Recurring revenue is a term applied to business models that involve three types of selling and billing structures: a one-time transaction plus a periodic service charge; subscription-based services involving periodic charges; or a contractual relationship that charges periodically for goods and services. VentanaResearch_RR_BenchmarkResearchTelecommunications was the first major industry to use it, but recently the model has gained popularity in others. It is a major trend in information technology as an increasing number of companies offer software and hardware technology accessed as a service through cloud computing. Recurring revenue also has been transforming the entertainment business, as customers subscribe to rent movies, music and other creative digital products instead of owning them; this is part of the so-called “sharing economy” whose social impacts are wide-ranging.

The increasing importance of the recurring revenue model reflects a shift in buying preferences for both businesses and consumers. For them, renting assets may be easier and less expensive than buying them. For providers, recurring revenue is attractive because it establishes a regular, predictable income stream as long as the customer continues to use the service. To ensure that, though, they must build an ongoing relationship in which they handle interactions smoothly and maintain customer engagement throughout the life cycle.

Ventana Research recently completed benchmark research into recurring revenue. The research shows that companies vr_Recurring_Revenue_01_why_companies_use_recurring_revenueadopt the model to create strategic business opportunities. They like it for generating more income immediately, but they also see potential to sustain a long-term income stream by offering services of ongoing value to their customers. The most commonly cited business drivers for using a recurring revenue business model are increasing the top line (selected by 51%), enhancing the customer experience (also 51%) and increasing customer loyalty (46%). The model provides companies with an ongoing opportunity for satisfying customer interactions that drive customer loyalty. However, they had better be sure to follow through on it; companies that fail to provide competitive services or fall short in service delivery will lose customers with little hope of ever getting them back.

The research also identified the most significant challenges companiesvr_Recurring_Revenue_03_recurring_revenue_challenges encounter when they adopt recurring revenue strategies. These mainly concern customer retention.

  • The most common, cited by 55 percent, is maintaining customer engagement. Having ongoing positive interactions can be an important determinant of renewal rates. Renewals in turn are a key driver of profitability in these businesses because of the relatively high cost of adding a customer. Along those lines, customer retention was cited as an impediment by 39 percent of participants. Moreover, since a company’s costs related to its recurring revenue business are relatively fixed in the short term, almost all the impact of lost revenue drops to the bottom line, depressing profits.
  • Nearly half (46%) said cross-selling and up-selling are difficult. This may be because they can’t engage effectively with existing customers. There may be multiple internal factors at play such as a poorly designed marketing program for existing customers, a lack of people or incentives for performing ongoing interactions, or technology limitations that prevent a company from creating or executing an effective customer nurturing program. Finding it difficult to up-sell or cross-sell also may be a reflection that the primary service is of limited importance to customers who don’t want to consider a more expensive, deluxe version or add-ons. Understanding which customers fall into this category is important so that up-sell and cross-sell efforts are focused on those who are most receptive.
  • More than one-third (35%) of research participants said creating new accounts is problematic. Often the source of this issue is inadequate technology, either using inappropriate software or struggling to acquire and integrate the data necessary for this function.

None of these impediments is impossible to address. However, companies planning to enter or expand a recurring revenue business must anticipate or focus on addressing them to ensure successful execution.

Overcoming difficulties in engaging customers positively and profitably usually involves having capable systems, processes and people to sustain ongoing interactions with the right customers at multiple touch points within the organization. Having multiple touch points is common: Four out of five (79%) companies reported that three or more business units interact proactively with customers; the three that do so most often are Sales (84%), Customer Service (77%) and Marketing (63%). vr_Recurring_Revenue_05_multiple_departments_interact_with_customersOne-fourth (26%) said that five or more business units work directly with customers. Because there must be multiple touch points with customers, it’s essential to maintain a single authoritative source of information accessible by all business units. This helps to prevent annoyances when, for example, customers have to provide information to one group that they already provided to another, or when a company representative at one touch point tries to sell the customer a service he or she already has.

Sustaining mutually satisfactory interactions with customers has become a bigger challenge for recurring revenue businesses because, in addition to multiple touch points, there has been a proliferation of communications channels that people routinely expect to use for interactions with businesses. Some companies have been successful in engaging with customers seamlessly across multiple communications channels, and this raises expectations for others. Our research quantified the magnitude of this challenge. Companies on average use 6.4 separate channels to engage with customers; one-third employ eight or more. Supporting multiple channels seamlessly is another important technology issue, affecting more than half (57%) of participants. Today, customers expect to be able to contact a company using whatever communication channel suits their specific circumstances, needs and preferences at any given moment. Beyond having the means to manage multiple channels, having uniform, accurate and timely information at each point of contact is essential for sustaining customer satisfaction.

The recurring revenue model is an increasingly attractive choice for consumer and industrial businesses, offering many potential benefits for companies and their customers. Done well it can increase revenue, decrease costs, stabilize cash flow and ultimately enhance profitability. However, businesses that adopt this model are likely to find that it requires a different approach to selling, billing and support. In particular, we recommend that they adopt dedicated systems necessary to support the recurring revenue model and institute training that is often required to make the most of this opportunity.

Regards,

Robert Kugel

SVP Research

One of the issues in handling the tax function in business, especially where it involves direct (income) taxes, is the technical expertise required. At the more senior levels, practitioners must be knowledgeable about accounting and tax law. In multinational corporations, understanding differences between accounting and legal structures in various localities and their effects on tax liabilities requires more knowledge. Yet when I began to study the structures of corporate tax departments, I was struck by the scarcity of senior-level titles in them. This may reflect the low profile of the department in most companies and the tactical nature of the work it has performed. Advances in information technology have the potential to automate most of the manual tasks tax professionals perform. This increase in efficiency will enable tax departments to fill a more strategic, important role in the companies they serve.

In the past (and still in many organizations today) there was a sharp pyramid of value-added work in the tax function, with tax attorneys at the top, corporate counsel in the middle and tax practitioners at the bottom. The tax attorney, versed in the intricacies of laws and their applications – especially in cross-border situations – typically has had the greatest ability to minimize tax expenditures. The role requires a combination of inspiration and art to see the underlying logic of tax laws and legal structures to be able to apply creative interpretations to black-letter statutes and has been rewarded accordingly. Senior corporate counsel has weighty responsibilities and therefore merited elevated titles. But the role of tax preparation has been oriented toward functional execution. It typically is done hard-working experts who have limited impact on policy and decision-making. Because the workings of this group are particularly sensitive, it also has a culture that attracts people who tend to be tight-lipped and not given to self-promotion. This hierarchy has helped to keep tax matters outside of the mainstream activities of the corporation, as I have discussed.

Today, information technology can flatten the value-added pyramid  by automating routine work. Doing this can give skilled practitioners in the tax department more time to spend on value-adding analysis and contingency planning because they spend less time on data gathering, data transformation and vr_Office_of_Finance_15_tax_depts_and_spreadsheetscalculations. Increased productivity creates more time to find tax or cash flow savings, as well as to provide better-informed guidance on alternative strategies. To accomplish this, corporations must automate their tax provisioning process; most will benefit from having a tax data warehouse, which I have written about. However, our recent Office of Finance research finds that this is not widely done. Instead almost all midsize and larger companies (90%) use spreadsheets exclusively or mainly to manage their tax provisioning process, including calculations and analysis, and this demands manual effort.

Desktop spreadsheets are not well suited to any repetitive collaborative enterprise task or as a corporate data store. They are a poor choice for managing taxes because they are error-prone, lack transparency, are difficult to use for data aggregation, lack controls and have a limited ability to handle more than a few dimensions at a time. Data from corporate sources, such as ERP systems, may have to be adjusted and transformed to put this information into its proper tax context, such as performing allocations or transforming the data so that it reflects the tax-relevant legal entity structure rather than corporate management structure. Moreover, in desktop spreadsheets it is difficult to parse even moderately complex nested formulas or spot errors and inconsistencies. Pivot tables have only a limited ability to manage key dimensions (such as time, location, business unit and legal entity) in performing analyses and reporting. As a data store, spreadsheets may be inaccessible to others in the organization if they are kept on an individual’s hard drive. Spreadsheets are rarely documented well, so it is difficult for anyone other than the creator to understand their structure and formulas or their underlying assumptions. The provenance of the data in the spreadsheets may be unclear, making it difficult to understand the source of discrepancies between individual spreadsheets as well as making audits difficult. Companies are able to deal with spreadsheets’ inherent shortcomings only by spending more time than they should assembling data, making calculations, checking for errors and creating reports.

On the other hand, a tax data warehouse addresses spreadsheet issues. It is a central, dedicated repository of all of the data used in the tax provisioning process, including the minutiae of adjustments, reconciliations and true-ups. As the authoritative source, it ensures that data and formulas used for provisioning are consistent and easily audited. Since it preserves all of the data, formulas and legal entity structures exactly as they were in the tax period, it’s far easier to handle a subsequent tax audit, even several years later. In this respect a dedicated tax data warehouse has an advantage over corporate or finance department data warehouses, which are designed for general use and often are modified from one year to the next as a result of divestitures or reorganizations.

Another benefit of automating provisioning and having a tax data warehouse is that this approach provides greater visibility and transparency (at least internally) into tax-related decisions. This gives senior executives greater certainty about and control over tax matters and allows them to engage more in tax-related decisions. In companies where executives are more engaged in tax, the tax department gains visibility. Also, because automation enables better process and data control, external auditors spend less time examining the process and tax-related calculations in financial filings, and it cuts the time the tax department might need to spend in audit defense with tax authorities. Process automation enables tax departments to increase their efficiency and give members more time to apply their tax expertise to increase the business value of their work, thereby flattening the value-added pyramid.

The scope of the value that tax practitioners can add is broadening because having greater visibility into the methods used in direct tax provisioning will be increasingly important. I have noted that companies that have significant operations in multiple tax jurisdictions are likely to face a more challenging future. While I’m skeptical that there will be a massive change in how tax authorities manage cross-border tax information soon (which is more a reflection of the competence of the taxing authorities than their motivation), it’s worth assuming that it will grow at least gradually and therefore companies must be prepared to deal with increasingly better-informed tax officials. Transparency also fosters consistency in tax treatments and the ability to manage the degree of risk that CEOs, CFOs and their board are willing to take on in weighing how conservative or aggressive a corporation would like to be in how it handles taxes. This is another way for tax practitioners to increase their value and visibility in their corporation.

Forward-looking companies have been making the transition to automating their direct tax provisioning process, redefining their approach to managing taxes and giving their tax departments greater visibility. It’s unlikely that these companies are using desktop spreadsheets to any meaningful degree. It’s not clear when the mainstreaming of the tax department will be common, but it’s probably at least several years away. Evidence that a fundamental shift has occurred in how corporations manage their income tax exposure will exist when a majority of midsize and larger companies use dedicated software rather than spreadsheets for this function. That’s also likely to be when Senior Vice President – Tax becomes a common title. This promotion won’t be the result of title inflation. It will happen because the tax department’s role will be important, making a bigger, more visible contribution to the company as practitioners focus more on analyses that optimize tax decisions and far less on the calculations and other repetitive mechanical processes that consume time but produce little value.

I recommend that every CFO of a company operating in multiple tax jurisdictions with even a slightly complex legal structure consider automating tax provisioning and deploying a third-party (rather than a custom-built) tax data warehouse.

Regards,

Robert Kugel – SVP Research

Twitter Updates

Stats

  • 87,931 hits
Follow

Get every new post delivered to your Inbox.

Join 71 other followers

%d bloggers like this: