Column

Downturn is an upturn for XaaS and digital transformation

Current global conditions have driven an acceleration in both XaaS revenue streams and investments in digital transformation. Technology providers need to understand how these two trends could impact their business models. This paper will cover the following topics related to this phenomenon:

  • Quantifying the surge in the importance of XaaS revenues.
  • Why XaaS revenues are accelerating.
  • The importance of digital transformation in current global conditions.
  • What this means to technology providers.

Quantifying the surge in XaaS revenues

TSIA can trace the surge in importance of XaaS revenues back to April of 2020. In a TSIA survey that month, more than 50% of the companies with business models based on selling products (transactional revenues) reported a drop of 10% or more in bookings. Only 23% of companies with business models based on selling recurring services had the same experience. This is because new product transactions can quickly freeze in a global downturn. Recurring revenues from service contracts are more resilient in a downturn.In May 2020, TSIA ran a survey asking this question:

“Which of the following best describes the net change in the percentage of customers utilizing your technology subscription (XaaS) offers in the last 12 months?”

The response data shows that all the respondents reported XaaS offer usage was growing in the midst of a global pandemic.

[Read also: Digital leaders outperform in the COID-19 era]

By the end of the second quarter, it was apparent XaaS revenues were significantly outperforming product revenues on a broad basis. TSIA tracks an industry index composed of 50 technology companies called the Technology & Services 50 (T&S 50).

It is evident that, on average, these software companies experienced product revenues declining over 12% but service revenues (which include SaaS revenues) increased more than 10%.

Finally, in calendar Q3 2020, both HP and Dell reported overall declining revenues but significant growth in recurring revenues driven by as-a-service offers.

HP’s and Dell’s experiences are not unique. Companies in the TSIA Managed Services benchmark database report an average growth rate of 32% for their managed services business, which far outpaces the average growth rate for products.

The global downturn has clearly put wind in the sails of XaaS revenues. Why?

Why XaaS revenues are accelerating

Over the past five months, we have met with 76 leadership teams from TSIA member companies. One topic discussed in these briefings is the acceleration of XaaS offers. The reasons they give for this acceleration are very common:

  • In the current economic climate, customers want the ability to pay as they go for the technology they are consuming.
  • With many customers being forced to downsize, they want a technology consumption model that allows them to scale up AND down based on the business environment.
  • XaaS offers are better suited for supporting a remote workforce.

These are the three main reasons markets are accelerating to XaaS offers. And then there is the push for digital transformation.

The increasing importance of digital transformation

At this point in time, digital transformation can encompass many different objectives and outcomes. To help clarify the conversation, TSIA is focusing on what digital transformation means to the majority of companies today. Currently, there are two key vectors of value realization companies are pursuing with digital transformation initiatives:

  • First Value Vector: The migration of workloads from on premises to off premises.
  • Second Value Vector: The leveraging of analytics and AI to reengineer the customer and employee experience. This vector can include initiatives to create new offers and new go-to-market models.

The customers of technology providers were pursuing digital transformation and these two value vectors before the pandemic. However, when the pandemic hit and employees were sent home, many customers faced the reality that their technology infrastructure was not up to the task at hand. If customers had the financial wherewithal, they accelerated their investments in digital transformation.

As part of our industry analysis, TSIA collects transcripts from quarterly financial analyst briefing calls held by publicly traded technology companies. We then run analytics on those conversations. One view we create is titled “hot topics.” What topics do the analysts want to discuss and what topics do executives want to discuss?

What this means to technology providers

If XaaS revenue growth is accelerating and digital transformation initiatives are on the rise, what initiatives should technology providers seriously consider in order to remain competitive when the global economy returns to growth? TSIA would argue that every technology provider should be building the following capabilities to remain competitive.

Development of XaaS offers that:

  • Support consumption-based pricing models.
  • Support the customer’s desire to migrate workloads away from datacenters they manage themselves.
  • Help customers digitize and optimize their business processes.

Restructure customer engagement models so they are:

  • Optimized to sell and service XaaS offers.
  • Cost effective in expanding and renewing customers on XaaS platforms.
  • Focused on ensuring customers realize business value from their technology investments.

XaaS revenues were outpacing traditional product revenues before the global downturn. The downturn has simply accelerated and amplified that trend. Hopefully, your company is prepared to ride this wave of growing XaaS revenues.