Surge in as-a-service models set to generate strong revenue growth beyond tech sector

• 66% of companies surveyed believe their valuation will increase by 50% if they transition to anything-as-a-service (XaaS)
• 54% say they are now ready to adopt XaaS models
• Nearly a quarter (21%) expect to generate more than US$1b in revenue by 2027

Businesses’ readiness to adopt anything-as-a-service1 (XaaS) models has risen dramatically since the onset of the COVID-19 pandemic, with the technology sector leading the way and others gaining momentum. While today only 9% of surveyed businesses have completed XaaS transformations, most (85%) are at the progress stage – either piloting or operating at scale. This is according to EY report, As-a-Service Business Operations & Transformation: When customers change the way they buy, should you change the way you sell?, which surveyed 1,200 organizations to gauge adoption trends of XaaS across industries, updating EY research conducted in 2019.

More than half (54%) of responding businesses are prepared to adopt XaaS today, while the number of businesses that are not yet ready has fallen sharply – from 13% in 2019 to just 2%. This is underpinned by overwhelming optimism around the financial impact of XaaS: 67% of respondents say the upside over the next three years will generate US$100s of millions, and 21% expect to generate more than US$1b. Further, 66% believe their valuation will increase by 50% if they transition to XaaS. Overall, the proportion of businesses generating more than 80% of revenues from XaaS is expected to grow, from 3% now to 19% in three to five years.

Ken Englund, EY Americas Industry Markets Leader, TMT, says:

“By the end of 2Q20, XaaS was significantly outperforming product revenues on a broad basis. It’s little surprise, therefore, that a growing number of organizations are now planning to shift most of their portfolios to XaaS offerings so they can add software and artificial intelligence capabilities that help build smart-connected products and services, expand markets and develop new ways to monetize data and algorithms. Most adopters tell us that XaaS has helped generate new value propositions, business models, and products and services – and that it has even transformed how they interact with their customers.”

The seismic shift toward XaaS is being led by three technology sectors: software vendors, platform providers and digital services. Across these core sectors, 16% of respondents say they are “extremely ready” for the shift to XaaS, while this falls to 5% for other sectors. Beyond the more traditional technology businesses, there are a number of sectors that are set to define a second wave of XaaS migration: among them, life sciences/health care (third position) and automotive manufacturers (fourth position) rank in the top five sectors where companies have completed their XaaS transformation.

Migration to consumption models and outcomes pricing

With the market maturing at such pace, businesses are increasingly migrating from basic subscriptions to consumption-based models and outcomes pricing. While 60% of all organizations surveyed are currently using subscription models to charge for XaaS offerings, 52% intend to shift to consumption models in the next three to five years – driven largely by the appeal of a more predictable revenue stream.

This evolution has led to a shift in priorities for businesses across industries. In 2019, the leading challenges to XaaS transformation were communicating the value proposition and defining solutions. Today, the biggest hurdles relate to building integrated product strategies and taking XaaS offerings to market – including defining the route to market, training and incentivizing sales teams, and marketing XaaS offerings to different segments.

Staying ahead of changing consumer behaviors

As companies shift from traditional subscription pricing toward usage-based models (69% of respondents), they are seeking to better align with modern buying behaviors and the value delivered by their products.

Michael Kanazawa, EY Global Innovation Realized Leader and EY Americas Consulting Growth Strategy Leader, says:

“Businesses are shifting toward consumption-based pricing because it offers agility, affordability and minimal capital commitment – in turn translating into scalable profitability. The business models are evolving even further as companies combine their subscription services with consumption-based pricing, helping customers to extend or enhance offerings as needed. These new blended models can require innovation to value propositions, product designs, as well as the need to transform commercialization approaches and back-end capabilities. A main takeaway point from this year’s research is that these XaaS models are moving toward the mainstream, and as they scale, they are driving the need for transformational changes across the enterprise.”

In order to succeed in operating XaaS models, the survey finds that go-to-market enablement (46%), billing and payments (44%), and finance and accounting (42%) are the top three processes that require significant or large transformation. Further steps being taken to prepare for XaaS include setting up customer success functions to drive adoption and expansion of XaaS models (undertaken by 86% of organizations surveyed), while 35% have set up a new legal entity or tax structures in order to support their transformation programs.

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