Within the last few years, more companies (and consumers) are becoming part of the subscription economy. In the B2B world, for example, Software-as-a-Service and Infrastructure-as-a-Service are common subscription models in the technology arena. However, servitization now extends into a multitude of product and service categories, changing the business landscape — both financially and operationally. If given the opportunity to pay upfront or choose a subscription model for your next SAP product or service investment, what would you select? SAPinsider had the opportunity to sit down with Capgemini’s Prashant Jain, VP, SAP S/4HANA Transformations and North America Center of Excellence Leader, and Ram Ranganathan, SAP Enterprise Architect, to discuss servitization and what the emerging XaaS trend means for company operations, customer relationships, and technology solutions today and in the future. Drive Toward Everything-as-a-Service (XaaS) Today, more companies are adopting the XaaS approach to bring individualized solutions and experiences to their customers and establish a partnership for future growth. "How customers interact with products and services is evolving," says Jain. Commoditization is giving way to personalization where product and service alignment is a critical business strategy. And with it comes a higher service expectation. But how do companies better serve their customers? Jain says traditionally, companies sell a product, and they deliver it to the customer without further engagement. However, customers want to engage with products to leverage them for strategic advantage. They want to be associated with leading products and services and see what improvements and new features they launched as they develop throughout the life cycle. “As the product owner, the company wants to be closer to the customer and move toward better delivery of innovations and new experiences. The customer gains the latest improvements and features as they are available. It becomes a win-win for both parties,” Jain says. When looking at the maturity curve in the marketplace, Ranganathan says the subscription model comes in a couple of different flavors. One is simply from a product and features sale perspective. Another is usage-based consumption, where companies charge for their product or services based on customer utilization. “However, the evolution of the subscription model has really turned toward outcome-based service where you’re guaranteeing a certain output and charging for that,” Ranganathan says. “It’s a lower cost of ownership for the customer and a better guarantee on the quality in the experience,” Ranganathan adds. “And if the customer is unhappy, it’s a lesser cost of switching services or production. XaaS provides many advantages for the end customer from an enterprise perspective.” For example, Ranganathan says a leading food and beverage company is moving toward leasing its vending machines rather than selling them to distributors and restaurant chains. The customer reduces the cost of ownership by avoiding maintenance and service costs while providing constant revenue for the company. Rather than paying a large, upfront cost for a product or service that may not yield the expected return, customers can lower the total cost of ownership through servitization, allowing the company to pivot due to quality issues or lower rates of return. This leads to a few critical questions. How do companies manage the sales cycle? How do they charge their customers and deliver that experience throughout the product or service journey? Creative Billing and Recurring Service In a servitization model, the life cycle is changing, says Jain, from product development to the sales process to customer engagement to reacting to feedback. Companies have now become very creative in how they charge the customer. Organizations are charging certain upfront payments for installation, while others charge for premium services. Even more creative, says Jain, are companies with billing cycles based on outcomes or certain events, such as reaching user base numbers or achieving revenue targets. An example is the volume-based billing model. Here, a company would charge a different amount as soon as the total number of users or the level of consumption exceeds a certain threshold. “But if you look at it from a CFO perspective, it’s putting a lot of burden on the organization as it attempts to recognize this revenue. The company sold a product for X amount, but it will be serviced and billed over the next two years — how is that tracked?” says Jain. “And as you go into the subscription business, whether you’re in high tech, telecom, life sciences, etc., regulations and reporting requirements change often.” Besides the financial aspects of servitization, Jain says companies are making their assets more intelligent with the use of sensors to track how the customer is engaging with the product. With a subscription-based model, knowing how a product is being used and how often is essential to revenue generation and customer retention. “It becomes a microcosm of the larger economy — managing an asset network where products are sold, connected, and their usage tracked for potential sales and support for other products,” he says. Ultimately, companies are building recurring revenue that avoids the volatility associated with the general market, explains Ranganathan. To achieve that, it requires getting closer to the customer to recognize additional product streams with sustainable growth. For example, a Medical Device company is exploring a subscription model where hospitals and other medical institutions no longer pay for fixed assets such as beds, exam tables, and surgical machines. This is a significant transformation for the Med Tech industry, where new machines and devices must be technologically enabled for a subscription-based model. However, when that occurs, the collaboration between the Medical Device company and the medical institutions will be further focused on patient care and innovation from now on. “The trend toward XaaS is leading companies to move away from capital expenditure to more operational expenditure models where they’re not running large budget cycles and investing in capital equipment,” says Ranganathan. “The subscription-based approach is meeting the service expectations and convenience cost for customers.” Servitization Asset Management is Evolving What is required to meet those expectations? Technology and the use of smart products that can capture product usage and stream that information and feed it into an engine that can price it based on various parameters, explains Jain. For example, the volume of usage, time of day, and customer type based on discount criteria are all part of the complexities that go into calculating the usage, pricing, and billing affects. “All of these parameters around asset management are enabled once you capture the real-time data coming through that smart asset,” Jain says. “We have our engineering teams working with customers to enable ‘smart products’ by integrating Internet of Things (IoT) devices and sensors into their products. That real-time information can then be fed into a data lake or data stream where it gets consumed by applications such as SAP Billing and Revenue Innovation Management (BRIM).” Jain and Ranganathan provide two servitization use cases illustrating how XaaS comes to life. SAP solutions can play a critical role in establishing the subscription model framework for companies, as smart devices and sensors are integrated into their operational and financial processes. One additional consideration is that servitization depends on the scalability, low latency, resiliency, and efficiency of the underlying infrastructure components. Capgemini has partnered with Intel to help clients collect, move, store and process massive amounts leveraging disruptive technologies like Intel Optane persistent memory and Intel Xeon processors. Our joint solutions and capabilities can enable clients to innovate, improve operations, and exploit data to drive real-time business decisions. XaaS Gateway to SAP S/4HANA Adoption Companies are looking to transform their business through servitization and exploring different solution platforms, says Jain. Having a clean digital core and the SAP S/4HANA platform can help companies realize the vision of creating something that is scalable, remains pure and integrates with the external world. The SAP Billing and Revenue Innovation Management solution enables servitization and XaaS, with companies using the solution to launch their SAP S/4HANA journey, explains Jain. One of Capgemini’s customers is on an existing SAP ECC system and is going through a transformation. Over the next three to five years, a substantial portion of their business is turning toward subscription revenue. “This customer has embarked on a journey where it’s starting a new SAP S/4HANA instance to implement SAP Billing and Revenue Innovation Management to bring revenue and new age products and subscription business onto the SAP S/4HANA landscape,” Jain says. “Over time, it will decommission the older SAP ECC system.” “But more customers are using SAP Billing and Revenue Innovation Management as an opportunity to justify the business benefits of moving to SAP S/4HANA and catapulting into that journey as well,” Ranganathan says there are several customer instances where Capgemini is implementing the subscription modules, but 80% of the customer’s business is still based on perpetual licenses. However, the volume toward subscription is increasing, as is the customer’s implementation footprint with SAP S/4HANA. “SAP is creating a credit module for customers that are moving away from perpetual licensing to subscription models, increasing their SAP S/4HANA adoption as well. It’s also leading to an increase in data volume on SAP Billing and Revenue Innovation Management,” Ranganathan says. “As subscription volume increases in terms of revenue on the SAP S/4HANA side, SAP is integrating the remaining modules, such as accounts receivables and payables, order to cash, and purchase to pay modules into SAP S/4HANA faster than they originally planned.” With a billable mechanism in place, companies can build additional services over time, says Jain. “It’s the ability to position a product that has a base income and over time, as you develop your business and its capabilities, add easy-to-bill bundles of services or offerings to your customers. In doing so, you’re incrementally scaling your ability to grow your business and develop completely new lines of income.”

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Intel

Capgemini Sees Subscription Model Adoption Increase

Reading time: 7 mins

Ram Ranganathan

Director of SAP billing and revenue innovation management practice, Capgemini SAP Practice

Prashant Jain

Vice President, Business Transformations and NA SAP CoE Leader, Capgemini

John Yuva, Senior Editor, SAPinsider

Senior Editor

Key Takeaways

⇨ Consider servitization for flexibility, risk reduction, and increased profit margin. Subscription-based models provide companies with flexible billing options, reducing risks associated with economic volatility. Such revenue options are unattainable with a single customer transaction. Smart products can help capture the monthly usage of products and stream that information into the billing engine.

⇨ Explore technologies that support an evolving XaaS model. Smart devices, including sensors, are critical to providing a long-term strategic advantage for companies utilizing a XaaS model. Sensors provide 24/7 monitoring of usage and continual data insights that enable companies to respond quickly.

⇨ Subscription-based does not equate to inferior quality. There can be misconceptions that servitization means lower quality to the customer. In fact, the opposite should be true. Because customers are paying on a subscription-based schedule with outcome-based expectations, the pressure is on companies to provide the most high-quality service possible. Customers can often discontinue service and move to another provider if quality suffers.

In this article, we will explore the benefits of the subscription model, like Software-as-a-Service and Infrastructure-as-a-Service, in the technological arena
Within the last few years, more companies (and consumers) are becoming part of the subscription economy. However, servitization now extends into a multitude of product and service categories, changing the business landscape — both financially and operationally. Today, more companies are adopting the XaaS approach to bring individualized solutions and experiences to their customers and establish a partnership for future growth. How customers interact with products and services is evolving, says Jain. Commoditization is giving way to personalization where product and service alignment is a critical business strategy. And with it comes a higher service expectation. But how do companies better service their customers? Traditionally, companies sell a product and it is delivered to the customer without further engagement. However, customers want to engage with products to leverage them for strategic advantage. They want to be associated with leading products and services and see what improvements and new features are launched as they evolve throughout the life cycle.