Revenue is a priority for C-level executives, and with financial management software, CFOs are gleaning greater insight into financials than ever before. Yet experts say one important income stream is being ignored: recurring revenue.
"Companies are leaving money on the table," said Carter Lusher, research fellow and chief analyst at Ovum, a London-based consultancy. "When we look at recurring revenues -- and there are various types, whether its maintenance contracts or subscriptions -- while these things have been around forever, they've been neglected by most organizations."
The September release of recurring revenue management software Renew On Demand from San Francisco-based vendor ServiceSource could signal the emergence of a new technology, according to experts -- and one that companies could benefit from immediately.
"There's no reason not to jump on this," Lusher said.
Recurring revenue has fallen by the wayside
Analysts say recurring revenue management has been overlooked due to inadequate systems, distracted sales representatives and disorganized customers.
Patrick Stakenas, research director at Gartner Inc., headquartered in Stamford, Conn., explained that companies have generally relied on customer relationship management (CRM) software, Microsoft Excel spreadsheets or billing systems to keep track of recurring revenue streams, even though they are not designed for the function.
"Your typical CRM system isn't geared towards managing hundreds of thousands of … transactions on a constant basis," he said. "If the reorders stop coming, it takes months or quarters for businesses to realize it."
Lusher said the sales strategies of many companies focus primarily on generating new business, which makes it easy for renewals to disappear from the sales team's radar. "If you look at the typical sales process, it's oriented toward closing the deal and moving on," he said. "Most of the sales reps [meet] their quotas based on new business, not necessarily renewing maintenance contacts, which is considered unsexy."
Lusher also pointed out that oftentimes the customer's buying manager who coordinated the purchase is not the same person who is responsible for upkeep of the product, a situation that can cause confusion. "All of a sudden you're expanding out the number of people beyond what the rep might normally need to track -- technicians, [it] might be end users; it's a much broader set of players within the customer that need to be tracked on a regular basis."
On the rise, recurring revenue warrants closer attention
It's clear that recurring revenue management has been a longstanding blind spot. So why is the issue coming to the forefront now? Simply because there's more of it at stake, experts say.
Stakenas said the rise of Software as a Service (SaaS) is one contributing factor. "Typically it's manufacturing companies or distribution companies that have a high level of recurring business, or service organizations such as SaaS, which has come into play over the last five or six years," he said.
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Lusher underscored the increase in the number of software companies, which tend to have higher recurring revenue streams. "Almost everything is becoming recurring revenue these days," he said. "We've gone from very discreet recurring revenue, from tangible goods to software maintenance. Oracle has made billions off software maintenance contracts over the years."
Since recurring revenue now represents a larger piece of the pie, it's garnering more attention from executives, according to Ganesh Bell, chief product officer for ServiceSource Renew On Demand. "In the last 10 years, the recurring revenue stream has dramatically increased. It's almost 50% to 60% in some companies."
Before releasing Renew On Demand, ServiceSource was a managed services provider that assigned sales staff to handle renewals and recurring revenue for customers. The new SaaS recurring revenue management software lets companies take charge of monitoring their own revenue streams. Bell said the software pulls data from enterprise resource planning (ERP) and CRM systems to identify business that is close to expiration and notifies users in ample time to reengage the customer. The product also offers real-time benchmarking information and analytics capabilities that can help sales managers formulate strategies.
With the increased visibility, Stakenas said recurring revenue management software can help companies bolster customer retention. "Now if they see a certain amount of business falling off, they can address it while it is happening," he said.
Also, when recurring revenue is maximized, a company's total revenue increases. "It's a good revenue stream, and I think that organizations are slowly but surely coming to the conclusion that in the economy we're in, every source of revenue has to be maximized," Lusher said.
Bell agreed. "Most CEOs and CFOs would love to have [the money] to invest back into their businesses, which can fund and fuel innovation."
Recurring revenue management possibly an emerging market
While the ServiceSource website touts that Renew On Demand is the "only cloud application built specifically to maximize recurring revenue," Stakenas said there are more vendors in the space, including NetSuite and Zuora, although they "appear to focus more on billing and less on the overall process."
Instead of recurring revenue management functions being built into CRM systems, both experts said they expect a specialty market will emerge.
"I think a market is going to spur from this. Whether it's going to be all new or take a chunk from CRM, it's hard to tell," Stakenas said. "SAP, Oracle, Salesforce.com -- I think they're going to realize that this is a potentially separate marketplace and create products in what could be a new space."
"It's always the issue around a nascent market: Is this a function, or is this a real standalone app?" Lusher asked. "I think that this is going to be a standalone area."
However, Stakenas said some companies might be reluctant to adopt separate software for recurring revenue management, opting instead to tweak their CRM. "Some of the issues will be companies saying, 'Can't we just do with our existing CRM system?' And if they wanted to put considerable time and effort into it, they probably could," he said.
But for companies that don't have the time or the desire to experiment with their CRM systems, Lusher said the fact that Renew On Demand is cloud-based means that companies can try it out without a firm commitment. "The advantage of a SaaS-based product is that it's relatively low-risk and high-reward," he said. "An organization could immediately jump into a modest contract with a company like ServiceSource and then start getting value out of it -- or not. They can quickly decide to kill it if it isn't working."
Even though recurring revenue management software is a fairly new development, Lusher recommended that companies look into it. "Recurring revenue is a very high-margin business that companies should not be neglecting," he said. "Don't wait."
This was first published in October 2012