Product
The Core Principles of XaaS: Insights from Adobe's Cloud Strategy
2023-3-20
As we discussed in our previous article Types and Benefits of XaaS, XaaS benefits both providers and users, and it is natural to view the trend as now irreversible. The first step toward XaaS is to shift the emphasis to the realization of user value by offering products as services, rather than selling them on a sell-out model.
Similar to the shift to XaaS is the billing structure for digital advertising. Over the past 20 years, we have seen an evolution from banner ads, which were measured by CPI (Cost per Impression), to CPA (Cost per Action) ads, which focus on specific actions like installing an app or opening an account. Nowadays, with the use of AI and machine learning, mainly by large media companies such as Meta, we are seeing an evolution to oCPA (optimized CPA) advertising and more. As with digital advertising, a business transformation is beginning to take place, shifting the center of gravity to what users essentially want, centered on software. In this article, we will review the case study of Adobe's shift to the cloud, and then review the key points of the shift to XaaS.
Adobe's Cloud Conversion
As a typical example of a company that has achieved XaaS in a very short period of time and won the fruits of XaaS, we will focus on Adobe, which is well-known for its Creative Cloud. We will look at the challenges they faced, how they approached them, how they moved toward realization, how they communicated externally, and the results they achieved. In this article, Kara Sprague, Principal at Mckinsey SF, interviews Mark Garrett, CFO and Dan Cohen, VP of business operations and strategy at Adobe "Reborn in the cloud".
Summary
After the Lehman Brothers collapse
After the Lehman Brothers collapse, Adobe had a head start in sales volume and managed to improve sales by increasing prices. After discussions among management, strategy, finance, and business leaders from various perspectives, the company quickly transitioned to a cloud model.
The move to the cloud model affected all aspects of the product, engineering, and business. In product, we had to listen to our users and continue to build relationships with them, and in engineering, we had to revamp our infrastructure to deliver our products in the cloud. Finally, on the business side, due to the change in revenue timing, it was also essential to design incentives and address accounting and investor relations.
As a result, the entry-level model and upgrades have resulted in a wider user acceptance than in the past. In addition, the resulting subscription nature of the business established a highly predictable revenue model. The stock price more than tripled, sales growth increased from single digits to over 10% annually, and recurring revenue surged to 70% in 2015, up from 19% in 2011.What Adobe's Case Study Can Teach Us About Going XaaS
Many companies that sell some kind of product, like Adobe in the past, may have experienced a situation where the number of units sold has reached a plateau and the only way to increase sales is to revise prices or launch a new model. These days, due to the evolution of devices and diversification of needs, the changes in the market related to product offerings are only intensifying. The case of Adobe, which has seized this change and steered the company toward the cloud, offers a great deal of learning.
1. XaaS conversion is a top-tier business transformation
XaaS is not something that can be implemented in a short amount of time, but should be viewed as a top-tier business transformation. Converting a product offering to a subscription model is more than a simple change in business model. It involves significant product, engineering, and business changes that require in-depth risk assessment and internal and external communication. The XaaS transition will also require changes to the organizational structure. As with new businesses, it is not something that can be successfully implemented by assembling a dedicated team, but rather requires a strong PMO with personnel from relevant departments under the direct supervision of management. Also, significant changes will need to be made to the offerings through the cloud, and the skill set within the team will need to be expanded by hiring people with a variety of skills, not just internal transfers.
2. Build ongoing relationships with users
It is not enough to convert everything to XaaS. First, you must identify whether there are true user needs that are not being captured by the sell-out model, and then you must evaluate whether it makes sense to offer these needs in the cloud. After XaaS, unlike the sell-off model, it is necessary to build an ongoing relationship with the users. It's not enough to capture user needs just once; you must continually address user issues, articulate user value, and refine the product accordingly. In response to this, the source of competitiveness is to continuously maintain contact with users, obtain feedback, and enhance the product. For example, it will be necessary to establish user communities and other points of contact with users, and put in place a system to manage them.
3. Providing products through the cloud
To deliver products via the cloud in a timely manner based on user needs, significant engineering changes will be required. First, instead of having the product downloaded to the end-user's PC and operated locally, it will have to go over the Internet and be operated on a browser or application. To make this happen, protocols that can provide user authentication and usage are required, and security, availability, redundancy, and DR (disaster recovery) support are to be guaranteed by the provider. In addition, since the continuous pursuit of user value requires the adoption of agile development models, such as Scrum, for development methods. This approach will allow us to update the product with each development project and deliver benefits to users through additional functions and modifications.
4. Adaptation to Subscription
From a business perspective, the change from a sell-by-sale model to a subscription model can be viewed as a change in revenue structure. With this change, the focus of business evaluation shifts to Annual Recurring Revenue (ARR) rather than sales trends. Although many SaaS companies have gone public in recent years, business valuation based on ARR is still not universally adopted. Therefore, when major companies convert to XaaS, it will be important for them to visualize and report not only the content of their business, but also how it is appropriately evaluated and what results are achieved based on the evaluation criteria. In addition, the incentive design will be reviewed for each sales channel in line with the revenue structure. In addition, we will support user adoption, track utilization, and bill accordingly. Business operations will also need to be built and managed in line with subscriptions.
5. Risk Assessment and Communication
There are risks associated with XaaS. If what was previously offered on a sell-by-sale model is now offered on a subscription model, sales and profits will certainly decline during the transition period, and the stock price is likely to drop as a result of these changes. When considering the lead time and feasibility of transitioning to XaaS, as well as how it can improve sales and profits compared to the past, it is essential to evaluate several factors. Metrics such as ARR and Unit Economics that properly evaluate these factors must be prepared and disclosed in a transparent manner.
Only by steadily completing these five points with a high degree of accuracy can XaaS conversion be achieved. While revenues may initially decline, offering a broader range of plans compared to a traditional sales model will deliver value to a larger user base. For example, introducing freemium as an entry-level plan can expand your user base tremendously. And, by offering seamless upgrades, you can also increase ARPU. It is not an easy transformation, but this process allows you to build an ongoing relationship with your users through subscriptions, ensuring a predictable revenue stream.
Conclusion.
The proliferation of XaaS is irreversible. If we view the shift to XaaS from a company that has adopted a sell-by-sale model, it will require a level of transformation that will turn the entire company upside down and restructure it. When converting a business that recognized sales at the point of sale to a subscription model, sales will undoubtedly drop in the short term. Of course, if you get the XaaS conversion right and transform it, as Adobe has done, you can evolve your business qualitatively. XaaS requires a commitment and ability to execute from the product, engineering, and business perspectives, and to continue to provide valuable services to users.
References.
About the Author
Yoshitaka Miyata. After graduating from Kyoto University with a degree in law, he gained experience in a wide range of management consulting roles, including business strategy, marketing strategy, and new business development at Booz & Company (now PwC Strategy&) and Accenture Strategy. At DeNA and SmartNews, he was involved in various B2C content businesses, both through data analysis and as a product manager. Later, at freee, he launched new SaaS products and served as Executive Officer and VP of Product. Currently, he is the founder and CEO of Zen and Company, providing product advisory services from seed stage to enterprise-level. He also serves as a PM Advisor for ALL STAR SAAS FUND and as a Senior Advisor at Sony Corporation, primarily supporting diverse products in new business ventures. Additionally, he has been involved in the founding of the Japan CPO Association and now serves as its Executive Managing Director. He is a U.S. Certified Public Accountant and the author of "ALL for SaaS" (Shoei Publishing).
