Stephen Hurrell's Analyst Perspectives

Among the many digital economy trends written about in recent years, one of the most significant has been the adoption of a subscription business model. For organizations with a business model that also includes reselling third-party products and services, this shift to subscription services adds complications and potential challenges.

Partner models come in different forms, with partners potentially being resellers or suppliers. On one side is the recognizable example of a reseller acting as an additional selling channel. Another example is a manufacturer with a supply chain of primary suppliers that enable building or assembling goods. But increasingly, partnerships also apply to other forms of business. Examples include organizations that bundle service offerings — such as insurance — with proprietary products, organizations that rent assets from third parties, or service organizations bundling either digital components sourced from cloud computing or digital content created elsewhere. An example of a reseller is a partner that originates orders such as renting a car or renting a hotel room at the same time as buying air tickets.

These business models are typically supported through custom software projects or extensions to existing ERP systems. But as organizations shift to subscription services, or perhaps acquire subscription-based products or services, there is an opportunity to examine dedicated revenue management applications with the attendant benefits, not only from a functional and technological cost-of-ownership point of view, but also to improve customer experiences.

Subscription models that also includes reselling third-party products and services place additional strain on existing custom or ERP-based systems, as there is now a need for continuous computation of not just what an organization will be paid against what it delivers, but also the monies that are needed to be paid out. A good dedicated system recognizes this dynamic and represents the contract or order with both buy- and sell-side notations at the product and service level. There is both a price computed and charged by the vendor for the delivered product or service, and a cost computed to enable the correct payment to the supplier, asset holder or originator. In addition, the computation on the sell side needs to consider that the cost may be adjusted at some later date based upon an aggregate number of units delivered, with disbursements dependent on customer subscription or usage payment schedules. Plus, the receipt of payments will not necessarily align with payments to the supplier or originator. As is the case with monies received, the value of payments to the partner will be posted to accounts payable so that the accounting — including revenue recognition — is more properly handled in the appropriate financial accounting system. These challenges highlight the benefits of a dedicated application, which greatly reduce the cost of ownership as compared to maintaining and modifying a heavily customized ERP or proprietary system.

An additional benefit of coupling revenue management for buying and selling is that the data is linked at the source. Product and service profitability analytics no longer require collating and matching data, as would be the case in an ERP or custom approach. By virtue of the granularity of the transaction data captured at the product/service/customer/vendor level, an organization is more easily able to aggregate this data at any level required to understand point-in-time performance of customers and vendors as well as trends over time.

Despite the requirements for a dedicated platform, by 2025, fewer than 1 in 10organizations with a business model that uses third-party products and services will have a dedicated billing system that also deals with partner settlements. Although often viewed as part of financial accounting, I believe that the increasing adoption of subscription and usage models means that these processes tend to be less tied to the financial systems and more focused on understanding the implication for the customer experience and profitability. The right system will accommodate the needs of both areas of responsibility, with integrations to financial accounting systems as well as product masters and vendor masters, contract and order management systems, and analytics and reporting.

Organizations planning to move to a subscription-based model that also includes reselling third-party products and services or have or are planning to acquire a business already engaged with this model should examine dedicated billing and monetization applications and platforms, especially those offering integrated, product- and service-level partner payment capabilities.

Read more on this topic from Stephen Hurrell:

• Analyst Perspective: Subscription and Usage Management Technology Needs for the Modern Economy

Regards,

Stephen Hurrell