Recurring revenue strategies enhance the valuation of any company by improving the predictability of organic revenue growth and improving EBITDA by using repeatable solutions to reduce the cost of goods sold. Whether your firm is building products or providing consulting or other services leveraging intellectual property creation can deliver high value-added results.
Often, the challenges facing the firm are the same as those faced by your clients. How can you deploy solutions that work across your core businesses, productize them using your best practices, and deliver them as repeatable solutions to your customers—that is the essence of a recurring revenue strategy:
“Build it once, prove that it works by using it relentlessly, and then sell it often.”
Source: Ventyx/Global Energy Decisions
RECURRING BUSINESS MODELS RAISE THE BAR FOR COMPETITORS
The biggest challenge for a recurring revenue business model is not building it but conceptualizing what to build. The challenges facing China are vastly different than those in California or Virginia and so are the economics, market rules, and customer expectations. One size rarely fits all, but consistently applied best practice applications of primary business intelligence research, simulation modeling and scenario analysis and the expertise and tools to deploy them is what brings customers to your doorstep. Retaining those customers and expanding wallet share of their services spend only happens when you deliver high quality results, consistently, and competitively.
Organizations are often built the old fashioned way block by block and turn into silos loosely organized around a common strategy. After a while the culture of the business drives it more than logical business strategies. Internal competition among business units is as fierce as with competitors.
Revenue absolves all sins and those who find a sweet spot and produce the revenue and EBITDA get to drive the strategy forward. This works as long as the market conditions, regulatory regime or technology stays aligned.
Change is often swift and disruptive. Just look at what happened in the highly profitable power generation asset valuation segment with the great recession market collapse. A great line of business, with great clients and a growing energy demand collapsed with the credit crisis and is still stuck in the mud except with flat demand for ever more politically mandated renewable energy projects driven by government subsidies.
The growth challenge is to imagine a world of different futures and build integrated solutions that work in the “sweet spots” across more than one alternative business future for your firm and your customers.
WHY USE RECURRING REVENUE STRATEGIES?
- Recurring revenue improves the quality of earnings and business valuation. Unlike billable hours that must be re-earned each month, recurring revenue is a predictable revenue stream from the advanced sale of a data or software license, advisory fees for access to standard analytics products sold on annual contracts, or multi-year outsourced service contracts. Because the revenue is contracted to recur each month without the sales expense and uncertainty of billable hours projects, recurring revenue improves the quality of earning and overall business valuation.
- Recurring Revenue provides revenue stability. Because recurring revenue contracts are annual or multi-year deals the revenue they produce smooths the peaks and valleys and offers stability for the business in recessions or between big billable hour projects.
- Recurring revenue products monetize R&D investment that otherwise would be overhead. By creating a market for research and development outputs, recurring revenue products self fund or pre-fund R&D and free working capital for major investments turning overhead into a profit center.
- Recurring revenue products have higher margins and improve EBITDA. Because recurring revenue products are ‘produced once, used often and sold many times’ they tend to have higher margins on par with data and software products. Standardized work scopes and methods allow products to be produced with lower cost, junior staff under supervision to improve EBITDA and speed training.
- Recurring revenue products improve consulting productivity and quality. By providing a high quality starting point for repeatable consulting services, recurring revenue products let consultants start work on billable hour tasks faster than competitors, improve productivity by using lower cost junior staff for standardized simulation analysis and improve the quality and consistent of consulting work by leveraging best practices.
ALIGN THE BUSINESS FOR GROWTH
Applying a recurring revenue strategy to realize the organic growth potential is the first essential step in creating a virtuous circle that aligns your business interests with those of your customers. The internal business results from such a strategy drive improvements in EBITDA and performance by:
- Align units around a common growth strategy and modular components;
- Hone best practices with customer engagement to align with customer interests;
- Leverage core competencies and capabilities to create recurring revenue streams;
- Reduce product go to market lead time using speed as competitive advantage;
- Shifts expertise to customer facing roles focused on business solutions
- Enable use of lower cost junior staff to build and maintain product modules;
- Repeatable use product modules optimize performance and integration of infrastructure, information, innovative technology, and services into complete solutions to address customer needs across global markets.
Recurring revenue strategies value the firm’s core competencies by monetizing them, using them relentless inside to improve performance results and EBITDA, and demonstrate powerfully to clients that they made a wise choice that enables them to live into their own need for performance and results.