For software and information products companies, recurring revenue strategies are a key to improving the quality of earnings, enhancing the overall valuation of the firm and scaling growth with improved EBITDA. Often, the strategy, growth and sustainability challenges facing information technology businesses are the same as those faced by their clients. If the firm can deploy solutions that work across core competencies then productize those using best practices, methods, data, and deliver them as repeatable solutions to customers—that is the essence of a recurring revenue strategy. Recession and market volatility adds pressure to grow earnings in the face of falling energy demand, weak credit access, and rising risk slow large scale projects. Growing revenue from recurring sources can smooth out the volatility of earnings and scale growth in these uncertain markets.
Many global business challenges face firms in the energy vertical:
- Growing earnings in a consolidating world of global economic volatility and uncertainty where competitors are gaining advantage, scaling faster and diversifying markets and business lines.
- Global regions with the best growth opportunities also have high volatility exposures, barriers to entry or scale and risks of global trade, emerging markets and interdependent supply chains.
- Rapid change in disruptive technology, networks and IT/OT convergence and high performance computing is forcing enterprise analytics partners to fill the gaps in their core competencies.
- Improving competitive performance of existing power plant operations is an imperative to extending their useful lives and earnings potential—but will the investment pay off?
- Uncertainties about new energy infrastructure projects loom including fear of inflation, cost of uncertain regulatory compliance requiring consideration of a range of technology choices.
- While the near term threat of cap and trade legislation may have receded the pressure to reduce greenhouse gas emissions despite soft energy demand and policy uncertainty has not.
- Environmental and clean water challenges especially in emerging markets create opportunities and problems to be solved to turn them into profits—with the right analytics solutions.
- Alternatives to the traditional utility business model create demand for microgrids, combined heat and power, energy storage, and distributed energy solutions not previously used or modeled.
- Consolidation for market share growth creates fewer bigger players and brings new entrants seeking to use disruptive technology in the ‘sweet spots’ for growth. Hunkering down and playing defense may be the riskiest strategy of all for many traditional energy vertical players.
- The traditional software business model on annual licensing faces new threats from software as a service business models that make products easier to use and wraps them in an ecosystem of applications and service extensions to create more end to end solutions that work for clients.
TODAY’S WORLD OF ENERGY MARKET DIFFERENCES
The biggest challenge for recurring revenue product strategy is not building it but conceptualizing what to build. The energy challenges facing China are vastly different than those in California or Missouri and so are the economics, market rules, and customer expectations. One size rarely fits all, but best practice, advanced technology application, and the expertise and tools to deploy them is what brings customers. Retaining those customers and expanding wallet share of their services spend only happens when the solutions deliver high quality results, consistently, and competitively.
Large organizations are often a confederation of silos loosely organized around a common strategy. After a while the culture of the organization drives it more than its strategic imperatives. Internal competition among business units is as fierce as with competitors.
Collaboration technology is helping to transform that collection of vertical ‘go it alone’ silos into ribbons of horizontal collaborators working together with the same data, same tools, access to the same expertise. Ecosystems are created and grow from the interaction of community of users finding partners to fill gaps in their product and those who find a sweet spot in the market and quickly assembling a team to produce the revenue and EBITDA get to drive the strategy forward. Change is often swift and disruptive in today’s global competitive markets.
The growth challenge for the energy vertical is to collaborate blending good technologies, information products, core competencies, and expertise into integrated end to end adaptive, agile solutions that work in the “sweet spots” of the energy industry across more than one alternative business future.
The strategy challenge is getting your clients to see you as a “go to firm” for turning business strategy into action across global markets not by just licensing tools but by creating a continuously improving ecosystem community of users that harness data, applications and expertise to deliver standardized best practice solutions to serve business needs around the world. Using those standard best practice products relentlessly thousands of times each year will perfect them and make them better. Packaging and offering those solutions and value-added services across a growing community ecosystem for consulting, operations and technology partners and customers completes the circle to scalable growth from recurring revenue sources.
WHY CROWDSOURCING WORKS IN RECURRING REVENUE STRATEGIES
- Recurring revenue improves the quality of earnings and thus overall business valuation. Unlike billable hours that must be re-earned each month, recurring revenue is a predictable revenue stream from the advanced sale of a data or software license, advisory fees for access to standard analytics products sold on annual contracts, or multi-year outsourced service contracts. Because the revenue is contracted to recur each month without the sales expense and uncertainty of billable hours projects, recurring revenue improves the quality of earning and overall business valuation.
- Building a community of users and leveraging their collective strength to improve the product. Being part of a team is important to every organizations success. We’re also learning that being part of a community team enables us to more effectively and efficiently stay on top of changing market conditions, catch trends at an earlier stage and benefit from the wisdom of the crowd in reacting to key issues. The power of business collaboration sites like Linked In have demonstrated there is more to gain from community interaction than there is to a lot you can miss if you stand outside.
- Recurring Revenue provides revenue stability. For many software companies, software licenses are the business norm. But often those products are dependent upon one or a few skilled users at the client firm. Lose the model runner and you lose the software license. Recurring revenue trusted adviser contracts are annual or multi-year deals just like software licenses but they offer more predictability and less risk to clients by being part of an ecosystem that can provide peaking needs when business is good and back-fill when a key employee leaves or retires. The recurring revenue they produce still smooths the peaks and valleys and offers stability for the business in recessions or between big billable hour projects but it offers more upside for the firm and its clients.
- Best practice in analytics techniques and scenario analysis are best done in community. Whether it is stranger teams collaborating in global scenario building projects or data analysts assessing implications of changes in reporting patterns for critical information every firm benefits from adopting best practice.
- Recurring revenue products monetize R&D investment that otherwise would be overhead. By creating a market for research and development outputs, recurring revenue products self fund or pre-fund R&D and free working capital for major investments turning overhead into a profit center. Users benefit from the continuous improvement of the products from the interaction and insight of participants.
- Crowdsourced predictive analytics tools are essential in today’s global business environment. Examining web trends from ad words or search engines to assess patterns is a growing part of scanning the environment in every strategy analysis. You just can’t do that in isolation nearly as well as you can by working with online firms that use crowdsourcing to help gather business intelligence and filter it .
- Recurring revenue products have higher margins and improve EBITDA. Because recurring revenue products are ‘produced once, used often and sold many times’ they tend to have higher margins on par with data and software products. Standardized work scopes and methods allow products to be produced with lower cost, junior staff under supervision to improve EBITDA and speed training.
- Creating a market for talent and expertise from the knowledge of Baby Boomers. Every day 10,000 baby boomers retire. They are taking with them critical information, knowledge and insight the world still needs. TCLABZ believes the markets will crave access to this Boomer Expertise and the Boomers will seem opportunity to extend their work lives on their terms, in their time as they wish through participation in markets for expertise that serve both business and boomers well.
- Recurring revenue products improve consulting productivity and quality. By providing a high quality starting point for repeatable consulting services, recurring revenue products let consultants start work on billable hour tasks faster than competitors, improve productivity by using lower cost junior staff for standardized simulation analysis and improve the quality and consistent of consulting work by leveraging best practices.
Align Your Business for Growth
Applying a recurring revenue strategy to realize organic growth potential is the first essential step in creating a virtuous circle that aligns your business interests with those of your customers. The internal business results from such a strategy drive improvements in EBITDA and performance by:
- Aligning units around a common growth strategy, common, modular product components;
- Hone best practices with customer engagement to align and customer interests,
- Leverage core competencies and capabilities to create recurring revenue streams;
- Reduces lead time for engagement to start work using speed to competitive advantage;
- Shifts expertise to customer facing roles focused on business solutions and enables use of lower cost junior staff to build product modules and maintain them;
- Repeated use of product modules optimizes performance and integration of information, technology, and services into more complete solutions to address customer needs.
Recurring revenue strategies value the firm’s core competencies by monetizing them, using them relentless inside to improve performance results and EBITDA, and demonstrate powerfully to clients that they made a logical choice in selecting your firm as their trusted adviser.
Smart meters are just the beginning the transformation at work to a distributed energy future. Making sense of uncertainty and its strategic implications for your business in today’s economy requires more than data and analytics skills to proactively assess opportunities and risk. Predictive technology is helping us find clues about changes taking place from the patterns of interactions across the markets. Making sense of these patterns and using them to extract insight, assess options, and chart business plans across alternative, expected business environments combines the best of scenario analysis with the predictive analysis of data trends to extract insight—for your business! The big unanswered question is whether customers will get the benefits of smart meter deployments. But your smart meter only provides data—you must do something with it to get benefits!
Solutions that help you make choices by combining your data, your business needs and performance with the wisdom of the crowd doing the same thing to assess opportunities and risks, provides insight about where changes in energy behaviors make sense to capture the benefits of the smart grid-enabled energy future. The interaction of a knowledge-based crowd for competitive distributed energy markets combines the best of qualitative scenario analysis with advanced predictive analytics to improve your odds in managing uncertainty with the amazing power of ‘what if’. Insight gives you choices. Whether your choices produce benefits or bruises to your bottom line depends upon you!