Why Partners Need To Adopt a Recurring Revenue Model

I have been exploring and driving business models based on recurring revenue all my career. It started with a business in the early 1990s, when we offered a server-as-a-service. That meant we placed a physical server with Novell NetWare (this was before Microsoft was a major player in this area), printing services and e-mail system at the customer's office. We connected to the server remotely for maintenance and support. Occasionally, we had to send for a technician to fix something that couldn't be fixed remotely, like a hard drive that needed replacing or a power supply issue. Essentially, however, we became that customer's IT department and ran the system for them. Everything was included in the fixed monthly cost.

We simplified how to buy and consume a "server and network solution," winning new customers at a great pace because of it. However, we were three young owners with little experience so, eventually, after a few disagreements, I bought them out and continued on my own.

Fast forward to the new millennium, when I was leading the transformation of a midsized Scandinavian Microsoft partner from selling hours to selling managed and hosting services. We started with a service desk, firewalls-as-a-service and various server monitoring solutions. After a couple of years, we built our own datacenter and started to offer hosting services to both existing and new customers. Everything circled around Microsoft's technologies. With several millions of users all over the globe, I made an exit in 2016.

A few smaller exits later, and guess what? The preferred business model is still recurring revenue.

Recurring revenue business models have always been my passion and I often advise Microsoft partners about how to make this transformation. In today's marketplace, customers love to buy subscription-based services, so that's what partners should offer. Instead of constantly having to find new customers and new projects, you can spend your organization's time on improving your services and exceeding expectations so your customers are happy and make referrals. Happy customers are the best salesforce you can ever dream about, so make sure to measure customer satisfaction so you know where you stand and what to improve. Customer satisfaction should be the most important KPI in your company.

Partners that provide a service that brings great customer satisfaction can afford to be bold and waive the traditional lock-in with long contract terms, and instead allow their customers to cancel at any time. The usual one-year or multiyear agreements in B2B is only for the weaker partners that don't trust their own services. After all, you serve at the pleasure of your customers.

So what should you offer? Look at your existing services and see if any of them can be transformed into "as-a-service" product. Some typical recurring-revenue services are:

• Monitoring something, together with incident management
• Updating services for infrastructure or applications
• Private or public cloud capacity services (often the same as traditional hosting)
• Subscription to an application without hosting
• Subscription to an application with hosting (SaaS)
• Cybersecurity services of many kinds
• Firewall-as-a-service, physical or virtual
• Desktop-as-a-service, physical or virtual
• Printer-as-a-service
• Compliance-as-a-service
• AI Agents-as-a-service

Always consider your portfolio as subject for evaluation so that you discontinue what's not working and experiment instead with new services that might be useful for your customers. In fact, I encourage you to experiment and involve your existing customers in the evaluation process. Consider a mix of services produced in-house, then add services that you resell from other partners. Core services are ideally produced in-house, but complementary services can be sourced from other partners that you trust.

Recurring revenue services shouldn't be about high margins; they're about creating large volume and efficiencies so your customers stay forever. High margins create tensions and smart customers avoid overpaying in the long run. Microsoft has always opted for volume over charging customers a premium and selling in small numbers, so you should do the same.

Make sure that your services are affordable and that the business-case calculations that your customer makes are easy for you to win. One secret to success is to have standardized offerings and implement an industrialized approach in your delivery. A standardized offering, like an SKU, means that you will deliver your services with a predetermined quality and efficiencies of scale means that you can work on improving your production cost.

If you customize your services and go for bespoke offerings, you will lose the ability to grow and maintain a healthy margin. Quality enforcement will also be hard, your support people will have problems handling bespoke versions of your services, and your customers might have problems upgrading to your latest and greatest version. Sometimes there's a need for light customization, but make sure you do it outside the core of the service so it's a layer on top and not part of your actual SKU.

If you have built a successful recurring-revenue business, make sure you constantly improve it so your customers can expect to receive even better service over time. Build roadmaps of your services and invest in constantly adding improvements.

Building a healthy recurring revenue business will over time transform your bottom-line profits, and cash-flow problems will be a thing of the past. Not only will your shareholders, management and employees appreciate this, but it also means that the multiples used when calculating your Enterprise Value (EV) will so much higher than when you had a traditional business. This is good not only if you ever want to sell, but also when you make acquisitions as you can pay with your premium-priced shares, making M&A easier and protecting the dilution of your own shares.

If this all sounds too simple, it shouldn't be that complicated -- just remember that this transformation will not happen overnight. The transformation starts with a strategic decision, perhaps a little bit of experimentation, and then it will happen gradually, month-by-month. Your existing salespeople might be hard to convince; in my experience, you may need to add a few more who are laser-focused on your new portfolio of subscriptions. Most partners that embark on this journey will increase their investments in marketing and take a more modern approach, enabling them to deliver more and better qualified leads. Often, they'll redirect funding from the sales department to the marketing department to support this motion.

We live in a world that loves subscriptions. By moving toward recurring revenue services, you'll be in better shape to become a winner in the marketplace. Good luck and please let me know how it goes!

Posted by Per Werngren on January 14, 2025