AD: Hello and welcome to The Margin, a podcast exploring the forces shaping business monetization. I'm Andrew Dailey, Managing Director and Analyst at MGI research. consumption-based business models powering the growth that companies like snowflake and the cloud infrastructure providers like Amazon AWS placed unique strains on revenue accounting teams. The sheer volumes of data created by consumption models make the use of spreadsheets as a RevRec tool obsolete for revenue accounting teams inside of high growth, complex businesses. What are the options for automation? What is the risk of holding on to spreadsheets for too long? Joining me today is Jagan Reddy, founder and CEO of RightRev. Jagan has spent his career tackling the complexities of automating revenue management. He co-founded and led Leeyo Software until its acquisition by Zuora in 2017. And then he went on to found RightRev, a supplier of revenue automation software focused on high complexity use cases. We'll be discussing the unique challenges associated with revenue accounting inside of these usage-based businesses, and Reddy's view on why finance leaders are uniquely positioned to bridge the gap between sales, billing and revenue recognition. Jagan, welcome to The Margin.
JR: Thank you, Andrew, for having me here. So let's start by taking a look at what makes quote-to-cash a compelling area for finance to take a leadership role. You have seen a lot of business model change in the last 20 years. These business models have changed very rapidly and indeed has cost a very massive option in the overall processes. And any business that want to innovate, introduce new products, generate new products and do any pricing strategy. There's so much impact happening in the back office, especially in the culture of new processes, because they are directly connected with customer experience. So that's what's make the quote-to-cash a much more important function in any business that can drive the growth and adapt the new business models.
AD: So let's first take a step back and just look at what do you see as the challenges for finance executives and finance organizations in adapting to these new business models, whether it's subscription or consumption or any of them?
JR: The migration of business from the traditional business models to subscription and consumption business models. This has given the end customers a flexibility to use whatever products they want. They can cancel whenever they want, they can upgrade any time they need. They can buy more products they want. So the contract terms have become super customer friendly. So that means it's more complex for the businesses because they have to adapt to all the different terms and conditions on the contract, how they sell the products, how they invoice the products. Now, when you have all these complexities the finance team has to deal with how do they make sure the customer experience goes down even after giving all this mess choices for the customers? And then internally, how do they ensure they can do the right accounting? They collect the right money and they do the right reporting to the street. And how can they forecast their business? How can they grow the business? These are all the internal painful process for finance to handle given this change in this business model.
AD: So one of the challenges that you just kind of alluded to there is the fact that finance has to deal with sales, have to deal with the fact that 30% of the average, support questions that come in typically have a billing question tied to them. How can finance better integrate across the organization, across the different functions to get to a better outcome and quote-to-cash?
JR: Traditionally, you've seen, these teams operate in silos like sales will go and sell. They take the lowest price machine. They go, they sell the products based on the lowest price. They give whatever discount they want. They don't care about what happens in the back office, how they record their revenue, what revenue is really recognized on the P&L and balance sheet. They don't care. But because of this, there's been a lot of surprises for the CFOs in the last minute to see the numbers they projected. They don't make the revenue number, even though sales team claim they have done all the sales according to their production in the last ten years. I would say these teams have come together to solve the overall problems for the company, right? There are no more silos. They are working together. Sales cannot launch something without consulting with finance, and finance can make decisions without working with sales. So we have seen in the last ten years these teams are working together. Then working on their own. Now sales is very different and when they want to do some pricing, they're always working with finance to make sure what is the maximum discount I can give a customer. Why shouldn't I go about certain discount? What products can I discount? What I should not discount? So they are working together to make all the decisions today.
AD: But in reality you get to the end of the quarter, you get to the end of the year and sales is going to do whatever it takes to make the number. And, I don't know, you could say ironically, it's the CFO that has to sign his or her name on the on the financial statements to the auditors and to the regulators. It would be a different picture, maybe if sales had a sign on the line. One of the challenges for the finance organization in producing those statements and in producing the auditor reports, the inputs to that comes down to revenue recognition, kind of what role do you see revenue recognition having, in terms of enabling better quote-to-cash process?
JR: Yeah, I think you said it right. Even though these teams work together, they try to make the decisions together. When quarter end comes, what is the most important thing they have to meet the numbers they have promised to the street or the internal goals, everything. At that point, the sales doesn't care about what happens on the accounting function. What would they do now? Okay, now sales go and do whatever they want to do to make the revenue numbers attain. They want to sell whatever they sell. Now how does the finance team make sure they account everything correct? That's where a lot of the regulatory team has put a lot of guidance on how to recognize revenue, and they have a lot of rules set up, how you need to account for certain products, how you sell the product, how you discount the products and everything. Now, to handle this complexity, the finance team has to go through a huge amount of calculations and everything to get these finances right. How do they get to this numbers? What tools they use? We will talk about it, but this is where the efficiency in the quote-to-cash process comes in.
AD: In the past, organizations would just throw more people at it and more spreadsheets. And today, there's no way you can scale a finance organization and do things in a timely manner, in an accurate manner, in an auditable manner and get it right. So what does the modern CFO, what does the modern finance organization do to be able to scale without having to throw more bodies at it?
JR: Yeah, the reason why, first of all, why we can do spreadsheets or anything because the new business models are now putting out an enormous amount of data, right? Like you go to a SaaS business or you go to a consumption business model. In a SaaS business if you are on a monthly billing every month, do you have an invoice? Traditionally, if you invoiced one time, there's only one time billing and the customer owns the software, there's no more billing. But now in size you have every month the billing goes out. If you have 100 million subscribers, there is 100 million invoices going out every month, and in a year you have 1.2 billion invoices you can have. Look at the amount of data they have to handle to calculate all this revenue. The Excel is not going to hole some people do it in access database. It's not going to hold up. I would say they don't really care to get to the complexity. They handle things on the surface level but then let the business do. What do you want to do in spreadsheets or figure it out on your own? That's where people throw a lot of bodies.
AD: So one of the other approaches using a data lake. What's wrong with that approach?
JR: Which is great. Data lakes can hold a huge amount of data, but then you have to go and build all this complex algorithms to calculate the revenue for you. It's not super straightforward given the ASC 606 that came in with all the complexities, with pricing, bundling all of that. To write the calculations to get to the right revenue number is almost building another product for you, right? So why do the work for you on you? Why can't you buy something that outside somebody has done the work for you and use it?
AD: So what are the data analytic tools that people can use? How do you solve this problem?
JR: I would say more than just the analytics tool you need. You need a calculation engine first to take all the data points, apply the right revenue rules, and then come up with the right revenue numbers. And then on top of this, you can put an analytics tool to analyze all your revenue to figure out what are the revenue patterns you're seeing, what are the revenue streams for it. It's coming from how is this going to impact your future revenue growth? You can do all this from a tool perspective. There are several big data lakes available. You can you can look at like Snowflake is something that we use heavily. It's it's like it can handle a huge volume of data. There are the tools as well. But we use Snowflake, as a platform to do all kind of analysis. And our calculation engine runs on Snowflake, and then we apply a user friendly, analytics tool on top of Snowflake to provide you the great KPIs, reports, analytics, so forth.
AD: So what about the problem of the ingestion of the data in the first place? So we're talking about calculations. Once you've got the data, how do you bring the data in in a consistent format?
JR: That's where the challenges because, first of all, the data is is enormous amount of data. The data quality can be like super bad in some use cases. Data can come from various sources. So if you are going to automate revenue for IoT company, think of millions of IoT devices they sell. All these devices can start sending you data consumption, data metering, data everything. And then you have to do revenue recognition on them. So your sources can be millions of devices. It can be a couple of systems out there. Now when you ingest all this data, data quality is a huge issue for a revenue automation tool. You put bad data, either you stop it and not get in to calculate revenue and have the team fix it, or if you let it in, it's going to calculate incorrect. This is where the specialized revenue recognition tools have a gatekeeper or friend, where it will block bad data to come in, and it will alert the user saying you need to take care of this data before we can process.
AD: Why do you see quote-to-cash as the opportunity for finance? Finance could look and solve a lot of different problems across the business. They have a view across everything. What's unique about quote-to-cash that makes it so special?
JR: So the most important metric that you see on a financial statement is going to be a revenue number, which is the top line right now. What feeds into the top line growth is going to be the data coming from your code to revenue process or quote-to-cash flows, as you say, right. If the finance team can't focus and get this right, your P&L is screwed up. You can't do much about it. Your top line is going to be incorrect. Now, getting the quote-to-revenue process right is going to help your sales team sell more, get the customer experience better. And also if you want to introduce new products, how quickly you can introduce to the market without having a proper quote-to-finance, you are literally limiting your business growth because they can launch new products quickly. They cannot put a new pricing strategy quickly because your processes won't support them. Right. So this is where finance team spends most of the time making sure their quote-to-revenue process is absolutely scalable, efficient and clean and neat. It handles all these business models.
AD: Now you work with some very progressive, innovative companies. Traditionally people think about revenue. Accounting is something that it's done kind of after the fact. What are you seeing inside of companies where the finance organization is able to make decisions inside of the quarter based on how the quarter's going and what revenue they want to incentivize in the quarter versus what revenue they may want to push out and recognize a quarter or 2 or 3 later?
JR: I think most of the companies take the revenue as it comes. I've seen this, I would say, in the traditional business models where the companies can decide they want to take the revenue. This quarter or they want to push it out to the next quarter. But with the new business models like subscription and consumption, you don't have a choice, right? If your customers use the product, you have to recognize sovereignty of additional choice on a SaaS business. You just cannot stop it because it's monthly recurring revenue. You have to take it. You can't push out or push in anything. But now how do you account this correctly month to month? And how do you give the visibility inside the business? This is the most challenging thing the finance is trying to solve.
AD: Pricing is one of those areas where for most organizations, the pricing muscle, if you will, kind of went unused for a lot of years. And then we had this recent bout of inflation and everyone had to rediscover their pricing muscle, as you see, more kind of very customer centric pricing models gain more traction. How do you see the finance team taking the lead, or what role were they playing in influencing the establishment of pricing models, the enforcement of pricing models, and then obviously the accounting?
JR: Yeah, I think from a pricing model perspective, we have seen the shift happening from—it's happening from the customer demand, firstly. Customers basically say, why do I pay for something that I don't use. That's where the consumption business model is coming. Consumption business model is nothing new. It's been there before, but it's for different goods and services we had. Now we are seeing that everywhere it's being applied to. Now with the consumption business model coming in, there's a huge impact to how do you price your, products. How do you measure your price that you sell? And what is the cost you incurred? How do you ensure that your margins are saved? You're not running into losses and everything. So this is where when businesses are moving from subscription subscriptions, we are seeing like it's slowly dwindling down and people are moving into consumption business models because of the customer demands. And we are seeing finance team is really involved to make sure the pricing models are not impacting the gross margins, especially in second. When this pricing model happens, finance has to clearly look into see how what is the discounting pattern for the products you can do. Like consumption models have different discount metrics. They have tiered pricing. They have minimum usage every month. So there's so many different models. And they have to price for all the different models as well.
AD: So if we think about the quote-to-cash process, you've got a process, you've got people, you've got presumably technology underneath that. What would your advice be to CFOs in terms of where they should focus both their time and their investments? Is it in optimizing at the process level? Is it improving at the human resource, the people level? Is it investing in new technology? Is it all of the three?
JR: There is no one technology that's going to fit for what you need to automate your processes cleanly that can scale. This is something that you continue to invest in. It's not going to stop at one point. Now, where do you want to invest is it's a clear winner. Technology is the clear winner, right? Just throwing bodies at a problem is not going to help you scale. It's going to be on the technology. But a lot of businesses think they can invest in a technology and it will help them grow for the next ten years. And that's not seems so true. The reason is the business models are rapidly changing and the customer demands are really the driving force behind this. So that means you have to continue to invest in the technology to ensure your processes are efficient. If you have this efficiency in place, on the other hand, it will allow you to scale your business very fast.
AD: You mentioned ERP, and a lot of the fortune 500 companies, they have this massive investment in ERP. But what we've seen in the last 5 to 7 years is a real shift in the mindset as it relates to ERP, which is that's a core system of record, but a lot of the investment is taking place in other areas. And if you look at the investment for a lot of companies, it's gone into sales, it's gone into marketing, it's gone into a number of areas in the business. Finance is actually heavily under-invested from a technology point of view. Is that something you see?
JR: I've been telling this for the last, I would say like ten years. And I'm talking to several folks. Like I keep saying, ERPs came into place to integrate all the different functions of the business. And then I keep saying it's going to start—the ERP is going to start disintegrating. It doesn't mean the teams are disintegrating, but the automation tool is going to disintegrate because ERPs are not able to keep up with the different business models that that come up all the time. And that's where the businesses are going to start looking for best of the breed technology guys out there. So today, if you see where that ERPs are most of them use ERPs as a general ledger like a finance books, but everything else is like spread out across the best of breed technology. So that's what we are seeing. So even though companies have a lot of investments in ERP, it's truly they’re becoming a general ledger financial statement tool. Nothing more than that.
AD: So for a CFO or even a CIO that's thinking about or whose company is thinking about adopting a new business model, new approaches to pricing, what are the 2 or 3 kind of bottom line recommendations that you'd give to them as they start to look at adopting new business models?
JR: When you go after business models, from a processes perspective, the pricing from a new product introduction, the pricing strategy is one of the key thing that we have seen people struggle with, because the way you price and sell the product is going to impact your entire processes, including the revenue number. The second is, how do you deliver your services? It's going to impact the entire processes as well. So for example, in a consumption business model you've seen, customers will come and buy, we will pay you upfront and then they do a credit product. Some customers will sell the same services as a pay as you go model. These two are completely very different. End of the consumption business model. They need new tools to automate all this. Why do you need to meet in them? You need to feed them for revenue recognition. So pricing is one that I strongly recommend to to look into. Make sure the pricing strategies are good because it impacts all the way to the revenue and then how you deliver the goods, it's going to impact the revenue. And the third most important one, what we have seen from a revenue recognition standpoint is how much you allow your customers to do contract modifications. So what we say is what is the flexibility you are giving to your customer? When can they cancel the products? When can they change their products? When can they upgrade? All this is a huge impact in your quote-to-cash processes. And this is one of the nightmares that I've seen the finance teams handling today.
AD: Thanks. Thank you for listening to The Margin. If you have questions about today's episode, or if you'd like to schedule a call with an MGI analyst, reach out to us at insights@mgiresearch.com. You can also reach us on LinkedIn, Facebook and X. You can find more information about our research and advisory work at mgiresearch.com. Until next time.
JR: Thank you, Andrew, for having me here. So let's start by taking a look at what makes quote-to-cash a compelling area for finance to take a leadership role. You have seen a lot of business model change in the last 20 years. These business models have changed very rapidly and indeed has cost a very massive option in the overall processes. And any business that want to innovate, introduce new products, generate new products and do any pricing strategy. There's so much impact happening in the back office, especially in the culture of new processes, because they are directly connected with customer experience. So that's what's make the quote-to-cash a much more important function in any business that can drive the growth and adapt the new business models.
AD: So let's first take a step back and just look at what do you see as the challenges for finance executives and finance organizations in adapting to these new business models, whether it's subscription or consumption or any of them?
JR: The migration of business from the traditional business models to subscription and consumption business models. This has given the end customers a flexibility to use whatever products they want. They can cancel whenever they want, they can upgrade any time they need. They can buy more products they want. So the contract terms have become super customer friendly. So that means it's more complex for the businesses because they have to adapt to all the different terms and conditions on the contract, how they sell the products, how they invoice the products. Now, when you have all these complexities the finance team has to deal with how do they make sure the customer experience goes down even after giving all this mess choices for the customers? And then internally, how do they ensure they can do the right accounting? They collect the right money and they do the right reporting to the street. And how can they forecast their business? How can they grow the business? These are all the internal painful process for finance to handle given this change in this business model.
AD: So one of the challenges that you just kind of alluded to there is the fact that finance has to deal with sales, have to deal with the fact that 30% of the average, support questions that come in typically have a billing question tied to them. How can finance better integrate across the organization, across the different functions to get to a better outcome and quote-to-cash?
JR: Traditionally, you've seen, these teams operate in silos like sales will go and sell. They take the lowest price machine. They go, they sell the products based on the lowest price. They give whatever discount they want. They don't care about what happens in the back office, how they record their revenue, what revenue is really recognized on the P&L and balance sheet. They don't care. But because of this, there's been a lot of surprises for the CFOs in the last minute to see the numbers they projected. They don't make the revenue number, even though sales team claim they have done all the sales according to their production in the last ten years. I would say these teams have come together to solve the overall problems for the company, right? There are no more silos. They are working together. Sales cannot launch something without consulting with finance, and finance can make decisions without working with sales. So we have seen in the last ten years these teams are working together. Then working on their own. Now sales is very different and when they want to do some pricing, they're always working with finance to make sure what is the maximum discount I can give a customer. Why shouldn't I go about certain discount? What products can I discount? What I should not discount? So they are working together to make all the decisions today.
AD: But in reality you get to the end of the quarter, you get to the end of the year and sales is going to do whatever it takes to make the number. And, I don't know, you could say ironically, it's the CFO that has to sign his or her name on the on the financial statements to the auditors and to the regulators. It would be a different picture, maybe if sales had a sign on the line. One of the challenges for the finance organization in producing those statements and in producing the auditor reports, the inputs to that comes down to revenue recognition, kind of what role do you see revenue recognition having, in terms of enabling better quote-to-cash process?
JR: Yeah, I think you said it right. Even though these teams work together, they try to make the decisions together. When quarter end comes, what is the most important thing they have to meet the numbers they have promised to the street or the internal goals, everything. At that point, the sales doesn't care about what happens on the accounting function. What would they do now? Okay, now sales go and do whatever they want to do to make the revenue numbers attain. They want to sell whatever they sell. Now how does the finance team make sure they account everything correct? That's where a lot of the regulatory team has put a lot of guidance on how to recognize revenue, and they have a lot of rules set up, how you need to account for certain products, how you sell the product, how you discount the products and everything. Now, to handle this complexity, the finance team has to go through a huge amount of calculations and everything to get these finances right. How do they get to this numbers? What tools they use? We will talk about it, but this is where the efficiency in the quote-to-cash process comes in.
AD: In the past, organizations would just throw more people at it and more spreadsheets. And today, there's no way you can scale a finance organization and do things in a timely manner, in an accurate manner, in an auditable manner and get it right. So what does the modern CFO, what does the modern finance organization do to be able to scale without having to throw more bodies at it?
JR: Yeah, the reason why, first of all, why we can do spreadsheets or anything because the new business models are now putting out an enormous amount of data, right? Like you go to a SaaS business or you go to a consumption business model. In a SaaS business if you are on a monthly billing every month, do you have an invoice? Traditionally, if you invoiced one time, there's only one time billing and the customer owns the software, there's no more billing. But now in size you have every month the billing goes out. If you have 100 million subscribers, there is 100 million invoices going out every month, and in a year you have 1.2 billion invoices you can have. Look at the amount of data they have to handle to calculate all this revenue. The Excel is not going to hole some people do it in access database. It's not going to hold up. I would say they don't really care to get to the complexity. They handle things on the surface level but then let the business do. What do you want to do in spreadsheets or figure it out on your own? That's where people throw a lot of bodies.
AD: So one of the other approaches using a data lake. What's wrong with that approach?
JR: Which is great. Data lakes can hold a huge amount of data, but then you have to go and build all this complex algorithms to calculate the revenue for you. It's not super straightforward given the ASC 606 that came in with all the complexities, with pricing, bundling all of that. To write the calculations to get to the right revenue number is almost building another product for you, right? So why do the work for you on you? Why can't you buy something that outside somebody has done the work for you and use it?
AD: So what are the data analytic tools that people can use? How do you solve this problem?
JR: I would say more than just the analytics tool you need. You need a calculation engine first to take all the data points, apply the right revenue rules, and then come up with the right revenue numbers. And then on top of this, you can put an analytics tool to analyze all your revenue to figure out what are the revenue patterns you're seeing, what are the revenue streams for it. It's coming from how is this going to impact your future revenue growth? You can do all this from a tool perspective. There are several big data lakes available. You can you can look at like Snowflake is something that we use heavily. It's it's like it can handle a huge volume of data. There are the tools as well. But we use Snowflake, as a platform to do all kind of analysis. And our calculation engine runs on Snowflake, and then we apply a user friendly, analytics tool on top of Snowflake to provide you the great KPIs, reports, analytics, so forth.
AD: So what about the problem of the ingestion of the data in the first place? So we're talking about calculations. Once you've got the data, how do you bring the data in in a consistent format?
JR: That's where the challenges because, first of all, the data is is enormous amount of data. The data quality can be like super bad in some use cases. Data can come from various sources. So if you are going to automate revenue for IoT company, think of millions of IoT devices they sell. All these devices can start sending you data consumption, data metering, data everything. And then you have to do revenue recognition on them. So your sources can be millions of devices. It can be a couple of systems out there. Now when you ingest all this data, data quality is a huge issue for a revenue automation tool. You put bad data, either you stop it and not get in to calculate revenue and have the team fix it, or if you let it in, it's going to calculate incorrect. This is where the specialized revenue recognition tools have a gatekeeper or friend, where it will block bad data to come in, and it will alert the user saying you need to take care of this data before we can process.
AD: Why do you see quote-to-cash as the opportunity for finance? Finance could look and solve a lot of different problems across the business. They have a view across everything. What's unique about quote-to-cash that makes it so special?
JR: So the most important metric that you see on a financial statement is going to be a revenue number, which is the top line right now. What feeds into the top line growth is going to be the data coming from your code to revenue process or quote-to-cash flows, as you say, right. If the finance team can't focus and get this right, your P&L is screwed up. You can't do much about it. Your top line is going to be incorrect. Now, getting the quote-to-revenue process right is going to help your sales team sell more, get the customer experience better. And also if you want to introduce new products, how quickly you can introduce to the market without having a proper quote-to-finance, you are literally limiting your business growth because they can launch new products quickly. They cannot put a new pricing strategy quickly because your processes won't support them. Right. So this is where finance team spends most of the time making sure their quote-to-revenue process is absolutely scalable, efficient and clean and neat. It handles all these business models.
AD: Now you work with some very progressive, innovative companies. Traditionally people think about revenue. Accounting is something that it's done kind of after the fact. What are you seeing inside of companies where the finance organization is able to make decisions inside of the quarter based on how the quarter's going and what revenue they want to incentivize in the quarter versus what revenue they may want to push out and recognize a quarter or 2 or 3 later?
JR: I think most of the companies take the revenue as it comes. I've seen this, I would say, in the traditional business models where the companies can decide they want to take the revenue. This quarter or they want to push it out to the next quarter. But with the new business models like subscription and consumption, you don't have a choice, right? If your customers use the product, you have to recognize sovereignty of additional choice on a SaaS business. You just cannot stop it because it's monthly recurring revenue. You have to take it. You can't push out or push in anything. But now how do you account this correctly month to month? And how do you give the visibility inside the business? This is the most challenging thing the finance is trying to solve.
AD: Pricing is one of those areas where for most organizations, the pricing muscle, if you will, kind of went unused for a lot of years. And then we had this recent bout of inflation and everyone had to rediscover their pricing muscle, as you see, more kind of very customer centric pricing models gain more traction. How do you see the finance team taking the lead, or what role were they playing in influencing the establishment of pricing models, the enforcement of pricing models, and then obviously the accounting?
JR: Yeah, I think from a pricing model perspective, we have seen the shift happening from—it's happening from the customer demand, firstly. Customers basically say, why do I pay for something that I don't use. That's where the consumption business model is coming. Consumption business model is nothing new. It's been there before, but it's for different goods and services we had. Now we are seeing that everywhere it's being applied to. Now with the consumption business model coming in, there's a huge impact to how do you price your, products. How do you measure your price that you sell? And what is the cost you incurred? How do you ensure that your margins are saved? You're not running into losses and everything. So this is where when businesses are moving from subscription subscriptions, we are seeing like it's slowly dwindling down and people are moving into consumption business models because of the customer demands. And we are seeing finance team is really involved to make sure the pricing models are not impacting the gross margins, especially in second. When this pricing model happens, finance has to clearly look into see how what is the discounting pattern for the products you can do. Like consumption models have different discount metrics. They have tiered pricing. They have minimum usage every month. So there's so many different models. And they have to price for all the different models as well.
AD: So if we think about the quote-to-cash process, you've got a process, you've got people, you've got presumably technology underneath that. What would your advice be to CFOs in terms of where they should focus both their time and their investments? Is it in optimizing at the process level? Is it improving at the human resource, the people level? Is it investing in new technology? Is it all of the three?
JR: There is no one technology that's going to fit for what you need to automate your processes cleanly that can scale. This is something that you continue to invest in. It's not going to stop at one point. Now, where do you want to invest is it's a clear winner. Technology is the clear winner, right? Just throwing bodies at a problem is not going to help you scale. It's going to be on the technology. But a lot of businesses think they can invest in a technology and it will help them grow for the next ten years. And that's not seems so true. The reason is the business models are rapidly changing and the customer demands are really the driving force behind this. So that means you have to continue to invest in the technology to ensure your processes are efficient. If you have this efficiency in place, on the other hand, it will allow you to scale your business very fast.
AD: You mentioned ERP, and a lot of the fortune 500 companies, they have this massive investment in ERP. But what we've seen in the last 5 to 7 years is a real shift in the mindset as it relates to ERP, which is that's a core system of record, but a lot of the investment is taking place in other areas. And if you look at the investment for a lot of companies, it's gone into sales, it's gone into marketing, it's gone into a number of areas in the business. Finance is actually heavily under-invested from a technology point of view. Is that something you see?
JR: I've been telling this for the last, I would say like ten years. And I'm talking to several folks. Like I keep saying, ERPs came into place to integrate all the different functions of the business. And then I keep saying it's going to start—the ERP is going to start disintegrating. It doesn't mean the teams are disintegrating, but the automation tool is going to disintegrate because ERPs are not able to keep up with the different business models that that come up all the time. And that's where the businesses are going to start looking for best of the breed technology guys out there. So today, if you see where that ERPs are most of them use ERPs as a general ledger like a finance books, but everything else is like spread out across the best of breed technology. So that's what we are seeing. So even though companies have a lot of investments in ERP, it's truly they’re becoming a general ledger financial statement tool. Nothing more than that.
AD: So for a CFO or even a CIO that's thinking about or whose company is thinking about adopting a new business model, new approaches to pricing, what are the 2 or 3 kind of bottom line recommendations that you'd give to them as they start to look at adopting new business models?
JR: When you go after business models, from a processes perspective, the pricing from a new product introduction, the pricing strategy is one of the key thing that we have seen people struggle with, because the way you price and sell the product is going to impact your entire processes, including the revenue number. The second is, how do you deliver your services? It's going to impact the entire processes as well. So for example, in a consumption business model you've seen, customers will come and buy, we will pay you upfront and then they do a credit product. Some customers will sell the same services as a pay as you go model. These two are completely very different. End of the consumption business model. They need new tools to automate all this. Why do you need to meet in them? You need to feed them for revenue recognition. So pricing is one that I strongly recommend to to look into. Make sure the pricing strategies are good because it impacts all the way to the revenue and then how you deliver the goods, it's going to impact the revenue. And the third most important one, what we have seen from a revenue recognition standpoint is how much you allow your customers to do contract modifications. So what we say is what is the flexibility you are giving to your customer? When can they cancel the products? When can they change their products? When can they upgrade? All this is a huge impact in your quote-to-cash processes. And this is one of the nightmares that I've seen the finance teams handling today.
AD: Thanks. Thank you for listening to The Margin. If you have questions about today's episode, or if you'd like to schedule a call with an MGI analyst, reach out to us at insights@mgiresearch.com. You can also reach us on LinkedIn, Facebook and X. You can find more information about our research and advisory work at mgiresearch.com. Until next time.
