Principal Sales Engineer
So, let’s level-set.
Your enterprise resource planning (ERP) systems are the foundation for your business. And while you’ve probably invested more time and resources in them than you’d like to admit, they get the job done. They are your system of record and general ledger. They serve finance and accounting and, if you sell products, probably manage your supply chain with manufacturing, inventory, pick/pack/ship, return materials authorizations, etc. These systems are sophisticated and do many things.
And maybe you are launching or scaling subscription services that are billed differently than traditional, physical products. They may be billed on a recurring basis, as opposed to unique, one-time transactions and include the element of time, such as a 12-month subscription billed monthly, quarterly, or annually.
This is a great question. And one that we hear more and more often these days.
The answer is simple.
Traditional ERP systems were designed, from the ground up, for physical products, not subscriptions. And these two product types have very different needs from a business applications perspective.
You need a solution that is designed to work with your ERP systems, to augment and help them. You need to implement processes for managing subscription commerce, recurring billing and subscription finance. Here are 5 ways that a complementary solution can help you achieve that:
1) Automate complex financial transactions
The nature of a subscription relationship with your customers is change. And you want it to be. You want to make it easy for customers to add more services, and on their timeline. You want to cross-sell and up-sell. You want to incent your customers to buy more with trials and promotions. And while all of this sounds pretty basic on the surface, each of these customer subscription changes drive complex financial calculations in order to provide your customer with a single, intuitive bill.
Each of these specific change orders are in relation to the same customer subscription, also referred to as a ‘contract’. All product charges have to be aligned to a customer bill cycle. Customer changes drive charge pro-rations and pro-ration credits. And all charges should be neatly co-terminated, simplifying the renewal process for your customers.
Your ERP systems will struggle with these, since orders for products are all treated independently. We’ve seen companies approach this with custom ERP projects using independent billing schedules for each new and change order. These approaches either restrict the kinds of changes your customers can make, impacting revenue, or they generate a significant amount of manual processes and manual work, increasing costs.
2) Use subscription-specific metrics
The metrics that you’ll want and need to manage your business are different with subscriptions. They are not historic reports, based on orders placed, but, rather, they are forward-looking. Metrics like monthly recurring revenue (MRR), total contract value (TCV), annual contract value (ACV), delta monthly recurring revenue (DMRR), as the isolated financial impact of customer changes discussed in #1 above.
In order to calculate and present these metrics, you need to change focus to an underlying subscription-centric object model. Selecting a fully-integrated platform with a unique design gives you the visibility you need to run your subscription business.
Your ERP systems will appreciate the help here, since these metrics are difficult, if not impossible, to calculate, given independent billing schedules that are not related.
3) Enable fast changes to pricing & packaging
As sturdy and reliable as your ERP systems are, they weren’t designed for rapid change. Since rapid change is required for success in the Subscription Economy, you need a solution that is. So, when marketing wants to try a new time-based promotion, or trial, or price point, or even an entirely new price model, for that matter, that’s OK!
With a solution that works alongside your ERP to help you run your subscription business, new product and pricing changes can be automated to your sales channels within minutes, without having to burden IT, finance, and other business organizations.
This capability will allow you to be more agile and competitive and focus your core IT resources on projects other than customizing your ERP, for months at a time, to get a simple price change to market. (On average, across the companies I’ve worked with, it seems it takes an ERP system about 3 months and many resources to roll out a simple price change.)
The capability to change pricing quickly is especially critical as we’ve learned that none of our customers get their pricing right the first time, or even the first few times. Our most successful customers optimize pricing by A/B testing and simply trying many different combinations to find what sells the best.
4) Allow for pivots in your business model
With subscription services providers, we see this over and over. If a company has a successful B2B offering in the enterprise space, the next step is to move ‘down market’ and create an offering for mid-market or SMB customers. Or a company wants to expand with a B2C offering or support an indirect sales channel with partner resellers.
Whatever the desired change in business model, changes to many of your business processes will be inevitable. Perhaps a salesperson-driven assisted sales process with quotes and invoices broadens to a low-touch sales process using web self service with credit cards.
These types of changes have ripple effects across commerce, billing, and finance.
You need an easy-to-use B2Any platform to help manage change for your subscription business. Expanding or pivoting to new business models should be pre-meditated, easier and faster. Juxtapose this with your ERP. Optimized for one business model, ERP evolution requires large amounts of custom work, time, and resources.
5) Simplify integration to your general ledger
So, I understand that I need a subscription-centric system to help my ERP, but how can the two systems work together? Doesn’t that require a bunch of work?
These are great questions. Integration to your general ledger and finance systems must be pre-meditated and can happen either at the summary/journal entry level or at the billing transaction level.
Let’s start with summary level integration using Zuora’s Z-Finance module. With this approach, Zuora is positioned as an accounts receivable sub-ledger, to your master general ledger. Zuora has a chart of accounts, accounting periods, and your accounting period close process is supported in Zuora. And Zuora respects the integrity of a closed accounting period, (which comes in handy for auditing and compliance). Zuora also has an event-driven, revenue recognition module which, (surprise surprise!) was designed to automate changes to revenue from all of the customer changes we’ve discussed. At the end of an accounting period, Zuora generates a summary journal entry report for entry into your general ledger. And there’s a whole lot more by way of data and reporting that you’ll have access to. Bottom line: Z-Finance makes integration to your general ledger fast and compliant.
Integration between Zuora and your general ledger can also be done at the individual billing transaction level. Zuora has open, standards-based APIs, an event-driven notification framework, and easy ways to export data and reports from our system to be merged into and used by your general ledger.
There are many ways that a subscription solution can complement your existing ERP systems. ERP alone is not designed to make the evolution to subscriptions. But your business should be.
Want to join the dialogue on this topic? Come join us for Subscribed 14 in June, where we have a new Enterprise track focused on how companies blend new systems with their legacy systems of record.