The Curse of CPQ: Can It be Overcome?
What is Quote-to-Cash?
It is best described as everything between a sales opportunity and value realization. It is also known as CPQ (Configure, Price, and Quote)— a Gartner moniker that does little justice to the scope and impact of this category.
Q2C includes every step that the customer takes in the journey of expressing her need, learning about your solution, buying the product or service, receiving the product or service, using it, modifying it over time, receiving and paying bills, and potentially returning the product or terminating the relationship. The hero in this story is the product and service that you are selling, and how the customer engages with it during her relationship.
In this expansive view, the Q2C software category encompasses the entire spectrum of capabilities related to this journey. From guided selling, configuration and pricing, quote and order capture, e-commerce, and contract management, all the way to distributed order orchestration, asset-based ordering, renewals, cancellations, billing, and payments.
It covers a wide swath of use cases across many dimensions:
Multiple classes of products and services sold by sellers to buyers in B2C, B2B, B2B2C and marketplaces.
Multiple classes of end-users from customers, resellers, and dealers to employees in finance, operations, sales, call centers and physical stores.
Multiple classes of enterprises including Professionals, SMB, SME and Large Enterprise.
Multiple types of industries and sub-industries with varying types of offerings and go-to-market channels.
Market, Size, Growth and Evolution
Analyst estimates for the Q2C market range widely. While the market for best-of-breed CPQ solutions is estimated around $500 M annual spend, this is still a fraction of the overall spending on Q2C that includes parts of ERP, CRM, industry-specific application stacks and custom applications. Some believe that this number could be as high as $20B per year (40 x best-of-breed software spending). As on-premise software and custom applications continue to move into the cloud across all industries and categories, this creates a huge upside for Q2C SaaS companies over the next 5–10 years.
We also have to consider the $4B spend on digital commerce software in 2015 growing at 17+% until 2020. While the digital commerce and the CPQ /Q2C markets have traditionally remained separate, there is early (but inconclusive) evidence that they are starting to converge, with a few vendors offering integrated commerce cloud suites spanning both categories.
CPQ / Q2C is Filled with Horror Stories
While Q2C software has always held great promise for powering the next generation of transactional systems, this market has also been a mystery to fathom and unpack. It has been constantly afflicted with adoption failures, claims of overselling and a failure to find sustainable long term growth.
What are the root causes of these challenges and how can these be addressed? Can the next generation Q2C SaaS vendors break the shackles that have constrained the category so far?
Let us briefly revisit the history of this category. We have seen multiple boom and bust cycles of Q2C software in the last three decades.
The Age of ERP - 1980 to 1996: Traditional back-office vendors like SAP, Oracle, and Baan dominated this space. There was no front-office, the UI was ugly and there was a massive SI tax to make it work.
The Age of the Internet- 1996 to 2000: A new raft of internet-based vendors like Selectica, Firepond, and Trilogy took the market by storm, especially for e-commerce. In spite of early successes, these companies were hurt by the high cost of integration to the back-office and the services-heavy nature of these deployments. None of them found sustainable growth or scale, and eventually lost relevance.
The Age of CRM — 2000 to 2008: Led by Siebel Systems, this period saw massive growth in license sales revenue of Q2C software — especially in telecom, media, utilities and high-tech industries. While some of these deployments were successful, it also resulted in huge amounts of shelf-ware, deep customer satisfaction issues and conflicts between the business models of traditional CRM and Q2C.
The Age of the Cloud — 2009 to Now: Big Machines (Oracle), Apttus, Steelbrick (Salesforce), Demandware and several other vendors have led the way in establishing cloud-based Q2C businesses. They have been reasonably successful in SMB and SME, and are starting to grow into the large enterprise.
But the story is ongoing and still being written.
Growing Q2C cloud subscriptions to billions of dollars in annual revenue demands that we act with humility, learn the lessons of the past and be more mindful of the dynamics at play. There are strong underlying reasons why we have seen this recurring pattern of excitement, growth, despair, and decline of new Q2C technologies.
Ten Key Learnings and Considerations for Q2C SaaS players.
1. Address the Platform Question
Q2C software runs mission critical processes. Enterprises’ products, pricing, promotions and order capture processes are unique by design to drive differentiation.
There is tremendous variability in order capture processes and their UI manifestations based on channel, interaction type, customer segment, user type and other factors. These need to be highly configurable. These processes typically need to access a wide range of heterogeneous systems in batch and real-time modes and integrate the results seamlessly into the user experience.
To achieve the above, delivery teams need a robust meta-data based platform for application development and configuration.
The platform and its core primitives are as important, if not more, than the delivered reference applications.
A robust platform — in addition to supporting the development of cloud-based applications using rich metadata — should also include fairly evolved Q2C-specific primitives and libraries, including advanced support for real-time data querying & transformation, data mashups, multiple types of rule engines, headless access to data and logic, dynamic workflows, dynamic user interface widgets, etc.
This is particularly relevant as Q2C SaaS companies move upmarket from SMB /SME. I discussed the importance of Platform vs. Apps in Selling to Elephants vs. Deers.
It is beyond the scope of this post, but there is also the very profound question of which PaaS to use: Should you develop on third party PaaS products like Salesforce or Microsoft, use open source PaaS like Cloud Foundry, or build your own? In the Q2C cloud applications space, Salesforce has been the most popular for many obvious reasons, but it is also creating several conflicts of interest between the platform vendor and the ecosystem.
2. Address High Cost of Integration and Services
In the absence of a robust development platform and configurable reference apps, Q2C projects for large enterprises typically end up with heavy customization.
As ARR: Services ratios go out of whack, TCO metrics suffer, and vendor profitability and valuation come under severe strain.
Both vendors and SIs routinely under-estimate time, effort and complexity of these projects by an order of magnitude.
Q2C business is not SFA. Solving these problems requires world-class customer success teams.
Customer success teams need to be staffed with top talent that can connect the dots across both customer and vendor silos, and drive alignment on what success means. It has to be objectively measured in terms of their customers’ ease of doing business and substantial improvements vs. status quo.
Until product-market fit is well established, Q2C ISVs are well advised to work only with systems integrators who are willing to acquire deep product implementation expertise and support intimate feedback loops.
3. Deal With The Business Model Conundrum
The Business Model Conundrum refers to the problem of building a sustainable software business in Q2C with high gross margins, acceptable cost of sale, consistent customer success and scalable delivery. The history of this space is littered with examples where the initial high growth only led to significant delivery challenges, and eventual stagnation.
Most Q2C SaaS vendors want to run a subscription business. But in the absence of a robust PaaS, they end up looking like a professional services business and also run into customer satisfaction issues.
Not addressing the need for a robust platform is the root cause of the business model conundrum. It almost always results in sub-optimal outcomes to both the vendor and the SI eco-system.
Vendors who invest in integrated customer development teams (product management + development + delivery acting in sync to solve problems and learn fast) until you reach product-market fit are better positioned for the future vs. those who choose an “over-the-wall” approach to internal delivery or SI teams.
As customers become successful, product management and engineering can continue to abstract out platform capabilities that are reusable.
Ironically, the firms that invest more into customer success in the first few years are better positioned to deliver productized offerings vs. the vendors who prematurely jump into product based business models.
4. Address High % of Shelf Ware, Low Adoption, and Limited Coverage
Q2C projects go to the very heart and soul of the enterprise and are intended to dramatically improve the customer’s ease of doing business with the enterprise. Anything not within the range of excellence does not pass the final validation test of the business sponsors.
In several cases, even customers do not understand these considerations, until much further downstream, when it may be too late to remediate effectively.
A combination of 1,2, and 3 discussed above have resulted in low levels of Q2C software adoption, especially in large enterprises. This is best measured through % of coverage of the enterprise’s products under deployment, and for different types of channels, customers, users, and transactions.
By the same token, it is very hard to displace a system, once it has been deployed to exacting standards. Vendors who get to this state can extract significant value from this lock-in.
5. Mobile is Not An Add-On. It is the Main Deal.
There continues to be a great demand for mobile apps for varied use cases — employee facing, customer facing, partner facing, and for different types of products, services and interactions over the life cycle of the customer. For many enterprises and users, mobile has become the primary channel of using Q2C software.
Q2C vendors need to step up to help companies deliver these native mobile experiences. Succeeding in the mobile-cloud age will need new investments in mobile capabilities and competencies across the organization. And the platform needs to natively support development and publishing of mobile applications for iOS, Android and the mobile web.
6. Industry Clouds and Q2C / Commerce Clouds are Converging
Customers want industry specific processes and workflows.
The industry cloud offerings and the Q2C cloud offerings will start converging and competing, as they solve the same problem. Both are transactional apps built around monetization of products/services.
Q2C applications must become industry specific at multiple levels to differentiate (Schema, workflows, templates, UI, default connectors to industry apps, industry specific business logic, etc.).
There are large eco-system opportunities in several industries where OEMs want to share a common commerce and catalog infrastructure with their dealers and resellers. These represent multi-hundred million dollar deals.
Deep industry focus can significantly reduce the cost of sale, and enable a bowling-pin approach to winning customers.
7. Experiment with New Business and Engagement Models
Q2C deployments are about driving growth and sales. Customers are more open today to providing vendors significant upside if they truly act as partners for success.
Vendors who optimize for gross margins vs. customer success can lose out on the larger deals to follow that expand product and channel coverage.
Creative vendors with a relationship mindset should pilot new types of engagement and business models that create a win-win for both sides. There is a lot of money to be made, if a lot of value is created.
8. Assemble a Product Portfolio for Full Life Cycle Commerce, Cutting Across Channels
Q2C products continue to evolve towards full-fledged commerce suites, though more as a one-stop shop than as a truly integrated portfolio.
Mega-vendors and the well capitalized cloud companies will seek to consolidate the space through targeted M&A.
Product Information Management is a key area of investment. It is a gap not well addressed.
A holistic and integrated roadmap for multi-channel commerce may take many years to realize, but the vendors who offer such a vision are in a better position to access customer budgets across multiple buying centers.
9. Invest in Q2C Data Science to Embed Actionable Intelligence In-Context.
Big data in Q2C has been most prevalent in the use of a) pricing and margin optimization, b) advisory selling, c) bundle and add-on recommendations, and d) predictive actions for optimizing renewals, upgrades, up-sells, cross-sells, collections and retention. These are all sub-markets, each with a variety of vendors.
There are many opportunities to apply fresh thinking in this area. New IoT data streams provide ways to integrate machine usage data to Q2C, layer rating and billing processes on top of machine data, and use data science to increase usage, renewals, up-sell and cross-sell.
Several of these projects, even as overlay services, have proven to deliver huge uplift / conversion with eye-popping ROI numbers.
10. Build a Partner ISV Ecosystem for Maximizing Reach and Innovation
Q2C is really broad and no one can do everything.
Vendors need to open up APIs to their application and platform infrastructure to encourage open innovation in the market, especially around last-mile solutions.
These are likely to be smaller marketplaces or mini app exchanges where customers can buy applications built on specific Q2C platforms. For example, Shopify, Magento and Demandware have built vibrant eco-systems.
An app ecosystem helps ISVs build a strategic moat, solves the end-to-end customer problem and makes customers more sticky.
In summary, the Q2C software category is riding the crest of a boom cycle. It can either be the foundation for sustainable growth over the next decade or lead to a slow-down, as we have often seen in the past. It will depend on a number of factors including the extent of consolidation, the emerging dynamics between the major platform players and smaller cloud ISVs, and the levels of user adoption and customer value realization. Most importantly, it will be determined by the ability of Q2C vendors to learn from past cycles and ensure that their platform, product, go-to-market and delivery strategies are constantly in step with the needs of the customer.
Disclosure: I worked for Baan, Siebel Systems, SAP and have also consulted with multiple Q2C vendors and enterprises evaluating/implementing Q2C products.
[1] Since this was published in April 2016, Salesforce has acquired Demandware, and has formally launched a Commerce Cloud. In Dec 2016, Salesforce acquired SteelBrick.