One of the hottest trends within the retail point of sale (POS), IP telephony and office equipment reseller markets right now is the as-a-service business model where solution providers earn monthly recurring revenue selling subscription-based products and services. IT vendors are getting on board with this trend en masse, too. Gartner predicts that by 2020, all new entrants and 80% of historical vendors will offer subscription-based business models.
“The as-a-service model is going to dwarf the ‘buy a box and hold on to it’ model,” says Andrew Warker, VP at CCA Financial. “It may be more than two years before we see this happen, but it’s going to be here in less than 10 years. VARs that don’t get on board soon will have a hard time surviving.”
Cisco’s Global Cloud Index report claims that 83% of the best-performing US businesses planned a SaaS strategy in 2017 and 70% of those companies had no such intention in 2016. Making the transition from break-fix to managed services isn’t an easy move for value-added resellers (VARs). New automation tools are needed to operate the business. Sales compensation models must be implemented. And one of the biggest hurdles of all is financial planning. Specifically, how are you going to exchange the $10,000 in direct revenue from selling hardware and software in the old model with a $500-a-month subscription revenue? What’s more, how are you going to turn that bundled offering into a subscription? Should you finance it yourself and wait six months or more for break-even or should you work with a financial services firm?
Getting the financial part of the as-a-service sale correct is crucial. After seeing lots of partners struggle with financing their as-a-service business, I’ve put together the following timely tips to ensure your recurring revenue ramp-up goes smoothly.
Tips for Selecting an IT Leasing Provider
Rather than trying to finance recurring revenue deals on your own, which hurts your cash flow and slows down your growth potential, consider partnering with a third-party financing partner. Here are a few points to keep in mind when determining which kind of partner is right for your business:
- Control over your offering. Some technology leasing offerings are owned or affiliated with large IT vendors, such as Hewlett-Packard Financial Services (HPFS) and Cisco Capital. If a large percentage of your sales comes from one of these vendors then working with a vendor-specific finance partner may be a good fit. If you have a multi-vendor offering, on the other hand, these finance companies may not offer the flexibility you need.
- Shared risk model. Unlike financing IT hardware and software through a bank, technology-focused leasing companies and financers (e.g., HPFS, Cisco Capital, CCA Financial) understand the technology lifecycle and other nuances of your business, and they may even share some of the risks. For instance, if one of your customers is unable to continue paying on their solution, the financial services company may not put the onus on your company to collect payment – they may take on some of the payment collection or asset recovery burden from nonpayers. No matter which kind of leasing company you choose, make sure you understand how much of the risk they accept before signing with them.
- One bill. One of the challenges of creating a subscription model is aggregating the different payment structures from each vendor. Some may offer a monthly service whereas others may require quarterly or annual payments. Make sure that the service provider you choose can simplify the process of aggregating multiple vendors and providing customers with one bill.
- Finance partner stability. Even if a finance partner meets all the criteria listed above, if it’s carrying too much debt and goes out of business, it’s going to also put your company in a difficult situation. Be sure you’re only working with companies that have been in business for several years, have a track record of successful IT subscription deals, and are running a financially sound operation.
Some of the top reasons Epson partners choose a technology-focused leasing company like CCA is that they work with any POS and payment processing vendor. Plus, they provide full, up-front funding on all hardware and software components, they absorb the majority of risk in the sale, and they build technology refreshes into the deal, so end customers never experience payment spikes throughout their active subscriptions.
Advice to Retail POS Resellers
In the retail space, the driver behind the as-a-service model is different than the general IT world where the cloud is leading the charge, says Warker. “Additionally, retailers need to keep up to date with industry regulations such as PCI and EMV, and they can’t afford to swap out hardware every two years. Subscription-based services fill this need nicely,” he adds.
Warker sees his company as the contractual glue that makes as a service offerings work. “We had an ISV [independent software vendor] come to us with an offer from a large retailer interested in buying software, hardware, and IT services as a subscription, but the ISV didn’t have the means to finance the hardware, kitting, encryption, and cabling on its own,” he says. “We got to know the four vendors involved in the deal, and we were able to pull together each component of the offering and structure it, so the end customer received one bill from us each month, and we assume all the credit risk. Another perk with this model is that it’s easy for the ISV to provide add-on services after the initial sale.”
No matter which financing path IT solution providers choose, they should involve their technology vendor partners early on and identify the lead provider who wants to offer the as-a-service deal. One downside of an as-a-service subscription is that it’s like a house of cards; if one vendor’s product or service breaks down, the whole solution can become corrupted/invalid and come crashing down. That’s not meant to scare away VARs; it’s just a reminder that we’re talking about a business strategy with the potential for great rewards. And where there are great rewards, there are always risks that must be mitigated.