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The mass migration of software developers from perpetual licensing to subscription licensing models has allowed quite a few CFOs to enrich their strategy credentials in recent years. It’s a movement that has allowed finance chiefs to rebrand themselves as champions of change, and one that has helped to dismiss the image of CFOs being the C-suite’s most dependable naysayers.
Nevertheless, saying “no” to a migratory deadline is what CFO William Edmondson counts as one of his career’s most memorable finance strategic moments.
As CFO of 1E—a UK-based IT software and services company—and like other top officers, Edmondson nurtured a sense of urgency for the adoption of the new licensing model but at the same time remained wary of mandatory deadlines.
“Just as I had finally gotten reasonably comfortable with the fact that we were ready to do it—just as we were going to go ‘live’—there was a bit of a downturn in the business and I actually said ‘No, we have to pull it.’ Even though it was the right strategic thing to do, I said, ‘No’—there was just too much risk.”
Having spent the previous six months helping reset the mind-set of the organization, Edmondson recalibrated his approach and briefed the company’s board—this time as not only as a champion of change, but also as a regulator of risk.
“Typically, under a subscription license, in year one you would get between 30% and 50% of the value that you would get under a perpetual license, whereas over a period of three to five years, a business can earn a lot more than it would under perpetual—but when you make this transition, there is always a working capital crunch,” explains Edmondson, who says that 1E ultimately pulled the trigger on the adoption nine months later, after the company had put in place a “standby” credit facility. “That way, if things didn’t pan out in the way that we expected them to, we would have the additional line of credit as insurance,” recalls Edmondson, who gives kudos to 1E for completing the migration within only two years—a journey that he says takes most organizations three to five years. –Jack Sweeney jb
Guest: William Edmondson
CFOTL: Tell us how your view of the business has evolved as a finance leader …
Edmondson: About two and a half years ago, we started to transition from a perpetual licensing model, where all of the license fees are paid up front in a big chunk and then there’s a much smaller ongoing maintenance cost for the out years. We transitioned from that to a subscription licensing model, where you effectively charge the same amount—or hopefully a little bit more—year after year. The transition has really transformed our business in terms of visibility and our ability to deliver consistent year-over-year growth. As a result of this change, there are effectively just three key metrics that I’m concerned about.
One is annual recurring revenue, which is looking at the run rate at any point in time. For example, you would take September 2019’s monthly recurring revenue and multiply it by 12, and this would give you a view of what your current run rate was. That’s the first thing.
The second thing is our subscription renewal rates. There’s little point in selling a new subscription and then losing it the following year. Our whole ethos and strategy is to get those customers to renew, and we’re lucky because we have great technology and great customer care. We have renew rates of over 90%. That’s an absolutely critical number. It’s a bit like if you imagine a bucket that you’ve got. You’ve got the new subscription business coming into the top, but you’ve also got some leakage out of the bottom when customers don’t renew. What I focus on very much is how to reduce that leakage out of the bottom. How do we plug those gaps and plug those holes?
The third metric that I look at is the new business coming into the top—the new subscription contracts signed—because clearly this, over time, is going to add to all of our annual recurring revenue. These are the three key metrics that I look at. jb