XaaS is not new, yet there has never been more energy surrounding its concept than there is now. With that in mind, it’s the perfect time to explore why it’s suddenly such a prevalent topic.
What Is XaaS?
XaaS is short for everything-as-a-service, which means your customer will be able to acquire every product or service you sell with a monthly payment option. Historically, traditional IT companies have been far more interested in the technology they are selling than how the customer consumes the technology. This approach leads customers to rely on their cash or bank lines to purchase technology.
To be fair, there are end users who prefer the CapEx approach for tax, Key Performance Indicator or balance sheet reasons. However, the majority of customers want an option that allows them to pay for what they need and use, similar to a monthly utility bill.
Why Is XaaS So Hot Today?
I subscribe to many IT-focused news outlets, blogs and Google alerts, and am inundated daily with news about XaaS. So what’s happening in the market today to make this so top of mind?
Technology is Evolving
We start with a little history: 300 years ago industry was typically located near a river, because hydraulic power was needed to run the machines inside.
When the steam engine was invented, suddenly businesses could be located anywhere, as long as they installed and maintained a boiler to create steam. Even though the steam engine was a major technological advancement, you still had to generate your own power to run your shop.
Eventually, electric power became a reality, and you didn’t need to be in the power business for your company to thrive; all you needed was a power line. It became someone else’s job to make the power; a business simply paid for the use of that electricity.
So how is power different than data storage in the cloud? A few years ago, companies had their own servers to run business applications and store data, because there was no other choice. But with the cloud, you don’t need servers on site – you just need access to your applications and data. Companies like Azure and AWS are the electric power companies of old; you pay them to use their technology.
The evolution of technology lends itself to subscription models, and XaaS will only continue to grow as technology continues to democratize applications and data.
Customers Asking for Consumption
More than ever, IT buyers expect their technology to be delivered in a simple package. Many times, IT companies try to convince customers to write a big check for a project with lots of hardware. But today’s IT buyer cares more about delivering business outcomes than owning and maintaining technology. Customers love XaaS because it delivers complete solutions with simple consumption options. We have found that our partners who deliver a monthly payment option for all products, projects and services have happier customers.
Valuations
Another reason OEMs and solution providers are moving to a XaaS model is higher business valuations. Wall Street and private equity firms like – no, love – monthly recurring revenue (MRR). The more MRR a company has, the higher valuation that company can demand. When a private equity firm looks at an income statement of a prospective company, product and project sales get a substantially lower multiple than the MRR multiple, which is at record levels today. Consequently, organizations are trying to shift from CapEx to OpEx for valuation reasons.
How does XaaS work?
The “how” is the easiest part of this article. There are two parts of XaaS: service and products. For years, services have been offered on a monthly basis. The question is, who is going to pay for the product? For example, AWS spends billions of dollars building data centers, then offers their services in a consumption model for a monthly payment. Many times, MSPs offer firewalls and BDR devices with a monthly payment along with their services. The MSP will then pay for the devices out of cash flow, or finance the devices to help manage cash flows.
In the market today, OEMs and distributors are creating solutions to sell more of their products through monthly payments to help solution providers deliver a XaaS offering.
Should you offer XaaS?
If you are a solution provider, you should review your company goals, reach out to your customers to discover if there is a need and then explore ways to offer a monthly payment to your customers for everything you sell from products to services. Your customers and your bottom line will thank you.
