Software as a Service (SaaS) has popularized a monthly payment model for IT, in contrast to the large accumulated bills typical of on-premises systems. While the payment transition is fairly simple for accounts payable departments, challenges can arise for the vendors. How should SaaS providers approach billing when most current enterprise resource planning (ERP) systems weren't designed for a recurring revenue model?
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To address this need, billing and accounting systems created specifically to serve companies with recurring revenue operating models are now emerging. Zuora, a cloud-based vendor of subscription billing and finance tools co-founded by a former Salesforce.com executive, is prominent in the burgeoning market. Gray Chynoweth, chief operating officer at Dyn, an internet Infrastructure as a Service (IaaS) company based in Manchester, N.H., said Zuora's billing tool has shortened the organization's monthly close process by three days.
"We had this homegrown [billing] system that wasn't scaling. It was impacting our relationship with customers [and] not giving us the insight into the business that we needed," Chynoweth said. Dyn is now more agile since implementing Zuora billing and, he said, "shaving 30% off our close process -- that means I can make decisions 30% faster."
However, Chynoweth said the implementation process was strained by difficulty in converting data from Dyn's homegrown system to the specialty billing tool. For this reason, he recommended that businesses with a recurring revenue operating model adopt specialty billing software sooner rather than later. But Patrick Stakenas, research director at Stamford, Conn.-based consultancy Gartner Inc., said the investment might not be justified right away.
'Data mess' slows specialty billing software implementation
Chynoweth started at Dyn when the company was relatively small, and he said the homegrown billing system was initially adequate for the handful of customers. But after the business began to scale rapidly, the system wasn't keeping pace. At first, Chynoweth said he considered hiring a developer to enhance the system, but "we realized we were putting resources to a thing we didn't want to be that good at."
With that option off the table, Chynoweth then looked to ERP vendors, but concluded they were too extensive for the company's needs. "We could spend a lot of money on a big ERP, but the only reason we would do that was to get the add-on feature to get good billing," he said. "What attracted me to Zuora was that they were super focused on the most compelling challenge we were having, which was billing." Despite being more expensive, Chynoweth said Dyn selected Zuora over Intacct because he felt the former vendor was a better fit.
Dyn signed with Zuora in fall 2010 and spent the next six months implementing the product with help from Zuora consultants. Chynoweth said converting data from the homegrown system and porting it into Dyn made the implementation take longer than usual. In addition to data from the existing billing system, Chynoweth said some data needed to be uploaded from Microsoft Excel and Salesforce.com, which added to the "data mess."
Although he lauded Zuora's consultants for their attentiveness during implementation, Chynoweth said that if he had a chance to do things differently, he would've adopted a specialty billing tool earlier on. Bypassing a homegrown system from the start wasn't an option for Dyn, as specialty billing providers such as Zuora didn't exist when Dyn was founded in 1998, but Chynoweth offered this lesson learned as advice for others in the technology services market.
"The smart play is to know what your value proposition is, and if you're going to be SaaS, use Zuora or someone like them so you don't have to deal with the issues later on," he said. "You can get into these SaaS model companies for cheap money, so don't be penny-wise and pound-foolish."
But Stakenas said a SaaS company's need for a specialty billing system depends on its transactional volume and business model. "If you're starting out as a SaaS company and you're selling transactions [and] it's high volume, then yes, something like [Zuora] is necessary right out of the chute," he said. "However [if] you're selling technology SaaS, until you a get a reasonable amount of contracts, it's [not] that hard to manage. If you're managing eight or 10 contracts a month, you don't need technology to do that."
Chynoweth said that besides shortening the monthly close, another significant advantage of Zuora is its scalability. Before, "for every 500 customers, we needed another billing person, so a stack of people [were] doing very repetitive tasks and not adding a lot of value," Chynoweth said. "We're growing more quickly because we've added this system, and we haven't had to add another billing person."
Best-of-breed IT strategy allows for more vendor-user collaboration
Today, Dyn is in the process of upgrading from QuickBooks to NetSuite, a cloud enterprise resource planning (ERP) system. Whereas an ERP was too complex for Dyn's needs in 2010, Chynoweth said the company has now grown enough to make it a necessity. And although NetSuite features billing capabilities, Chynoweth said Dyn will stick with Zuora for billing since the vendor specializes in the function. This decision is indicative of his broader attitude about Dyn's IT portfolio.
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"As long as this company can, we're going to focus on getting specialists for different aspects of our business process. We can have a specialist focus on what they're good at rather than getting a one-size-fits-all solution that's probably mediocre at a lot of things," he said. "It's a smart strategy from a buyer perspective, [because] if all my eggs are in NetSuite's -- or another vendor's -- basket, then inherently I'm going to have less negotiating power." Chynoweth said he was pleased with Zuora's application programming interfaces, which allow it to connect with Dyn's other systems, in light of this "best of breed" buying philosophy.
Although Stakenas called Zuora a "niche-y" product, he agreed that ERP or customer relationship management (CRM) offerings might not be the best choice today for SaaS-style billing. "It's not that they couldn't -- they could build it," he said. "[But] normal CRM and ERP companies don't [currently] do it."
But to Chynoweth, Zuora's niche quality is an attribute. "Zuora's passionate about providing a billing engine. To me, that means they're going to enhance their platform faster rather than someone that's [offering a] broader suite of services," he said. "Because they care about the specific issue, I'm going to be able to collaborate with them."
As for how Zuora has responded to Dyn's requests for features such as improved reporting, he said, "I'm always mindful that with any third-party application, you're giving up some of your customization capability. They don't do everything I ask, but they do do the stuff that's super important, and they work hard to make me feel good when they say no."