It won’t be long before smart devices are as ubiquitous as smartphones are today. Wearables and home appliances like Nest’s smart thermostat have already taken off with consumers.
Companies like Google, Facebook, and Microsoft are all feverishly working on virtual or augmented reality headsets that promise to upend how we interact with technology — and that’s to say nothing of the wave of IoT-centric startups that have emerged over the past year-plus.
Soon IoT will be so widespread that businesses will adopt entirely new approaches that better capitalize on its potential. That will require CFOs to be prepared to support entirely new monetization strategies and billing models.
Companies are just beginning to explore how to monetize IoT to drive stronger business growth and increase customer satisfaction (and interaction). Yet, we can already see a few common use cases emerging. These include:
Usage-Based Billing: IoT has the potential to profoundly upend how businesses bill customers for products and services.
Traditionally, businesses have sold products and services by billing a one-time fee. IoT disrupts this by enabling companies to see how much and how often a product or service is being used by a customer. As a result, companies can bill by usage. The benefit lies in the recurring revenue stream.
A secondary benefit, data-driven usage monitoring, helps companies better predict product failure and induces them to replace outdated solutions. Rather than waiting for an issue to arise, IoT can help companies better predict and preempt them. GE is an early adopter of the usage-based billing model by embracing the “as-a-service” economy, and there’s been a direct correlation between that move and the company’s general stock performance. It’s become an important metric to the GE investors.
Optimized Revenue Streams: One of the greatest benefits of IoT data is its ability to uncover cross-departmental insights that can lead to identifying new revenue streams or optimizing current ones.
For instance, marketers may learn that customers have a greater need for ongoing maintenance. Maintenance service can then be productized and offered on a recurring basis. For finance, this introduces new billing models but also demands new methods for recognizing revenue. With optimized revenue streams, a CFO can further establish strategic guidance and the tangible impact on the comnpany’s financial well-being.
Customer-Driven Business Decisions: When recurring or usage-based billing is present, customer satisfaction quickly becomes a precursor for financial health. A compelling IoT use case improves the customer experience and drives engagement. This in turn creates more loyal (and financially stable) customers — something any company can get behind.
Service businesses, for example, can use smart devices to bolster their customer support. Knowing more about your customer might change how you service customers or inform how you interact with individual users. With ongoing, high-quality customer care, finance can rest easily that revenue streams will come in as forecasted. Without it, a major customer issue could cause you to fall short of stakeholder expectations.
Despite the many potential benefits, IoT has been embraced as a digital business strategy only by a group of early innovators. Companies often find themselves running into the same stumbling blocks.
Hype does not equate to strategy; tie it back to measurable business goals. The hype of IoT can be very attractive, but success will depend on integrating new technology with a clear, customer-driven strategy.
This is similar to the craze of social collaboration five years ago. Some companies jumped into social tools for business without determining how it could benefit their core business processes and struggled to see a return on their investment. IoT could be the same story. It’s true value will arise when it supports a measurable business goal. A new technology is not a strategy on its own; it must serve a larger customer strategy.
Failing to convert IoT data into actionable data. IoT also introduces a core technology challenge because it inherently generates massive volumes of data that that traditional systems were not built to handle. Finance teams need new big data technologies to make sense of this — tools with which many CFOs and IT departments have little or no experience.
So how can finance find the time to understand and implement these new technologies and the business models they enable? The key is to embrace technology that automates laborious, manual tasks so that finance teams have the time to focus on strategic initiatives.
In the future, all finance teams will have real-time data at their fingertips to make more accurate, strategic decisions for the business. They will also be able to break down silos between departments, further transforming finance into the foundation for any business strategy.
Accounting standard change, so be flexible. Companies must also be aware of how accounting standards may now apply when a business adopts a recurring revenue or usage-based billing model.
Recurring models are distinct from one-off product sales and can easily become complex for finance teams. For instance, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued new accounting guidelines in 2014-15 for recognizing recurring revenue, but many companies don’t have the tools in place to handle them and quite a few aren’t aware of the changes.
Nearly half of companies don’t believe they fall under any of the new GAAP revenue recognition guidelines, according to research from The Association of Accountants and Financial Professionals in Business. Yet, two-thirds of that subset said they hadn’t even assessed the new cost-recognition aspects of the new standards. Companies moving into IoT should prepare their finance teams for this transition instead of waiting until it’s too late.
Sometimes IoT feels like the wild west of corporate finance. Nobody knows quite what success looks like. There are, however, some things we can predict about our data-centric future.
There are countless opportunities for companies to use IoT to innovate their products and business model. Successful companies will leverage their finance teams to navigate the complexities. While no one CFO knows exactly how IoT will upend traditional corporate finance, it’s clear there’s no turning back now that it’s here.
John Bonney is chief financial officer of FinancialForce.