturing recurring revenues via subscription or on an “as-a-service” basis, CFOs need to be able establish and monitor metrics—like measuring the vitality of renewal rates—that will help the company manage customer experience. Many companies have already begun re-configuring their revenue streams. In a recent survey conducted by CFO Research, in collaboration with FinancialForce, 71% of senior finance executives report that their companies derive half or more of their revenues from services, either directly or linked to product sales. More than half (55%) say that services generate a higher percentage of revenues today than they did five years ago. Slightly more than a quarter (28%) report that all their companies’ revenues are service-related. These findings are based on a recent online survey of 163 U.S. and U.K. senior finance executives, conducted by CFO Research in collaboration with FinancialForce. Nearly two-thirds (65%) of survey respondents have titles of director of finance and above, with a plurality of all respondents serving as CFOs. Nearly three-quarters of respondents

 (72%) are employed at companies with annual revenues above $10 million, and more than one-third (37%) are employed at companies with annual revenues above $1 billion. Respondents represent a broad range of industries, with the highest proportions originating from Manufacturing/Industrial/Automotive and Financial Services/Real Estate/Insurance. Most finance executives surveyed (39%) view the primary motivation for introducing or expanding service-related revenues as finding new sources of revenue and profit growth. In addition, a quarter of respondents say that their company’s motivation was to achieve a more stable recurring revenue stream (see Figure 1). Given the dynamic nature of the new services terrain that product based companies are exploring, it’s no longer sufficient for senior finance executives to simply record past transactions. In addition to closing the quarterly books, CFOs now need to open their strategic vision to the bigger picture, using Big Data analytics tools to glimpse the future and provide foresight as to how best to mitigate oncoming risks. Thanks to the emergence of cloud-based models, predictive planning tools have become increasingly cost-efficient for

companies of all sizes. The resultant data should enable businesses to be more proactive when it comes to boosting different dimensions of customer service. As services become a driver of growth and shareholder value, the finance function will need to take a leadership role in monitoring and improving customer satisfaction. For finance executives, such a transition requires adopting a more customer-focused approach, tracking such metrics as the cost of customer acquisition and the retention rate. Among survey respondents, two-thirds reported feeling “substantial pressure” to change their finance team’s mindset to be more customer-centric and focused on renewal revenue streams. While 48% say they “somewhat agree,” just 19% say they “strongly agree,” suggesting there’s room for improvement. Only 7% “strongly disagree.” (See Figure 2.) In its revamped role, the finance function needs to become more collaborative, sharing its findings regarding trends and opportunities, and soliciting input as to where the company should invest to fortify its ties with customers. By mastering data analytics, finance executives can shape and spread a clear vision for making smart decisions within the new services-orientation framework. For CFOs, such responsibilities represent a welcome opportunity to focus on driving revenue growth rather than spearheading spending cuts, as they have in recent years.

 

Supporting the strategy also demands that the finance function develop technical know-how. Reporting service revenue—whether from performing maintenance, supplying support, or signing on subscribers— requires financial skills distinct from accounting for product sales. For example, it’s key to understand the sometimes-subtle difference between bookings (representing customer commitments) and revenue (tallying received payments)—and to pinpoint the percentage of bookings that can be recognized as quarterly revenue. It’s also crucial to track the up-sell and cross-sell rates that services companies rely on to boost revenue. More customers may jump at the multi-year deal, but there may not be sufficient (or any) profit margin left to bulk up the bottom line. Just under 30% of respondents say that subscription-based services have become significantly more important for their companies over the past five years. Roughly the same number (27%) see those types of services as an important part of the company’s growth plan over the next two years. Finance executives aren’t the only inhabitants of the C-Suite who will need schooling. As companies move toward a more services-oriented business model, management teams’ focus must broaden from such internal concerns as maximizing production processes to improving efficiency and quality. Exercising a more outward-oriented posture will enable executives to develop a better understanding of their customers’ businesses, pouring the foundation for long-term loyalty. With products and services bundled together, the sales function’s skills will need to ladder-up from focusing on features and functionality to a more sophisticated emphasis on supplying integrated “solutions.” As companies look to add services, senior finance executives would be wise to consider only those that relate to the core business, including integration, training, and other offerings that maximize the value customers are getting from the product. CFOs also need to serve as role models, displaying their enhanced knowledge of customer-satisfaction related skills as an ongoing reminder to their peers that the business is expanding in a different and exciting, strategic direction.

 

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