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A research report prepared by: Publication sponsored by:

The Shift to Digital Recurring Revenue

Enterprise Business Transformation:

Enterprise Business Transformation: The Shift to Digital Recurring RevenueApril 2014

© 2014 Saugatuck Technology Inc.

About Saugatuck Technology Inc.Saugatuck Technology, Inc., provides subscription research and manage-ment consulting services focused on key market trends and disruptivetechnologies driving change in enterprise IT, including Cloud, Mobility,Social and Collaborative IT, and Advanced Analytics. Founded in 1999,Saugatuck is headquartered in Westport, CT, with offices in Falmouth, MA,Santa Clara, CA and Frankfurt, Germany. For more information, pleasevisit www.saugatucktechnology.com or call +1.203.454.3900.

About This ReportSaugatuck Technology Inc. is solely responsible for the content of thisreport. Unless otherwise cited, all content, including illustrations, research,conclusions, assertions and positions contained in this report weredeveloped by, and are the sole property of, Saugatuck Technology Inc.The research and analysis presented in this report includes research fromongoing Saugatuck Technology research programs, including our globalsurvey and interview work with user enterprise business and IT leaders,briefings with providers, and analysis of publicly-available marketinformation from multiple sources.Research conducted for this report, and publication of this report, weresponsored by Zuora Inc.

TABLE OF CONTENTS

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Digital Transformation is Business Transformation

Four Key Challenges in the Digital Business TransformationI. Monetization of Digital OfferingsII. Partnering for Digital BusinessIII. Implementing New SystemsIV. Integrating with Back-End ERP Systems

Enterprise Business Transformation

Figure 1: Four Keys to Digital Business

SIDEBAR: New Systems, New Capabilities, Digital Business,Record Time

SIDEBAR: Digital Partnering for Monetization

TABLE OF FIGURES

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DIGITAL TRANSFORMATION IS BUSINESS TRANSFORMATION

Business transformation drives IT transformation. And in turn, IT transformationleads to new opportunities and more rapid competitive responses. “The key value isto provide efficiency, agility and flexibility, so when it’s important to consider anew business offering, there are no constraints,” the Director of Technology Plan-ning and Strategy at an established large enterprise said about the transformation toDigital Business. “We are always surprised where innovation comes from. As wedeploy new capabilities in the Cloud to make things easier for the business, it letsthe business focus on innovation.”Digital delivery models are impacting traditional businesses. Driven by consumerdemand for convenience and new consumption models, including subscriptions andusage-based consumption, enterprises are moving to Digital Business offerings andfinding huge upside from predictable revenue streams and long-term, recurring-revenue customer relationships.Yet for any firm to take advantage of becoming a Digital Business – whether alarge enterprise traditionally on the buy side of technology, a software ISV in tran-sition or a pure-play Cloud solution provider – this challenge is significant: how toimplement a platform to support a Digital Business model and then keep pace withthe ongoing pace of change. Make no mistake about it, doing business in the Cloudmeans operating at a much faster pace.“Not only does Digital Business increase the speed at which you have to move ingeneral, it changes how you can support change,” said the VP of product manage-ment at a well-known vendor with both on-premises and Cloud solutions in arecent interview with Saugatuck.In the ultra-competitive environments where companies are racing each other torelease the next big thing, innovation is never enough. Everything moves faster,and yet there is little or no margin for error. Speed-to-market and software qualityare both essential for Digital Businesses in achieving business goals and in creatingand sustaining differentiation. Succeeding in Digital Business also means beingagile and increasing your solution’s responsiveness to customers through theCloud. Consequently, technical problems may cost you customers permanently.Clearly, the potential upside is enormous. There's tremendous opportunity forgrowth, whether by extending existing business models with digital offerings or bycreating new business models built around recurring revenue. Of course, that alsomeans sustaining the customer relationship. High customer retention is withoutquestion the key to profitability in a recurring-revenue model.

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However, for established enterprises, especially those with brittle business models,entrenched processes, legacy systems and brittle, legacy mindsets, making thiswork is hard.To succeed in the Digital Business transformation, established enterprises needinnovative business models, platforms that enable and support business innovation,and a renewed company culture centered on innovation and on building customerloyalty. IT and the business need to think in a whole new way, and they need awhole new breed of systems to remove roadblocks to innovation and to augmenttheir core business systems portfolio.“The key competitive value is to provide Cloud speed, efficiency, agility andflexibility to the line of business leader, so when it’s important to consider a newbusiness offering, there are no constraints,” said the Director of TechnologyPlanning and Strategy at a very large enterprise in the midst of transformation toDigital Business.

FOUR KEY CHALLENGES IN THE DIGITAL BUSINESS TRANSFORMATION

While there are many dimensions to this transformation, and all of them willdemand significant effort, four key challenges are especially critical and shouldreceive special attention and focus: Monetization, Partnering, New Systems, andIntegration.Figure 1: Four Keys to Digital Business

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Source: Saugatuck Technology Inc.



I. Monetization of Digital OfferingsThe potential for monetizing digital offerings is wide open, and few engaged in thetransformation to Digital Business understand all the possibilities at the outset.Problems will arise when Digital Businesses grow larger, must serve new marketsand launch new offerings or encounter aggressive competition. A monetizationsolution has to be able to meet those challenges successfully.Moreover, in today’s market monetization is not an afterthought. Traditionalfinancial accounting is backward-looking and deals with the state of the business ata single point in time. Digital Businesses built around recurring customer relation-ships and revenue models need to consider expected, recurring cash flows,customer retention and growth, and manage with a clear view to the future.Channel expansion is a key aspect of the Digital Business transformation that canhave major impact on the way the business operates. One interesting example arosein an interview Saugatuck recently conducted with the CFO of a global mediacompany that formerly derived most of its revenue from the broadcast businessmodel. This Digital Business CFO observed that the impact of digital offerings hascompletely transformed how the media company views its decision-making oncontent production projects:

“The way we make decisions has changed. We rely on data, and you’dbetter convince me there is a monetization model behind it – and reach –across any channel and devices, including wearable, YouTube, games. Thechallenge with media in general is still the same – how do we produce ascheaply as possible? But now we can’t take out any more cost, so show ushow to grow revenue by driving the reach.”

Digital Businesses need to develop a flexible approach to monetization that canembrace new relationships, new channels, new categories of solutions and newpricing models:

“[Our business ] used to be 90 percent broadcast, but today it’s over 50percent digital products. It’s everything from pure ad revenue to contentreach on online platforms we monetize, but the bigger piece is in the shiftto digital downloads and other ways of distributing video-on-demand in acombination of a la carte and subscription. [We are] on channels like Hulu,Netflix, Amazon, Apple iTunes; and we are now developing contentespecially for digital distributors, different formats, and offshoots of ourcore content.”

II. Partnering for Digital BusinessThere are two main reasons for partnering in the transformation to Digital Busi-ness. The media company CFO whose channel expansion strategy we discussedearlier highlighted one: leveraging indirect revenue via channel partners to expandreach into new channels, new geographies and new industries. Spotify’s distribu-tion deal with Times of London to bundle one year of the Cloud-based music ser-vice together with the newspaper’s new online digital offerings is a good exampleof that. The other reason is to supplement in-house expertise.

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The transformation to Digital Business brings with it many new areas outside theknowledge base of most ISVs or large enterprises. These firms learn quickly thatpartnering is a clear economic imperative—one that enables new, supplementalinternal expertise, while outsourcing non-core expertise. As the Vice President ofProduct Management at the major vendor in Digital Transformation recalls:“We’ve been happy with ability to deploy faster, increase the speed at which weare moving, by partnering and adopting an agile approach, keeping projects smallernot gigantic. Partnering with people who really know what they are doing.”And there are many ways to leverage the agility, speed and expertise of partnersincluding the following:• Potential Partner Expertise• Business transformation services• Financial/business model consulting services• Monetization/billing and payment platforms, tools, and services• Compensation design, management, and services• Marketing management and services• Performance testing and management• Implementation services• Industry/Regional ecosystems• Channel program development and management• Cloud development software stacks, engines, tools, and expertise• Infrastructure hosting and services• PaaS/Cloud development tools and services• User Interface design and development• Service deliveryWhen asked about how established enterprises can meet these new challenges, theDirector of Technology Planning and Strategy expressed it this way:

“Clearly there are new service delivery challenges, especially being aprovider and having to meet SLAs, and especially with a complex solutioninvolving multiple partners. We are dependent on our infrastructureprovider, our billing provider, on our Cloud platform for scaling to meetdemand and need. This is harder for established players that have tochange their business models and transition their customers, in contrast toa disruptive provider who comes in without any baggage.”

How do businesses decide which partner model to choose? Through partnering, aDigital Business can accelerate time to market, scale rapidly and extend reachacross channels and geographies.There are a myriad partner revenue-sharing and billing models. And there may bean advantage in getting a partner to not just sell, but to provision, and take on theongoing billing relationship. Should businesses let partners own the billingrelationship or is it in their interest to just let partners sell, and own the billingrelationships themselves?The decision is clearly a strategic one, and all of these alternative choices allshould be enabled by the monetization system, an essential piece of the transfor-mation to Digital Business and a clear imperative for partnering.

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III. Implementing New SystemsAt the heart of most traditional businesses are on-premises ERP systems that serveas systems of record for the organization. These systems evolved at a time whenways of doing business were far less complex, more stable and predictable. Digitalofferings were rarely part of the picture. Product development focus was oftenmore about managing cost than enabling innovation. Five years ago, the largeenterprise CIO was still very busy implementing ERP systems as the IT primarychallenge. CIOs in established enterprises today find that ERP systems are tooexpensive to maintain, change and accommodate to digital business and torecurring revenue, both of which require a nimbler, more agile approach. Changesto customer acquisition, e.g., premiums, trials, promotions and incentives thatimpact future revenue, and changes to billing and accounting operations both willbe drastically different in the new digital offerings and require capabilities general-ly beyond ERP systems. New systems and platforms are needed to support thecontinuous cycles of innovation in Digital Business.Cloud sales and customer management solutions (CRM) and Cloud integrationcapability are two of the centerpiece platforms of today’s Digital Business. A thirdis the monetization solution that manages the entire customer lifecycle fromcustomer acquisition, onboarding, provisioning/de-provisioning, account manage-

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In 2013, Touring Club Suisse, Switzerland’s motoring organization, serving 1.6 million members,switched off the minicomputer systems that had run its operations for more than two decades. For CIOErnest Gmünder, the moment was the culmination of a two-year project that began shortly after he tookup his role at Touring Club Suisse at the end of 2010.The journey to rebuild its IT system began in 2011 and went live in December 2013. But this was atransformative change from traditional on-premises systems to a new Cloud-native system. The entirelyCloud-native system is comprised of six applications:• Customer relationship management environment used by sales agents in the call center.• Configure-price-quote processes that guides agents through questions during a sales inquiry.• Campaign management, lead management and related activities such as closed loop segmentation.• Commission calculations and sales performance metrics• Recurring-revenue management and billing, with partner management and commission payments.• Cloud-based integration platform tying everything back to remaining legacy systems.

“We have now an environment that offers us possibilities that are immense, and we know that it will befuture-proof. We know that it will evolve with what’s coming in the IT industry in general, and we canfocus our organization on what is business critical rather than just following what is happening on thetechnology front.” Achieving this in such a short time demonstrates one of the key advantages of cloudsystems, he says, “We have done in two years what everyone told us we should have done in fouryears. You can be very rapid.”Gmünder emphasized the positive impact of the new billing-and-payments management system onactivities such as introducing and changing products, giving more options in how members pay for theirservices, and improving productivity in the call center: “Easy pricing, easy billing is absolutely key. Wehave built an environment now where the system adds a lot of value.”

NEW SYSTEMS, NEW CAPABILITIES, DIGITAL BUSINESS, RECORD TIME



ment, billing and payments, to any partner ramifications such as bundling, resellingand revenue sharing. According to the VP of Product Management at a well-knownvendor, talking about managing both on-premises and Cloud solutions in abusiness in the midst of transformation, “New systems are necessary, whetherbilling or revenue recognition or go-to-market, catalog, or social channels incustomer care. New tools mostly but sometimes just the same tool implementeddifferently.”The right combination of Cloud-based recurring revenue management and billingsolution and provider is critical to the success of a Digital Business. You’ve got tobe able to turn on a dime and introduce new offerings to counter a competitor orpivot to enter a new market or do business with a new distribution channel. Someof the things that are worth considering when selecting a billing solution providerare customer account management options, service agreements, pricing models,billing plans, contract terms and rate plans. Metering capability may prove to bevery important, if usage models are, or will be, part of a monetization approach.Channel and partner management capability that enable either party to own thecustomer, to bundle and support multi-level partnerships may prove critical to thebusiness model of the transforming Digital Business. How complete the billingsolution is may determine the provider’s ability to respond competitively to shiftsin the market.

IV. Integrating with Back-End ERP SystemsToday’s Digital Businesses require more nimble monetization and customermanagement systems, and they also require the ability to integrate with thebusiness IT portfolio. Setting aside the enormous potential for synergies withsystems and APIs that can be the basis for new and innovative offerings, perhapsthe one certain requirement for integration is linking the CRM and Cloudmonetization systems to on-premises ERP, the enterprise system of record:

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In 2012 Fairfax Media Limited, a leading multi-platform media company in Australia, embarked on adigital content model.“The overall broad strategic imperative for Fairfax is to reduce our reliance on advertising – both printand digital – and find other ways to monetize audience relationships,” according to Fairfax CIO An-drew Lam-Po-Tang.To shift from advertising to digital recurring revenue, Fairfax needed infrastructure to manage subscrip-tions across mastheads and understand subscriber trends and behaviors. As Lam-Po-Tang saw it, thereasons were clear: increase speed to market, minimize investment and control operating costs. Partner-ing was the way to go.A digital partner for monetization made that possible. The self-service Cloud platform Fairfax selectedallows customers to select and store digital subscriptions, while managing all billing. Fairfax brandmanagers can now focus on audience relationships, product quality and pricing, rather than the mechan-ics of processing payments or maintaining the platform. By embracing a monetization platform partner,Fairfax has direct access to readership metrics and can focus on building revenue.

DIGITAL PARTNERING FOR MONETIZATION



• Monetization linked to traditional systems of record, e.g., legacy ERP andCRM systems. Despite the functional limitation of traditional ERP for billingand payments in recurring revenue scenarios, especially for multi-levelchannel relationships, and the much higher cost profile to run a DigitalBusiness solely on ERP, there is a need to link the more nimble monetizationsystem to ERP for back-end accounting and financial reporting. In addition,integration to CRM can drive a better understanding of the customer relation-ship and how to ensure high rates of retention for recurring revenue.

• Monetization linked to reporting and analysis systems, e.g., dashboards,can also support this by providing visualization of key metrics that may besupported by the monetization platform, the CRM system or the ERP/financialreporting system.

As the Director of Technology Planning and Strategy at the very large enterprise intransformation noted, “We have a need to hook ERP environments into third partyAPIs, doing handshakes for exchanging sales keys. If it’s not automated, you can’tscale. We are leveraging new technologies for monitoring customer experience andmonetization performance. And it’s in real-time production mode today, asopposed to wrap it and mail it, the way it used to be.”

ENTERPRISE BUSINESS TRANSFORMATION

Consumers and businesses today want access to services delivered how they want,when they want, and priced in a way that supports their consumption. More thanever, consumers prefer the convenience, cost and accessibility of Digital Businessofferings delivered, consumed and paid for on a recurring basis.This shift in consumption preferences coupled with the rise of social, mobile andthe proliferation of connected devices, is forcing enterprises to respond with inno-vative service delivery models.There are many questions to consider in the Digital Business transformation:• How will business processes change?• How will sales and marketing change?• How will organization and culture change?• What technology will be needed?• What partnering and alliances will be needed?• How will we monetize our Digital Business offerings?Business transformation drives IT transformation. And in turn IT transformationleads to new opportunities and more rapid competitive responses. The key value isto provide efficiency, agility and flexibility to business leaders, so when it’simportant to consider a new business offering, there are no constraints. As theDirector of Technology Planning and Strategy at an established large enterprisesaid about the transformation to Digital Business, “We are always surprised whereinnovation comes from. As we deploy new capabilities in the Cloud to make thingseasier for the business, it lets the business focus on innovation.”And that’s the way to manage enterprise business transformation and the shift todigital recurring revenue: Put in place the people, process, and technology that letsthe business focus on innovation.

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SPONSOR PERSPECTIVE:ZUORA AND THE SHIFT TO DIGITAL RECURRING REVENUE IN THE ENTERPRISE

Driven by customer demand for more flexible ways of buying and consuming services, enterprises arerapidly transitioning from selling products to services and are developing new business models built onrecurring relationships. As the market shifts to services and innovative delivery models, massive growthopportunities exist for enterprises ready to transform their businesses.

To this end, Zuora is pleased to sponsor this Saugatuck research among senior finance and IT execu-tives. The goal of this research is to uncover the primary challenges and the keys to success for enter-prises in the digital business transformation.

What we’ve learned is that supporting this transition in the enterprise is not easy. This paper details 4challenges among enterprises in the shift to digital:

i. Monetization of digital offerings

ii. Partnering for digital business

iii. Implementing new systems

iv. Integrating with back-end ERP systems

Designing a new business model built around recurring relationships is easier for companies that arestarting with a blank sheet of paper – for those who aren’t constrained by a legacy of product-centricbusiness processes, mindset and legacy IT systems. For large, global enterprises that have a traditionalproduct based business model, the transition can be a significant challenge.

Large, monolithic ERP systems make it difficult for enterprises to swiftly and easily embrace alternativebusiness models like subscriptions. As a result, enterprises seek out platforms that bolster their backendlegacy ERP systems to enable continuous business model innovation centered on the recurring customerrelationship.

About Zuora

Zuora is the global leader in subscription commerce and billing, helping companies in every industrytransition to the Subscription Economy. Enterprise leaders and high-growth companies alike use Zuora'smulti-tenant cloud platform to launch, scale, and monetize their subscription services.

Zuora's applications work where traditional ERP applications fail: Subscription pricing, quoting, orders,billing, payments, and renewals. Built from the ground up by SaaS industry veterans fromsalesforce.com, PayPal, and NetSuite, Zuora services innovative customers like Informatica, Tata Com-munications, Box, Xplornet, Ustream and Reed Business Information.

To learn more about Zuora, please visit www.zuora.com.

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