CFO Series Part I: When Business Models Converge
Quick: Is your business product-based or service-based? If you blurted “none of the above,” then your company may be smartly positioned to gain an edge against its fiercest rivals.
A range of technologies, from the cloud to mobile to the Internet of Things, is obscuring the line between product-focused companies and their service-oriented counterparts. As customers have adopted—and, in some cases, grown addicted to—incessant connectivity, purveyors of products have transformed their offerings. In a bid to foster more lasting customer loyalty, they’ve supplemented single transactions with subscription-based services, usage-based contracts and other value-added services.
From the other end of the spectrum, service-driven companies are using the same techniques to combat the ever-present forces of commoditization, reshaping their offerings into packages that provide ongoing revenue and diversify their revenue streams. Tech consulting firms, for example, may sell proprietary tools, such as dashboards and reports.
The numbers speak for themselves
The blurring of the border between the previously distinct business models is well under way, according to a recent study. In a survey conducted by CFO Research, in collaboration with FinancialForce.com, 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.
Research 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.
Finding new sources of revenue and growing profits
A plurality of finance executives surveyed (39%) view the primary motivation for introducing or expanding service-related revenues as finding new sources of revenue and profit growth. For finance executives, that aim translates into finding ways to leverage the technology needed to monitor customer satisfaction, supplying insights that can guide senior management as it rethinks its business model. Whether the strategy means capturing recurring revenues via subscription or on an “as-a-service” basis, CFOs need to establish the metrics that will help the company manage the customer experience—measuring the vitality of the renewal rate, for example.
Whether they started out selling services or peddling products, companies are converging on the same opportunity: creating long-term value for demanding—and capricious—customers. Whether products or services are generating revenue, CFOs must keep a watchful eye on a familiar place: tracking profitability.