Early in the pandemic there were many references to scaling, but those were directed primarily to our waistlines and the dreaded “quarantine 15.” In all seriousness though, there are great examples of businesses that have scaled tremendously during COVID-19. There’s also much potential for growth in the post-COVID economy with the right strategies and business models in place, which is the topic here.
If you read my last blog post, you know that Steve Strongin, Senior Advisor at Goldman Sachs, is a leading thinker in Wall Street valuations. He’s recently published A Survivors Guide to Disruption and The Great Reset: A Framework for Investing after COVID-19. He was my guest on the XaaS Files where we talked about many things, including the path for XaaS companies to grow and scale.
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What we know about COVID and XaaS
COVID highlighted how subscription models with predictable revenue streams can continue to scale during a significant periods of economic disruption, if designed correctly. Steve points to Netflix as a great example of a company that has thrived in the COVID period. “The company had a massive increase in demand and really didn't have to do anything to meet it. They were sitting on other people’s applications that were already operating at a scale well above the size of Netflix.”
COVID also brought eye-opening lessons to many about their vulnerabilities. According to Steve, “COVID-19 has taught corporations that in many cases, the control they thought they had was an illusion and that their vendors were in a better position to innovate than they themselves were. Any company that was using a globally distributed vendor to do payroll, computing, distribution or logistics had an easier time adapting to COVID-19 than one that was trying to run those functions for itself…Companies have been forced to understand what actually is core to their business, which has turned out to be a much shorter list than they thought pre-COVID-19.”
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“COVID-19 has taught corporations that in many cases, the control they thought they had was an illusion and that their vendors were in a better position to innovate than they themselves were.”
- Steve Strongin, Senior Advisor Goldman Sachs
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The path to a more digital model
As companies strategize how they will participate in XaaS and pivot to a more digital model, here are three considerations.
1. Decide how you generate competitive advantage. Why is it people want to do business with you rather than somebody else? What do you know more about? What do you really know how to do? Standardizing a process and operating it at scale can be a source of competitive advantage. Steve points to Amazon Web Services as a classic economies of scale load balancing system. If designed well, the marginal cost is low as you put more customers on your platform. But if scaling requires many more resources, for example, it will be hard to protect margins. Another advantage can lie in having a deep understanding of a specific area, such as ADP. ADP’s regulatory knowledge in different jurisdictions saves customers from having to understand all of the reporting and withholding rules where they operate.
2. Focus in on customers’ needs and deeply understanding those needs. Leveraging your partner ecosystem is a great way to gather intelligence on customer needs beyond what your organization knows. You can scale your understanding of customer needs as you expand your ecosystem. At the same time, scale your operations through the cloud. And remember, as discussed in a prior blog, it’s about scaling customer value and driving adoption.
3. Be a dream not a nightmare. As companies embark on the innovations that will help them participate in a XaaS business model, there is the very important question of market valuation. This relates to the idea that Wall Street rewards predictability over hope projects, and rarely does the street see both in the same company. Steve explains that’s why being Wall Street's dream presentation, rather than nightmare presentation, will go a long way. Here’s the dream presentation: “I have well-established business. There are new entrants. We realize these new entrants. We have a lab. We have great people in that lab. We are pursuing 30, 40 projects to make sure that we can fight off those new entrants and preserve our market, the ones that work, we're going to fund. The ones that don't work, we're going to kill, but we intend to protect our marketplace.”
Contrast that with the nightmare presentation: “Let me tell you about these three fantastic innovations we have that are better than the ones that are selling at 60 multiples on the outside and how committed we are to fund all of them and how they're going to remake the universe.”
“When Wall Street hears the nightmare speech, they don't hear the remake the universe part,” says Steve. “They think how much money are they going to waste trying to reinvent themselves to something they are not? Big companies’ deep pockets allow them to keep throwing good money after bad projects that don't work. The more they sell the dream, the more money Wall Street sees being wasted.”
My recommendation is to manage your transformation almost as if it were a small startup. You've got to get your seed funding and then hit thresholds. You either make it through the first gate and receive your Series A or, if things don't work, you won’t get any more funding. If anything, an approach like this may give you more valuation credibility the next time you do a presentation to Wall Street because it shows you are innovative but also have fiscal discipline.
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