The definition of success for Enterprise businesses has taken a dramatic shift. Top line recurring revenue growth is now the key metric and the efficiency of that growth drives the valuation multiples. Unlike in decades past, companies are actually rewarded for pumping dramatic amounts of capital into growth (Sales and Marketing) so long as that spends results in efficient increases to Annual Recurring Revenue (ARR). This is true even if a company has significant GAAP losses. Wall Street analysts are rewarding these companies because they understand that these companies are building sticky relationships with customers that can lead to increased monetization over time.
These investments in growth only make sense if the lifetime value (LTV) of that marginal ARR dollar is understood, coupled with a very predictable recurring expense model. If the LTV is understood, a company will know when the growth investments are no longer efficient, allowing for a decrease in Sales & Marketing. This decrease results in lower growth rates but higher current operating profits. Lower growth rates result in lower valuations.
This new model presents a problem for the CFO and CIO organizations. The CFO is the guardian of the Company’s business model. As part of that role, the visibility into future results and capability to move the right levers in a proactive as opposed to reactive mode are paramount to success. The historical and forecast data must be true and consistent and the business model metrics driven off of this data must be available on-demand. Availability to true and consistent data is a legacy problem across most industries. This is nothing new and many successful companies have created solutions in attempts to solve this. The new significant challenge facing most CFOs today is access to the appropriate metrics for their business. As described above, the metrics needed to measure the success of your business are different today and not readily available out of traditional systems. This challenge introduces us to the CIO’s difficulty.
“Companies are actually rewarded for pumping dramatic amounts of capital into Growth so long as that spends results in efficient increases to Annual Recurring Revenue; it’s true even if a company has significant GAAP losses”
The CIO has two main challenges in today’s new recurring revenue world, often referred to as the Subscription Economy. First, companies are willing to spend significant amounts on growth, but that growth needs to be efficient. One of the most effective ways to drive efficiency is through the use of tools. It is not uncommon for an early stage B2B business to have no fewer than ten SaaS applications purely dedicated to growth. The anchor is typically the CRM, surrounded by a multitude of supporting tools all playing a role in the steps to acquiring a customer. If the growth engine is fueled by in-bound leads, the sales funnel can start with ad spend and, through a series of conversions, end with a new customer. Along each step, there is a system that can help your growth optimize and improve. In fact, new companies are seemingly constantly created with tweaks to existing methodologies that make visibility and prospect conversion ever so slightly better. Especially troubling is that many of these systems can be accessed via a free trial. Without notice an invoice will show up at AP for a system that had no finance or legal purview even though it is now considered “mission critical” to meet the current bookings goals. The challenge for the CIO: how does a company rationalize and manage all of these systems while also keeping an eye out for costs?
The second main challenge for the CIO is that, while managing all of the new disparate systems, the company still needs a system of record for that one source of truth that produces the data that the CFO uses to drive the entire business model. Historically this would have been a traditional ERP system. In today’s recurring revenue world, that system of record needs to think about a customer and the costs to acquire that customer. The traditional systems are built to think about products and the costs to produce those products. The CIO has to solve for the requirements of today’s business model.
There used to be a common saying among CFOs that “No one is ever fired for putting in Oracle”. All of the implementations might have taken longer and cost more than expected but it was known it would primarily work once implemented. This is no longer the case. In fact, most of my colleagues would immediately be challenged by their Board members if they proposed a traditional on-premise solution. Each year, cloud security will continue to get stronger, cloud compute speeds will increase while storage costs will decrease. This is allowing for the introduction of new technologies at a pace we have never seen before. Because of the vast availability of options, consumers are demanding more flexible consumption models. This demand is resulting in a requirement for flexible and transparent business models. The CFO and CIO need to be ahead of these shifts, or they, like the companies they support, will be left behind.