Answering What, Why and How
Most SaaS will focus on technical aspects, and how it works
- By Paul Metzheiser
- Apr 01, 2022
While service-focused sales models is not new, system integrators selling hardware or equipment as-a-service is still a fresh and misunderstood concept. The one-time sales model is all integrators know. Therefore, integrators commonly interpret as-a-service with a one-time sale mindset. Resulting in misrepresentation of a service sale entirely.
Many security integrators don’t know, definitively, what an as-a-service solution is or why it’s touted as more valuable than a cash purchase for integrators and customers. Lastly, integrators that do see value and want to adopt a service sales model, tactically, struggle to execute.
Let’s clarify the answers for these important questions. We’ll define as-a-service, elaborate about the value to integrators and customers, and unpack the tactics integrators must do to successfully adopt a service sales model.
Security-as-a-Service. Most security-as-a-service definitions only focus on the technical aspects and how it works. While it is not wrong, we’ve discovered two components that must exist, no matter what, for a solution to define security-as-a-service. Without the following two parts, it is a misrepresentation.
Access To, use of. The more important of the two factors that define a security-as-a-service solution means the proposed offering must provide access to or use of some security product, service, or solution. It is intended to be a subscription solution. Therefore, there is no ownership of the technology and no ownership responsibilities. If your as-a-service contract ends in ownership, it is not as-a-service, but a traditional lease with a different name.
Monthly payment. Security-as-a-service should have no significant, upfront expense. It is intended to be a service provided, for a predictable, manageable, monthly payment.
It is that simple. Without these two components present, technically, it’s not an as-a-service.
Why Security-as-a-Service: customers and integrators. Let’s expand on why security-as-a-service is considered valuable and ideal for customers and integrators through their separate lenses.
Customer perspective: Security-as-a-Service vs Cash/Capital Expense Sale. Put your customer hat on. Consider the makeup of traditional, capital expense solution sales that results in ownership. There are some fundamental problems regarding the economics of ownership:
traditionally, assets a business invests in intend to appreciate in value. However, technology equipment rapidly loses value the day after it is installed. Therefore, using after-tax dollars to pay for these non-revenue generating assets defies basic economics. And while technology is essentially, there is a significant difference between importance and the need to own it. Knowing it’s going to lose value, basic economic principles advises us to avoid ownership when possible.
Consider the bill of materials for a technology solution. There’s commonly many non-recoverable costs associated with a solution that often equate to 50 percent or more of the sell price (i.e. manufacturer margin, distributor margin, integrator margin, licensing, installation, programing, software, design, warranty, training, etc.). The value of these non-recoverable costs disappear immediately upon installation (there is no resale value for these components).
Understanding this about the make-up of a solution ask this question, when you pay with cash to own technology, what do you actually own and how much of what you paid for does that represent?
Technology continues to advance and change at the most rapid pace in history. With no signs of it decelerating. R&D budgets for major industry manufacturers are fueling this advancement. Just view these publicly available figures allocated to R&D by top tier manufacturers in 2020, a pandemic year nonetheless:
- Axis Communications allocated 18% of revenue to R&D
- FLIR had 11.30% of revenue allocated to R&D
- Milestone Systems allocated 25.96% to R&D
This constant investment and advancement contributes to technology’s rapid depreciation.
The combination of these three issues should make customers inquire about a better way to pay for their technology solutions. This has driven customers to realize what their actually seeking is the use of technology. They care about access and outcomes, not ownership. This is one of the key reasons for growing interest and adoption of subscription-based, service-type solutions, even when substantial hardware components are required on customer premises.
RMR vs One-time Revenue
Now let’s view the value from an integrator’s lens. A quality as-a-service program should take integrators accustomed to selling one-time, capital expense sales and help them pivot to a service sales model. Allowing integrators to sell hardware, and easily bundle high margin multiyear support, maintenance, and service contracts at the point of sale. Resulting in contractual stickiness, building monthly recurring revenue (MRR) and increasing valuation of the business.
Previously and presently, integrators selling traditional one-time capital expense sales struggle or don’t even bother selling multiyear support and maintenance services at the point of sale. Where, security-as-a-service provides an easier avenue to achieve sticky, contractual, high-margin multiyear support service sales. This builds highly-desired, sustainable, predictable MRR.
First, by adding multiyear support services at the point of sale you increase revenue by 30-45 percent on each transaction. Secondly, building MRR creates a groundswell of benefits to an integrator’s organization. Such as:
- Recurring revenue has a valuation many times greater than one-time project revenue
- Sustained profitability (consistent source of higher-margin sales)
- Weather economic downturns (MRR keeps the business afloat, one-time project revenue disappears)
- Increased customer loyalty with contractual ties (create stickiness)
- Improved customer engagement which often leads to other sales opportunities, and
- Greater customer lifetime value (CLV)
Quantifying Recurring Revenue
Provide a sense of the quantifiable difference in value of recurring revenue versus one time revenue. Look at two key financial metrics – margins and business valuation. The table below compares the contribution of one million dollars of recurring revenue versus one million dollars of one time revenue for each. (Table 1 uses conservative assumptions for average integrator margins on one time and recurring revenue. Table 2 uses basic business valuation formulas with conservative multipliers.)
When analyzed from both of these perspectives; customer and integrator, it’s clear why financially astute integrators and their customers look to security-as-a-service as a more ideal and valuable solution.
Adding an as-a-service offering as an option on a proposal, among a buffet of other procurement options, unfortunately doesn’t create MRR success. The integrators who do have success approach it differently than one-time sales. They implement a multilayer strategy that encompasses sales, marketing, services, and operations. All of the following mentioned tactics are essential to successfully pivot to a service sales model.
The first tactic is leadership commitment. Results reflect the effort. Leadership must be a consistent advocate, understanding and believing in as-a-service. Then, they must inspect and enforce. Think milestones, objectives, scorecards and QBRs.
You’ll need a quality service offering you can deliver on. Productize it. Present your service offerings as an easy presentable package that’s a centerpiece of your value.
Next, find the right finance partner. A good as-a-service partner pays integrators in full, upfront, just like a cash transaction. You should never have to wait or get paid over time for selling a monthly subscription. Choose a finance partner that offers a true as-a-service offering. It should align with the subscription consumption model. Confirm that is focuses on use/access, not ownership. And lastly, a quality partner can provide value-added penalty-free provisions like rapid obsolescence protection and natural disaster coverage.
Invest in training sales teams. No matter how skilled a sales professional is, a service sale is different than the one-time sale.
Then, compensate your salespeople properly. If MRR is important, pay your people for selling MRR. Don’t pay them over time, pay them upfront. It’s how salespeople are wired.
Lastly, share your message with the world. Integrate as-a-service and service-focused messaging into your comprehensive content marketing strategy.
This article originally appeared in the April 2022 issue of Security Today.
Paul Metzheiser is the managing partner at TAMCO.