In consumption-based procurement the upfront payments to the supplier are far lower (or even non-existent). They profit only if you use their service. And you will only use their service if it provides value and meets your organisation’s changing needs.
For years many enterprise technology companies have been dining out on long-term contracts with heavy ongoing service fees and high up-front costs. Market forces such as the consumerisation of IT mean that the days of funding suppliers’ businesses while struggling to realise value from those front-loaded contracts in your own, are nearing an end.
These days all businesses need to evolve and adapt quickly to remain competitive. This alone makes changing to a consumption-based model not just attractive, but inevitable, in our opinion. But there are plenty of other less obvious, but equally compelling reason to make the shift. Here’s three of them:
The burden of creating value shifts from you to your supplier
If you’ve been part of the technology procurement process you’ve probably been in the situation where a supplier sends their ‘A’ team to front the pitch. They talk a good game with lots of promises for future benefits. Maybe they even bring in an off-shore dream team to help seal the deal, or, if you’re lucky, fly you to one of their ‘reference sites’ to talk to a happy customer.
You love the ‘A’ team, sign a long-term contract and hand over a big up-front payment. Some time down the track your business needs to change, and so too does your system. You call the ‘A’ team for some advice and support but they’ve moved on to the next big deal leaving you to work out how best to meet your changing needs or drive business benefits on your own.
So you’re locked into a long-term contract and there is no one looking after how you, the customer, continues to get value.
In consumption-based procurement the upfront payments to the supplier are far lower (or even non-existent). They profit only if you use their service. And you will only use their service if it provides value and meets your organisation’s changing needs. Suppliers must work to hold onto customers in order to achieve their pay off. In other words, they are incentivised to keep you happy by helping drive the business outcomes you want.
You’ll never have to suffer through an ‘old school’ upgrade again
Upgrading to the latest version can be costly, time consuming and even risky. Many upgrades tie up resources for months (and sometimes years). When you need to upgrade it is typically the IT department’s number one priority for the year. Even after a successful upgrade, you can be left with a feeling of dissatisfaction. What we all really want is for our system to ‘just work’ and evolve, rather than needing to be added to the list of commitments that require time and money allocated on a regular basis.
In the as-a-Service world, upgrading to the latest version is simple. The supplier does all the heavy lifting – there’s no configuration, testing or excessive downtime and lost hours. Additionally, since all customers are on the same software version, suppliers only need to support one technology stack. This enables them to focus their R&D dollars on delivering new features and tools, rather than maintaining what is already in production. Meanwhile, you and your team can be focusing on innovation, rather than keeping the lights on.
Want to change your supplier? No big deal. (Which means you may not need to)
Many incumbent providers know companies are reluctant to go through the expense and hassle of changing vendors, even if the technology isn’t wholly meeting the needs of the business.
Under the consumption model, it’s easy for customers to switch providers. This simple fact will motivate suppliers to not only work harder to drive positive outcomes for your business, but to continually look for ways to get you to stick with them.
For example, an entertainment business might want to start selling tickets to shows online. They select an as-a-Service model that gives them the ability to deliver an excellent online customer service and also gain efficiencies by requiring less staff. Now the business has the flexibility to scale up to service high-demand events and down in quieter patches. Being in the cloud also means they’re open for business 24/7 from anywhere in the world.
Other areas of the business see the benefits this delivers and start looking at what value they can gain from the supplier, e.g. analysing the data captured to drive marketing campaigns and increase sales. The supplier recognises this service is valued by others and adds this capability as a feature available to all of its customers. It also adds other features such as PoS integration and reporting modules.
By offering additional services that meet the needs of their customers the supplier not only retains customers, but they upsell them too. In this scenario everyone wins. Your organisation can choose a simple service that you can stop and start as you like, or you can subscribe to a full scale model with all the bells and whistles.
As the market matures and an increasing number of cloud providers make the game more competitive, examples of ‘good’ suppliers that deliver great service and constantly look for ways to keep up with your needs in order to retain your business (and stay ahead of their own competitors) will be common.
In a nutshell, change is coming and it’s good
Many CIOs who have been around the block negotiating large supplier contracts are well aware of the pitfalls in the old, on-premise model and are recognising the benefits a consumption model offers. Some of the big players in the supplier market are transforming their business models from selling hardware and software to a recurring revenue or consumption business model. We believe this change is inevitable and will gather pace. This is good news for you, the customer, because the shift to providing services on demand will incentivise the suppliers to work harder to provide you with a good customer experience, the business outcomes you desire and, crucially, the flexibility that has been so difficult to achieve until now.
As further background on the topic of consumption services, you might be interested in the following e-book: Boost your Agility, Capability and Cost Effectiveness – Travel Advice for your Journey into as-a-Service.
To discuss the topic further, please get in touch with the author, Julia Dol, on 021458542.