How IOT companies can reduce “Cash Burn”

In its recent publication, Technology-as-a-Service Playbook, the Technology Industry Services Association coined a phrase, “Swallowing the Fish”. This refers to the front-end costs being eaten up by technology companies as they invest in selling technology as a service, rather than their traditional sales of technology as an asset.

Being subscription based, it might first appear that Technology as a Service follows the same business model as SaaS. Rapidly signing up subscribers, and often, is the number one focus for both SaaS and TaaS providers. And just like SaaS, the financial success of TaaS relies on providing a scalable, repeatable solution in any location. The similarity ends there, however.

Unlike the SaaS model, Technology as a Service is struggling to find the balance between expenditure and revenue. As well as the typical investment in product design, development, testing and sales that SaaS goes through, TaaS providers have the additional costs of storage, installation and maintenance to recover. With a much bigger fish to swallow therefore, recovery of costs to the extent that a profit is being turned is proving elusive.

Nowhere is this more acute than in the IoT market. Minimising cash burn is critical to the success of any venture, not least IoT companies. But as it’s early days for IoT, the business models have yet to prove themselves, leaving them reliant on investor backing.

 

At a conservative estimate, the costs of hardware manufacture, storage and installation of IoT devices, whether they be single-purpose or complex multi-purpose devices, comprise a minimum 20-30% of contract value, despite the volume of subscriptions being still relatively low. And although routine servicing is easy to predict from a cost and time perspective, unexpected maintenance can further escalate costs and disrupt cash flow. Consequently, it can be many, many months before IoT devices begin to recover their costs, both from a classical accounting perspective and, more importantly for IoT businesses, from a cash flow point of view. And all the while, the cash keeps burning.

Fortunately IoT providers no longer have to accept that burning cash is their only option. Rather than living with the high upfront costs of landing customers and adapting the technology to theirs, while waiting for profits to roll in down the track, IoTs now have the opportunity to recover costs more quickly.

The Parallel Cost Model, developed by specialist field services business BEST Technology Services, is the alternative to swallowing the fish. BEST has used its intrinsic knowledge of the revenue and profit challenges IoT companies are dealing with to introduce an innovative, higher value, end-to-end supply chain model that uniquely mirrors IoT providers’ own commercial models.

The beauty of the Parallel Cost Model is that it balances revenue and costs, and generates profits, from day one in parallel with IoT providers’ expenditure models. More than this, however, the model absorbs the end-to-end supply chain costs of inventory, installation and logistics into a monthly fee. IoT providers are able to free up the funding that is so valuable to their first and second rounds of investment into the development and scaling of their IoT model.

For the Parallel Cost Model to succeed, it is not enough for an IoT provider to choose a field services partner for specific parts of their supply chain. Indeed, IoT providers know that this usually eats up their long-awaited profits. Rather, your field services partner must be capable of delivering the complete supply chain. And they must be truly committed to your business; they need to be aligned to your strategic goals and understand just how precious cash is to your business.

With this framework in place, the Parallel Cost Model brings an immediately cost effective solution. It relieves the tension between expenditure and revenue, finally making profits viable and eliminating the need to swallow up that fish.

 

BEST Technology Services welcomes your thoughts and comments. To discuss any of the commentary in this article, contact John McVicker. For more on how Best Technology Services’ field services capability can support your outsourcing, go to www.best-ts.com.au.

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