The rise of XaaS: Different models for technology spend

As consumers and businesses navigate the uncertainty brought along with the Covid-19 pandemic, there has been a sharp focus on product and service innovation. With customer preferences and the operating realities of the modern-day business environment rapidly evolving, businesses have had to double down on enhancing their value-creation capabilities. 

Unsurprisingly, outside of product and service innovation, there has also been a significant focus on business model innovation, which can simultaneously enhance an organization's competitive advantage, drive key differentiation and massively improve the customer value proposition. 

According to the research by Boston Consulting Group, over the past 50 years, the average span for a business model has fallen from 15 years to less than 5. Today, more so than ever before, business model innovation is an essential capability that organizations must have if they are to expand their market share, increase core profitability, transform or modernize their business, or combat against external disruption. 

Perhaps the best example of successful business model transformation is that of Amazon. From going as, a 1P reseller of books to building the world’s biggest 3P online store for goods, Amazon is now the de facto way of online shopping for billions around the world. But Amazon didn’t stop there. With Prime, they opened a huge untapped market for on-demand logistics and content. With AWS, they enabled companies to leverage computing infrastructure, platform and software services via a subscription model. Amazon even tried the famous “razorblade” model with Kindle - selling the core product at breakeven, and generating revenue through consumables (e-books). 

While Amazon is an amazing company to study, business models naturally vary widely across different industries, and so must the business model transformation efforts. That being said, the common theme emerging across different sectors is an overwhelming demand for solutions and services that enable agility for customers. 

CapEx vs OpEx

Before the rise of modern cloud computing, most technology companies would purchase assets they needed outright, with a one-time upfront cost on their balance sheets. The asset would then be depreciated throughout its useful life. These kinds of transactions are referred to as “CapEx”, and the problem with investing through CapEx is multifold. 

Let’s take the example of a data centre. If an organization were to invest in a state-of-the-art modern data centre, they would have to follow an extremely stringent approval process - ascertaining both the budgetary requirements, which would run in the tens of millions, and ensuring there is enough demand to optimize utilization. Overutilization can lead to service interruptions for customers, and underutilization can significantly hamper cash flow. 

To further add to the problem, capital expenditure carries significant commitment risk. In the ever-changing world of technology, being locked onto a legacy technology stack can significantly impact a brand’s customer value proposition. 

Clearly, investing in technology through capital expenditures is rife with friction. 

Today, balance sheets are shifting from a CapEx to an OpEx model, which has a number of advantages. Investing through OpEx, or operational expenditure means companies are investing through the income statement, instead of the balance sheet. This allows companies to spread their payments over a longer period of time, and deploy their cash on other worthwhile revenue-generating endeavours.



More importantly, this approach massively increases a company’s flexibility. It’s much easier for a company to scale up or down as required, ensuring businesses pay only for what they need at a given time. 

Subscription vs Consumption 

Let’s go deeper into the rabbit hole. If OpEx spending enables flexibility for your customers, what is the best way for you to offer it? For most businesses, it comes down to two options - a consumption model, or a subscription model.

 In a subscription-based business model, customers pay a monthly or annually recurring fee to access a product or service. This is now the de facto business model for the largest software vendors in the world. With Software as a Service, customers do not have to invest in expensive hardware and licenses upfront and have the flexibility to scale their usage up and down. Getting access to software through a subscription also ensures that businesses have access to the latest version of the software across any device, as well as technical support for when things go wrong. 

In a consumption-based business model, customers only pay for the goods and services that they consume at any given time. These are typically priced on a pay-as-you-go basis, but can also be charged on a fixed price basis for a set amount of goods or services. Micro transactions in video games, charging customers per singular API call, or per kilometre driven in a ride-sharing service are all examples of consumption-based business models. 

While these are serious business model innovations in the world of technology, things have a way of coming full circle. Some of the oldest industries in the world such as electricity and water utilities, telecommunication providers, and newspaper publications also leverage consumption and subscription-based business models. 

The Rise of Everything As A Service (XaaS) 

The Everything as a Service (XaaS) model has emerged in response to the burgeoning demand for a wide variety of products and services over the internet. There are several factors that have contributed to both the need, and the rise of XaaS: 

1. Increased Flexibility: XaaS allows businesses and individuals to access a variety of products and services on a pay-as-you-go basis, massively increasing their financial flexibility and reducing technology friction. 
2. The Growth of Cloud Computing: The rise of modern-day cloud computing has made it easier for businesses to access products and services via a XaaS model, as XaaS services are often delivered over the internet rather than being installed locally. 
3. Mobile Everywhere: The widespread adoption of mobile devices has made it easier for people to access products and services from almost any location and across devices such as mobiles and tablets. 
4. The Rise of the Gig-Economy: The rise of the gig economy has created a massive demand for flexible, pay-as-you-go products and services, allowing gig economy workers to get access to the resources they need on an as-needed basis. 
5. The shift towards Saas: Businesses today are seeking more predictable and recurring revenue streams, and XaaS offers a convenient way to offer a wide range of products and services to your customers on a subscription basis. 

With increased flexibility, cost savings and scalability benefits for customers and higher predictability and recurring revenue streams for vendors, XaaS achieves the dream scenario for any business - a win: win for both the customer and vendor. 

The article has a been written by R Venkatesh, President - Enterprise Business Group, Redington Limited