Apr 8, 2020 | 9 min read

Conversation with Blaine Mathieu

Podcast #86: Exploring the XaaS Model

Blaine Mathieu has had a long and successful career as a CEO, CMO, and CPO at public and private software and Industrial Internet of Things (IIoT) companies. Most recently, Blaine was the CMO and Chief Product Officer at VANTIQ - a platform for creating the next generation of real-time industrial applications using AI and IoT.  Currently, Mr. Mathieu serves as Partner with the Momenta Partners Advisory practice, helping accelerate the growth of startups and small to medium-sized innovators in Digital Industry. Blaine has been a critical hand in helping drive immense growth in both private software companies and public technology juggernauts – often by helping them optimize or transition to a XaaS business model. 

In our conversation, we discussed companies shifting to a XaaS model - or "Anything" as-a-Service - and how emerging technologies are  enablers of these new models like never before. In addition, we briefly touch on recent use cases for XaaS and how impactful the XaaS model will be as we go forward into our new normal. 

This podcast is essential listening for companies who are looking for insights on growing their  business and exploring new solutions based on a XaaS model. Blaine's extensive experience in digital transformation and  innovative business  models provides a guide on how to build a successful growth strategy for the future. 

 

Recommendations:

B4B by JB Wood

Crossing the Chasm by Geoffrey Moore

Driving Revenue Growth, How to Profit From the New XaaS Model by Blaine Mathieu

 

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Good day, this is Ken Forster, Executive Director of Momenta Partners and Momenta Ventures, with another edition of our Digital Leadership Podcast Series. Today it’s my distinct pleasure to introduce Blaine Mathieu, our newest member of Momenta Partners.

Blaine has help build numerous high growth, high margin, business at CEO, CMO, and Chief Product Officer at both public tech giants private software companies, and industrial IoT startups as well. Based in the San Francisco Bay area he has worked across North America, Europe and Asia. He’s known for his passion for AI, IoT and edge computing, speaking at dozens of global industry events. Today Blaine will speak with us about his experience in helping industrial companies take their products and services digital in XaaS or X-as-a-Service, versus S as a Service, or Software as a Service business model.

Welcome Blaine.

Thanks Ken, I’m really excited to be here, and to help you drive Momenta’s advisory business, really in this case focused on startups, and small to medium size innovators, really cool. And by the way, I’m also a former Gartner analyst from way back, but don’t hold that against me!

As with many of our podcasts there’s a bit of a backstory to our relationship. As you and I did a first edition of this podcast several weeks ago, which was never published, little did you know, or we know at the time that we were probably interviewing each other. And so, as it turns out we liked the podcast so much we hired the guy, or maybe he liked the formatting of the podcast so much he decided to join us. But either way, welcome aboard Blaine it’s great to have you aboard.

Thank you, and I think podcasts as an interview is actually a new methodology, we should get out there in the market, that’s a great idea.

I love it, that is a new normal that’s for sure!

For sure.

So, tell us a little bit about your background and experience which has really shaped your views of digital industry.

Well, it’s really interesting, most recently I was Chief Marketing & Product Officer as you said, at industrial IoT and AI platform company VANTIQ, and VANTIQ’s clients included companies like Francis Total, The China State Grid, The Japanese telecom giant Softbank Corp, and many other. That was really the culmination of almost a decade and a half I guess of working in companies that were trying to push something as a service, and particularly with in VANTIQ’s case Platforms As a Service. Prior to that I was at a company called GoodData which was Big Data Analytics As a Service, and I could really see six or seven years ago that IoT for sure was just finally starting to begin to come into the real world. Of course, the resurgence of AI and machine learning, and that brought me through GoodData to VANTIQ, and fundamentally brought me to Momenta, and the ability to help advise companies how to use those technologies, put them through innovative business models, and take them to the industrial world.

It sounds like an interesting combination to end up at Momenta. Why Momenta?

The thing that really got me excited about Momenta, besides this interview via podcast model that you’ve started, is the digital industry focus that you’ve got. So, most VC firms and advisory firms like Momenta, and I’ll talk more about that in a second, are fairly general in nature, maybe they focus on B2B use cases, or B2C more consumer-oriented use cases. But one thing I really loved about Momenta was this focus on digital industry; its use cases and sectors are on energy, manufacturing, smart spaces, smart cities, supply chain logistics. So, very focused and virtually all the companies we work with utilize some elements of IoT, AI, or perhaps blockchain and probably in many cases a combination of all of those things, and their solutions. So, an industry focus, so the people at Momenta are industry experts and practitioners in those spaces, they’re not generalists, they know the spaces very well.

Then the second thing that I just love about Momenta, was the leverage model between the three practices of Momenta, the Advisory Group which I’m in, The Talent Group, and the Ventures Practice, and certainly in the world of startups, and small to medium size innovators, the leverage between those is very high, because you’ve got an adviser coming in helping to shaped or reframe their strategy, which could very well lead to them requiring then to hire a new senior executive, a  CMO or a CRO, or a Chief Product Officer, or someone else. Then eventually that would help them get funded through the Ventures Practice. So, the leverage between these three practices coming together in one firm is really incredible.

It’s interesting, because our topic today is XaaS, ‘X’ as-a-Service if you will, many people have referred to Momenta as corporate, Dev As a Service in some sense, because of our venture side, on the advisory side we’re doing M&A work, and of course always placing key talent along the way. So, pretty interesting because in many ways Momenta has also gone through this XaaS journey.  For those of you who might not be familiar with the term, what is aaS?

Well XaaS, and as you said, I’m spelling that as XaaS, the X stands for something, or anything, obviously aaS is as-a-Service, I think of this as primarily a business model. Some people confuse XaaS with the technology model, and XaaS fundamentally is enabled by technologies, especially cloud computing, but certainly IoT and other types of new technologies enables XaaS models. But XaaS is a business model, and fundamentally the business model is about enabling you customers to subscribe to the solution, delivered over time. Some people colloquially refer this to this as renting the use of the solution, as opposed to buying it upfront and then owning it yourself and running it yourself.

Now this was popularized initially with SaaS, Software-as-a-Service, Salesforce especially began in 1999 popularizing the concept of Software-as-a-Service. But now the business model’s being widened to include many different types of as a service business.

It’s interesting, one of our startup companies, Mutable, describes themselves as Airbnb for Servers, and this is elastic if you will, computing at the edge. So, it’s a pretty interesting model as you look across how XaaS has interacted with all domains. Give me a sense of the different types of XaaS that are relevant to digital industry, you’ve mentioned Salesforce, so it starts off as a spectrum from there and continues to today.

Yes, certainly XaaS is what most people still think of in technology circles as being an as a service business model. But over the last few years as you’ve said with Mutable, almost every type of technology product is now being delivered as a service. Probably the next most popular category is PaaS, Platforms-as-a-Service, or many be infrastructure Platforms as a Service, we’ve all heard of obviously AWS, Azure, Google platforms, those are offered as a service to their clients. Then you have more niche focus platforms like the VANTIQ platform I was talking about earlier. We’re increasingly seeing in industrial settings, Product-as-a-Service, it could be PRaaS, Product-as-a-Service, GE’s jet engine powered by the hour models, or Machine-as-a-Servicemodels in manufacturing, so we’re starting to see those kinds of models.

Another really interesting category of XaaS is our databased Products-as-a-Service, or Data-as-a-Service. When I was at GoodData working with a lot of large enterprise companies, on what we called Enterprise Data Monetization, taking the corporate exhaust that has put off about all the data they are generating, and I’ll tell you this is really being accelerated by IoT with all the data that IoT devices and sensors are putting off. There’s a tremendous amount of value in that data, and if you can package that data and sell it as a Product-as-a-Service, a Database Product-as-a-Service to your clients, there’s huge value there, and more and more companies are seeing that.

The next level of that is, putting analytics on top of it, Analytics-as-a-Service on top of that data, and then finally, if you want to get really fancy, you could even repackage it as Insights or Intelligence-as-a-Service. So those are some of the different types of as a service business models. There’s one thing that maybe we can get to later if we have time, it’s sort of in a category of its own, but this notion of Outcomes-as-a-Service, but maybe we’ll come to that later, that’s a whole other kettle of fish.

That will be an interesting one to cover, because we hear a lot about outcome-based automation if you will these days, and service models. Why should companies consider adopting or shifting to a XaaS model?

Well like I said earlier, a lot of these new technologies, especially IoT, AI, cloud computing, mobile computing, are really enablers of these new business models in a way that weren’t nearly as possible before. But probably the key reasons businesses should consider it is, first of all we know businesses are trying to shift from in many cases CAPEX to OPEX. As a service business models enable companies, clients, instead of doing a huge investment to capital cos investment up-front, they can put that expense into a gradual operating expense over time.

What that means is, there’s a real alignment in economic value between the seller of the as a service model, and the buyer. So normally the buyer puts a huge investment up front and then they gradually achieve the value from that investment over time, maybe a course of years. But with an as a service business model the buyer pays overtime, and just in line with how they achieve value, so there’s a much greater alignment of that economic value.

Now, from the seller perspective it’s a great model because you have more predictable revenue streams, a lot less lumpy revenue, so many enterprise sale cycles you get a huge revenue hit and then you have long deal cycles, and it may be a long time before you get the next one. With as a service business models, less lumpy predictable revenue streams, as long as you have a good service you stick your customers, and these are fundamentally some of the reasons why public markets in particular, and private buyers as well, value companies that have as a service business models, higher in many cases than those that don’t.

What are some of the key challenges in becoming a XaaS business?

Well, it’s a good question, and I’ve spent a lot of my career working with companies large and small, to either create new XaaS businesses from scratch, which in fact may be easier in some cases than trying to transition an existing business, and we’ll talk about that. We know, Momenta knows very well that we’re often brought in because digital transformation initiatives often have failed frankly, you know that. A transition to something as a service business model is probably one of the most complex digital transformation projects, we think of digital transformation as being about technology, but often as you know, the technology is not the hardest part with all the services and everything that are being provided out there today, it’s about how do you transition the business itself on the business model. So, that is definitely a challenge.

I’ll say to directly answer your question, it is very hard to fundamentally run two different business models at the same time for any company. The organisational motions around as a service models are so different than non-XaaS models. The sales mindset is quite difference, with XaaS it’s about selling an ongoing engagement, maybe landing and expanding over time, whereas the sales motion in a non-XaaS business is to sell these big deals up front, get that massive contract, maybe sell a maintenance agreement on the back end of it, but very different sales mindset. The same with marketing, marketing in a XaaS business becomes more about retention, customer retention and customer growth, becomes if not the main purpose of marketing, equally important to marketing as the initial customer acquisition is, very different mindset.

Then finally I would say customer success is so critical, that function in XaaS businesses. In non-XaaS businesses, customer success, customer support as it used to be called was just often thought of as a cost center, it’s something you have to do to keep your customers. But in as a service business models it’s absolutely critical, because you’re not selling them something, sell it and forget it, you’re selling them an ongoing service which needs to deliver value over time, and that’s fundamentally why most of these organizations have been renamed to Customer Success Organizations, because it’s about the success of the customer over time, with the service that you’re providing over time.

It’s interesting when you talk about the challenges. We’ve finished a digital transformation project for a very large industrial manufacturer, publicly held late last year. The Chief Digital Officer who by the way doesn’t really want to take the title Chief Digital Officer, specifically said, ‘Please don’t talk about our industry As a Service when you’re presenting this. We’re fine about talking of efficiency, and we’re kind of fine about talking about new value lines and new business lines, but we don’t want to cross that line.”

Yet it was interesting, because the questions from the stakeholder audience always came down to, ‘Should we move to XaaS, or X as our service? So, it’s interesting the cultural element of that adoption and moving to that, especially if you’re a large CAPEX manufacturer, as many of these are today.

As we’re recording this, we’re in week two of the COVID lockdown, and both Blaine and I were involved in CEO roundtables over the last couple of days, for our portfolio of companies, i.e. bringing all the CEOs together to discuss best practices around how to survive and thrive during this time. One of the points that did come out is about how relevant these XaaS models are going to be, relative to making a big purchase of a platform up front, versus trying something out now. Especially because the adoption cycles are much more rapid, given the high sense of urgency and need, especially for remote control of applications and such. It’s an interesting very timely topic given the macro environment as well.

Absolutely, absolutely Ken. As we’ve heard over the last week, most of these companies are very happy that their business models have enabled them to get constant steady streams of revenue over time, versus relying on these massive revenue hits, which could very well be delayed right now while everyone is more or less locked down. So, steady constant revenue streams, sticky customers, that’s fundamentally what the XaaS business model is all about.

The flipside of that though, now that you remind me, is there are definitely RevRec issues and especially for public companies obviously, and cash flow issues, because at the same time you have the advantage of that sticky continuous revenue stream. In the old model you were recognizing revenue upfront, and probably also importantly to some companies you were getting most of the cash up front. Now both the RevRec and cashflow comes in over time, and the fact that its steady is good, but the fact that you don’t have it all sitting in your bank up front means that you have to really think through some of your corporate policies in that regard.

Absolutely. So, beyond the items you mentioned earlier, what are some of the additional requirements for successful XaaS, and really thinking around some of the financial models as well?

Well certainly if it’s not obvious by now, you need a deeper than ever understanding of your customer to go to one of these models, because you’re not selling it and forget it, or install – forget. This is an ongoing service you’re providing them, which your certainly continuously changing and enhancing, because you want to keep these customers sticky to make them long term customers. So, understanding their needs is not a onetime thing, it’s a continuous thing, and obviously most XaaS companies frankly are using net promoter scores, and many other tools to understand their customers more deeply.

Along with that is something that again pretty well every corporate as well as startup, is talking about these days, and many are using, its fundamentally about agility about being an agile organization, if not actually using agile scrum methodologies with sprints, short term sprints, to continuously enhance and launch improvements to you XaaS product or solution. If you’ve got a model which is again about architecting big bang releases, or upgrades, or enhancements to your product once a year or once every couple of years, it’s probably not going to be amenable to a XaaS model, you have to be very agile and lean.

At the same time, a failure mode that I have seen with XaaS companies, especially selling into enterprises, with enterprise clients, is being too agile you might say, doing too many releases, constant change, especially large organizations, corporates, especially in digital industry, can only absorb so much change. The pace of change can only be so fast, so there has to be a very good balance there, and that’s why understanding the customer again is absolutely so critical.

And then the final thing I guess I would talk a little bit about is pricing, and pricing model, becomes really interesting in XaaS business models. What you fundamentally have to do is price more than ever before based on the value delivered, not just on some arbitrary factor, but again really trying to understand the customer, understand the value that you’re delivering, and price based on that value, or the outcomes that you’re service is delivering.

Which brings up a great topic. Earlier you mentioned Outcomes as a Service, which is a pretty intriguing term, tell me a bit more about what you mean by that.

It amazes me that more hasn’t been written on this topic, and later I think we’re going to talk about book recommendations. I’m going to recommend a book called B4B written in 2013, which was fundamentally about how to move your non-as a service business toward becoming an as a service business, and then finally toward becoming an Outcomes as a Service business. If you’re interested in this topic, whether you’re a large or small company, I highly recommend you read that book. You mentioned it earlier, and I have to give Momenta credit, obviously nothing to do with me, Momenta’s done a lot of writing on the outcome-based pricing, and outcome-based business models, and as I was researching Momenta and reading through a lot of the past thought-leadership work that you’ve done, and analytics work that you’ve done, it struck me how Momenta has been on the leading edge of thinking around Outcomes As a Service. I’m sure it’s part of the reason I’m here.

So, fundamentally what the concept is, is instead of just paying to rent the product or the solution, over time as a service, which is what we’ve been talking about fundamentally, with Outcomes As a Service you pay for the outcomes of that product or service over time. You pay not for the solution itself; it’s not about renting the solution on a monthly basis, it’s about renting whatever the outcomes of that service are, and fundamentally what you pay for in the pricing model has to be based on those outcomes.

So, let me give you an example, a simple example that I think can all resonate with us. Let’s take healthcare, in a non-XaaS world which is where most of us are today with healthcare, you pay for doctors or medicine as you need them, maybe assisted by an insurance plan, but you sort of pay as you go with the help of insurance hopefully. The XaaS version of that model is, think of it as similar to belonging to an HMO, where you have minimal to no co-pays or other costs, you’re getting Healthcare As a Service for your $1,000 or $3,000 a month, you’re getting the Healthcare As a Service on a continuous basis, that’s the As a Service Healthcare Model.

Outcomes As a Service is increasingly being talked about where instead of paying a provider just to provide healthcare services, imagine if you could pay the provider based on your overall health quality. In fact, imagine that as your health quality declines, perhaps adjusted for age factors, the amount you pay might go down. As your health quality increases the amount you pay would go up over time. So, you’re actually paying for Healthcare Outcomes As a Service, that would be an Outcomes As a Service model in the healthcare space.

Probably a losing proposition of the world of COVID.

It’s a really-really good point yeah. There could be external shocks to the business model, and that again is actually a very valid point, because obviously COVID is an exceptional situation. But as you’re thinking through these business models and the pricing models, even regular as a service models, let alone Outcomes as a Service models, you definitely need to think through externalities and those kinds of factors, because they can have a material impact on business. It doesn’t mean you shouldn’t be doing them, because the benefits of these models as we’ve discussed a little bit, are very strong but you have to think through the possibilities.

Now, maybe to bring it to our space industrially, I can talk about a more industrial example. Let’s take electricity grid management and power management, suppose in the non-XaaS world a supplier or a group of suppliers sells hardware, and now increasingly software solutions for electrical grid management, and maybe there’s some annual Pay as You Go, or maintenance fees attached with that, there’s a huge upfront cost. The XaaS version of that is a vendor renting that complete solution to the utility, now fundamentally though the solution is still run and optimized by the utility itself, they’re just renting the infrastructure and the software and hardware, then again probably for multiple vendors in order to run that system.

Now think about what that can mean in an Outcomes as a Service model, instead of paying for the system or the solution over time, the utility might pay a turnkey supplier for the megawatt hours produced. They don’t really care how the system is run, they’re probably not even running it themselves, they’re paying for the outcomes. An extension of that might be the utility pays the supplier, maybe the rate would be based on a shift to renewable megawatt hours over time, which is a public policy initiative that is being pushed by the government, so maybe the rate that they pay perhaps could vary based on again renewable power that is being generated, or of a shift of a renewable over time, that would be an outcome-based business model attached to the production of electricity.

It makes a lot of sense. It reminds me of course of good old Rolls Royce back at the beginning of the decade, and the power by the hour model that they pushed very heavily at the time. Are there examples when it comes to manufacturing?

Yeah, it will absolutely. In fact, we’re seeing some of this even in the Momenta portfolio companies, being able to rent turnkey solutions for running manufacturing lines, or in many cases running certain elements of the manufacturing process, we’re not see so much a complete end-to-end systems yet but promoting some of those solutions as outcome-based services. For example, basing the pricing model on operating margins of that manufacturing line over time, so the goal is to achieve a certain level of output at a certain operating margin, and the price that is fundamentally paid, varies with the operation margins that are being delivered. We’re starting to see some of that.

It sounds like great benefits in terms of moving to Outcome as a Service, and certainly both from the supplier and from the end-users of these systems. Do you have any final tips for companies considering XaaS models?

Well, yeah, a few of them I’ve touched on. As you can imagine, it can be very difficult to pilot a business model. You can pilot a technology, and many of Momenta’s clients are doing many digital transformation initiatives, and they’re running pilots and POCs. It’s very hard to pilot a business model but especially for a large corporate, consider launching your as a service business model, as an internal service first before going outside, and many large organizations actually have the accounting models to be able to sell services to other parts of the organization. So, whilst it can be hard to pilot externally you can even do an internal pilot of this business model, before doing an external launch.

Another tip for as a service model is, I didn’t mention it earlier, but another benefit of as a service is over time margins can be very high, because you’re delivering the service repeatedly hopefully to many customers, and margins can be increased, versus doing these one-off big-bang implementations. But that only works if you standardized the offering as much as possible, so go in with the mentality that yes, the first couple of implementations you’re going to learn a lot, they may be semi-custom systems, but the fundamental goal is to create a standardized repeatable something as a service that you can push out to numerous clients. That will drive the margins that you’re looking to get out of this thing, and the growth.

I’ve also seen having done this a number of times now in companies large and small, always assume the learning curve is going to be steeper than you think. The runway is going to take longer than you think it’s going to take to get there, because you don’t even know what you don’t know at this point in time. Obviously companies like Momenta can help because we’ve been down this road many-many times, but you are going to learn new things especially as you get closer to your customers than ever before, and so you need the runway to be able to ultimately achieve the goals.

In many cases I’ve found a success mode is when you have a separate business unit, with a clear mandate around XaaS. As I said before, it’s very challenging to be running two very different business models in the same business unit; in the company is fine, but in the same BU very-very difficult because so many aspects of running this business are different. So, separate them out, have super-strong executive commitment to the effort, because the pay-off is big, but the journey can be challenging.

Then I guess the final thought on tips and tricks is, and we’ve heard this before but, ‘Culture eats strategy for breakfast’. What I mean by that is, a business model is great, digital transformation again we’re all experiencing that right now, but in many cases, it boils down to the ability and willingness of your people to execute against that model. I had a really interesting discussion, I was actually hosting a panel of the largest airlines in the US, talking about their implementation of some of these new technologies and models. There was really a lot of enthusiasm for the power by the hour models, the field service as service models that are being brought to the airline industry, enabled by a lot of these new technologies. But the biggest stumbling block they’ve had so far is around the acceptance of their employees, of the people in the airline to use these new services, use the new databased real-time technologies that are coming out. That’s the big challenge, it’s not even a business model challenge, or a technology challenge, it’s a people challenge. So, you have to think about those efforts as well.

Yeah, well said. One of our former clients was a large manufacturer of jet engines, and of course they were being able to monitor these remotely as part of their offering. What they started to do with the analytics is be able to cross-reference the performance, and thus life of the engines to specific pilots. You can imagine how that went over with the union organization representing those pilots! So, there are many different ways that you can create value and disruption in these models.

Absolutely. The thing that I would just ask large corporates and industrials to think about is, again it’s not a coincidence that almost I think virtually all of the thirty or so Momenta portfolio companies, these startups and small to medium size innovators that Momenta has invested in, are using something as service models today. There must be a reason for that, there clearly is a reason, I think it’s inevitable that that business model will be taking over a lot of how we provide services and solutions to the industry. I know we were talking earlier about cite machine, which is modelling analytics for Manufacturing as a Service, RevTwo with Field Service as a Service, I talked about that a little earlier in the context of airlines. So, again it’s not a coincidence, there must be a reason that virtually all new tech companies with the transformative, in some cases disruptive technologies, are running as service business models, and I think that’s why the large corporates need to really figure out how to get with that as well.

Well said. It certainly is descriptive of our investment thesis, which probably biases that set as well!

No doubt!

Yes. You mentioned earlier an interesting book B4B, do you have any other relevant books, or other materials you might recommend for the listening audience?

Absolutely, B4B by JB Wood, it’s a 2013 book, you can get it on Amazon, highly recommended if this topic is interesting to you, and as I say, it takes you through the full journey of what it means to be a none as a service business, sort of where many business models are today, through something as a service, and then all the way to Outcomes As a Service. It creates a road map for you, I use it in my consulting work as a great guide to help clients think through these transitions.

Another one is an oldie but still a goodie, Crossing the Chasm, by Geoffrey Moore. I know many people certainly in the startup role have read it, everybody has read it at one point or another. Everybody’s read it once, and what I find is you literally have to, and should be, re-reading that book every couple of years, or certainly every time you do a significant, or are thinking about doing a significant business model transition, because it’s not only about the early market, and how you transition to later more mainstream markets, but it actually helps walk you through every stage of that transition, and transitioning to an As a Service model is a critical business model transition. So, highly recommend, re-read if you’ve already read it, Crossing the Chasm by Geoffrey Moore.

Finally, I actually wrote an e-book on Driving Revenue Growth, How to Profit from the new XaaS Model, a few years ago. It contains a lot of the content that we’ve been talking about today. I think I probably will release an update via Momenta here in the not too distant future, but if you’re hungering to get some of this content right now, check it out, and I know there’ll be a link to it in the posting for this podcast.

Thank you very much Blaine, it’s been a real pleasure.

This has been Blaine Mathieu, our advisory partner with Momenta Partners, and welcome again officially, and thank you so much for the time. We look forward to continuing the conversation at Digital Leadership Podcast Series. Thank you very much.

Absolutely. Thank you, Ken, it was a lot of fun and I’m very glad to be here.

 

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