Evolution of the Recurring Revenue Business CFO
Leaders of the most successful recurring revenue businesses recognize that the customer experience is always “live” and requires constant attention and monitoring. Whether an offering is sold as-a-service or on a usage basis, the drivers of value, satisfaction, and loyalty must be consistently present and tangible to the customer. Companies that excel in this world put systems in place to get as close to a real time view of their customers’ activities, challenges, and perceptions; and then respond in kind. While this model has plenty of upsides, the downsides play out more immediately and dramatically than they do in a traditional business because things happen faster. As a result, finance teams are often the downstream inheritors of the messes created by a lack of attention paid to the customer experience.
While CFOs are trying to head off the potential downside of this dynamism, they are simultaneously contending with three forces of change specific to recurring revenue models that we have witnessed over the last few years:
1. Stakeholder Resistance
While CFOs are rarely the architects of recurring revenue businesses, they are on the hook to promote and defend them. Customers, distributors, employees, and analysts don’t always understand the effort and nuance required to nurture and grow such a model and can be frustrated by the pace of change.
2. Need for Speed
Legacy back office systems and processes delay getting real time information about the health of the business which in turn, can hamper the response needed to adapt to changes in the market.
3. Dynamic Risk Mitigation
With the increasing frequency of new political, social, and health disruptions, maintaining business resiliency through a recurring revenue model requires better data intelligence and forecasting to head off customer churn and downsells.
How is the office of the CFO to manage the dynamism of the recurring revenue model and these forces of change? The finance leaders we’ve spoken with over the last year who have successfully navigated this revealed new modes of operation they have adopted in four areas: strategy and innovation, people and culture, process and governance, and data and insights. Below, we will explore each of these areas, define the modes, and show how finance leaders are shifting their attention as their recurring revenue businesses evolve from launch mode to scale.
The first modal shift we’re seeing for the office of the CFO is within Strategy and Innovation. Companies that launch recurring revenue offers learn over time (sometimes the hard way) the importance of involving finance early in discussions around things like how to define and understand the serviceable addressable market, the time it takes to convert target segments, and how much to budget for enablement and incentives for the sales team and distribution partners. Having finance play a bigger role in pre-launch conversations can help establish realistic milestones for the business and provide a foundation for contingency plans down the road if needed. As the new offer takes off, the most successful finance leaders pivot their attention to margin building through process standardization and providing board level guidance around how to repeat the success of the next innovation.
Fig 1. Strategy and Innovation focus areas for the Office of the CFO
| New Recurring Revenue Business | Mature Recurring Revenue Business |
|---|---|
| Validate market fit / demand for new subscription or usage based offers | Advise C-suite on recurring revenue opportunities; participate in innovation discussion and advocate for best paths to monetization |
| Define role that recurring revenue has on growth, margin, and business resiliency | Drive analysis and POV of new recurring revenue investments required to sustain growth |
| Co-design the vision for business resiliency to mitigate potential risks | Create repeatable plays for onboarding acquisitions |
| Identify and prioritize digital capabilities required to successfully launch and optimize new offers | Provide quarterly perspective to sales leadership around pipeline maturity and future revenue scenarios |
The second modal shift focuses on People and Culture. Finance people tend to operate well in a traditional, accounting-based, compliance driven environment. As businesses shift to recurring revenue models, finance teams must adopt a more consultative and collaborative approach to their work to help sales, product, and IT understand the downstream impact of things like discounting, bundling, co-terms, etc. It can be hard to find and develop people that possess both a high level of financial acumen and technical accounting skills as well as the ability to partner with the business to help solve customer problems. We spoke to one CFO who told us, “I’ve warned my team to assume that much of what you do today will be outsourced to AI in the next year or two. So what are you going to do tomorrow to help the business?” Building up consultative skills within finance teams and getting them more familiar with the world of the customer and their experience will help inject a more customer-centric mindset.
Fig 2. People and Culture focus areas for the Office of the CFO
| New Recurring Revenue Business | Mature Recurring Revenue Business |
|---|---|
| Fund competency development required to support recurring model for finance team | Evolve competency model to include more consultative |
| Build familiarity with key customer relationships and their expectations | Serve as an executive sponsor on several strategic accounts to support the business and serve as a model for how to deepen relationships |
| Establish performance incentives that drive customer centric behavior at the team and individual level | Review and update performance incentives as the business expands into new customer segments and markets |
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The third modal shift is around Process and Governance. This is an area that almost every finance leader we spoke to wished they had more influence over. Automation in particular is a common theme in these conversations. Finance teams tend to inherit a much larger and more complex workload in a recurring business model compared to non-recurring models without a commensurate amount of additional headcount to handle it as the business expands. While introducing unique rate plans for customers can often lead to higher margin and faster growth, if pricing parameters are not established internally and complexity is left unchecked, then finance and accounting teams run the risk of not closing the books on time and introducing more potential for error. Building a partnership with product and sales teams early on in the go to market process that focuses on setting up the product catalog, discounting rules, and shared metrics will head off time spent on back and forths between sales teams and the deal desk during the end of a sales cycle. As the business grows, the most successful finance leaders maintain a collaboration cadence with their counterparts to focus on efficiency drivers like inspecting the product catalog for SKU proliferation, streamlining the renewal process, and tightening up the data flow between the field and the back office.
Fig 3. Process and Governance focus areas for the Office of the CFO
| New Recurring Revenue Business | Mature Recurring Revenue Business |
|---|---|
| Partner with sales leadership to standardize pricing and contracting rules | Review and optimize product catalog regularly with sales leadership |
| Identify new digital capabilities for the finance team to increase their visibility into the business s | Invest in automation tools to reduce time spent matching invoices to payment and forecast to revenue |
| Establish financial guidelines around launching/scaling additional recurring revenue streams | Review and update performance incentives as the business expands into new customer segments and markets |
| Update and activate new financial compliance requirements in accordance with ASC 606 / IFRS 16 | Establish and maintain closed loop data flow between CRM systems and back end finance systems |
The fourth modal shift centers on Data and Insights and the new ways they are being ingested by finance and shared outwardly to stakeholders. For leaders that are newer to recurring revenue, an 101 introduction to terms like “churn” and “net dollar retention;” what they mean and how to influence them may be the best starting point. Ideally, CFOs should establish early on what their reporting goals will be in the future and how they will be able to generate metrics around the things they will want to know. For example, a new set of SKUs that are just being launched may have a simple rate plan associated with each of them. Over time, these SKUs may get bundled a dozen different ways which will necessitate the ability to collect product level metrics to understand real allocation. As these metrics become more familiar through regular reporting and updates, there will be a need for more metric consistency and depth of detail. This will require a system that captures the differences between metrics to create context in situations where total contract value might be a different number than billings due to discounting.
Fig 4. Data and Insights focus areas for the Office of the CFO
| New Recurring Revenue Business | Mature Recurring Revenue Business |
|---|---|
| Adopt new key recurring revenue metrics (ARR, NRR, Churn) and begin to include them in updates to employees and shareholders | Manage relative performance of additional products and services |
| Educate stakeholders on how to interpret new metrics and set expectations around growth timelines s | Track impact of expanding portfolio on churn and lifetime value to inform better forecasting |
| Create reporting goals that are faster, automated, more accurate and configurable | Track and communicate impact of recurring revenue on enterprise value |
As companies continue to invest and innovate on recurring revenue business models, finance teams will be asked to navigate and manage new risk factors at scale without inhibiting the flexibility needed for growth. Successfully changing those teams’ mode of operation starts with widening the circle of attention to include more aspects of the customer experience and their behaviors in order to provide better guidance and partnership to the business.