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Integration Issues When Acquiring an "As-A-Service" Business

Integration Issues When Acquiring an "As-A-Service" Business

In recent years, mergers and acquisitions of technology companies have increasingly been executed by a broader sector of the overall economy. It has become relatively common to see technology acquisitions within traditional industries such as automotive, retail, financial services, and various sectors of the consumer packaged goods space. Whether you are running a licensed-based software company, selling hardware, or you are offering other non-technology products or services, there are several important integration challenges that need to be addressed when contemplating the acquisition of an “As-a-Service” (AAS) technology. The acquisition of an As-a-Service business by non-AAS companies is increasingly becoming standard practice to achieve a broad range of objectives including diversification of offerings, gaining new technology, and acquiring new customers. However, integration risks can prevent an acquirer from achieving goals. Depending on an acquirer’s objectives, here are 5 broad integration challenges that may have to be addressed prior to acquiring and AAS-based technology:

Portfolio Management of Offerings, Pricing and Licensing, Product Development, Quote to Cash, and Sale and Channel Management. This blog outlines these risks and investigates the challenges from a product management perspective.

Offering a traditional product or non-technology service requires a different business model from an AAS model. This difference exists because traditional  businesses realize gains with the transfer of property. With the AAS model, asset ownership remains with the provider and the customer gets the benefits by paying for the usage of the product.  

Where applicable, the 5 integrations risks mentioned above should be addressed early in the acquisition process to ensure successful integration of existing business operations with As-a-Service products.  

1. Portfolio Management of Offerings

Two offerings targeting the same customer segments with overlapping value propositions create competition within the same portfolio. An obvious case is providing a product as a rental. In some cases, this conflict may not be apparent, especially when the product features are very different but can substitute each other when solving the same problem. This issue is very common in software when one product is a customizable, generic toolset and the other one is a purpose-built operational software. A typical example could be a customizable workflow Software as a Service based customizable workflow tool vs. a software for an approval process for a particular industry or function. In this case, customers may use the SaaS offering to build similar functionality that the software-based tool can deliver. The value proposition has a direct reflection on pricing. Therefore, the impact of SaaS and software M&A on pricing has to be managed in portfolio strategy.

2. Pricing and Licensing

In product-based business, the customer makes a purchase and takes ownership. The pricing reflects the asset value. In an AAS model, the asset ownership remains with the provider, the client has “right of use” for a specified term, and the pricing is usage based. For example, a software product license may provide the customer with usage rights of the product and the price is based on a fixed fee. Only a maintenance fee might be recurring, which might cost the customer an additional 10-20% of the initial license, paid annually. Pricing impacts revenue, cash flow, profitability, and sales compensation. When selling a product, revenue is fully recognized upon delivery in the full amount and all associated sales costs can also be reflected in the sales margin. In the case of AAS, revenue accumulates over time, but associated sales costs are realized with the transaction. The sales margins tend to be thin or at negative at the time of transaction. These differences make it difficult to evaluate two businesses side by side. Appropriate business accounting adjustments to compare the business projection and the health of the two.

3. Product Development

Offering release cycles of AAS business models are typically more frequent than new product releases. This necessitates different organizational structures and processes for development, testing, and release. In the AAS, service development and service delivery are the primary value drivers, whereas a typical product-based business relies more on product design and production. Unlike product vendors who focus on providing a functional product, AAS companies deliver a continuously running service. Therefore, AAS service development and delivery teams should have service management capabilities and seamless processes to connect service creation and service operations. 

4. Quote to Cash

The quote to cash processes, systems, and organization for product business are very different from AAS. Order fulfillment and revenue recognition are the two obvious areas with significant differences. With software, the product revenue can be recognized when the product is delivered, and online delivery is sufficient for recognizing revenue for the software contract(s).  AAS revenue is recognized when a service portion is provided. Instead of full contract value recognition, only the monthly portion is recognized. Differences may be observed in quoting, and contracting in which the product sales cycle may require more manual intervention and is usually longer due to customer interaction.

5. Sales and Channel Management

The AAS model requires alterations in the way a business markets and sells its offerings. Product sales tend to rely more on the customer facing sales specialists through the entire sales cycle, but AAS can use mixed sales models with more use of digital channels, combined with telesales and telemarketing.  Product sales rely on indirect channels more than AAS since value-added resellers can usually deliver services such as product installation, implementation, and training. The AAS reliance on indirect channels is less since the end offering is in a ready-to-use state.

Given these broad operational variances and differences in the As-a-Serivce business model, acquirers must engage in early planning for the entire go-to-market structure -- it is imperative for seamless integration of an AAS business with product businesses.  Standard integration playbooks may not be sufficient to address these challenges, and adopting a process similar to a product creation approach might be helpful. 

About the Author: 

Cuneyt Buyukbezci is Vice President and Head of Marketing at Aerospike, a leader in the Hybrid Memory Database category. Cuneyt joined Aerospike from Hortonworks where he was in charge of portfolio marketing strategy, including competitive intelligence, portfolio positioning, and pricing. Previously, Cuneyt served as Director of Product Marketing for application delivery software at CA Technologies. Cuneyt held international leadership roles at HP and Sun Microsystems, including Director of Global Product Marketing and Strategy for HP Software.

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