Important Financial Terms Simplified for Commercial/CPQ Platforms

Important Financial Terms Simplified for Commercial/CPQ Platforms

In today’s market, for each commercial/CPQ projects we work on, we need to show business benefit of such projects. We all know that such calculation of business benefit needs to be clear and transparent, with minimum uncertain assumptions and measurable. Especially for CPQ projects & other commercial projects, it has been a challenging tasks for sure, when the most of the benefits are qualitative in nature, only some are quantifiable. I have seen benefit claims of 10mm/year for a CPQ project, but they did have to lower it to 1mm/year when challenged on the ability of being measurable and quantifiable for the next 3-5 years.

 Now, in most cases, our clients can ‘define’ such benefit, and manage to prove, with reasonable certainty, that we will realize such benefits and we can show such in our pro forma cash flow for next few years, as well as in the balance sheet. However, that alone might not be enough to sway the CFO or the finance leader. Questions will be raised on the timeline of payback, compared value of today or the cost of investment/loan to invest in this project.

Let’s look at the 3 financial terms that we should all use while we evaluate such benefit stories:

1. Payback period: tells us how many years we have to wait to recover the investment, assuming the benefits are measurable and can be claimed in pro forma statements (balance sheet, cash flow form)
2. Net present value (NPV): tells us the present worth of future benefits, extremely helpful in determining which project to invest in
3. Internal rate of return (IRR): tells us the rate of return on investment compared with the rate of borrowing capital (Weighted Average Cost of Capital or WACC)

Payback period: The payback period method simple computes the time required to recoup the initial investment. For example, for a given CPQ/Commercial project, we’d need to invest 1mm over next 3 years, and the project should provide us with 800k/year measurable and verifiable benefit. How many years would it take to get our money back? We get the answer by dividing 1mm by 800k, which is 2 years. In other words, after we go live with this project, benefit $ from the first two years will only contribute to recovering the investment; business will realize incremental benefit after cost is collected, which is after 2 years.

 Net present value (NPV): The net present value (NPV) of an investment discounts all the cash inflows over the life of investment to determine whether they equal or exceed the required investment. If the present value of the inflows less the initial capital outflow is positive, value is added to the firm. Let’s use a scenario for this one, assume that we have to choose one of the two CPQ/Commercial Platforms, Platform A and Platform B.

For Platform A, it’ll cost us 500k initially, then it will give us yearly benefit of 400k for the next 3 years. If the current market discount rate is 10%, we can break up the scenario like this:

CPQ: Integral Part of Commercial Digital Thread

CPQ or Configure, Price and Quote tools are mostly cloud-based platforms to enable the business automate their commercial activities like responding to customer inquiries and RFPs. The success of such CPQ platforms depends a lot on the Functional Leaders who can ensure these platforms meet business need and deliver business requirements as well as on the business sponsors for long-term sustainment. The most common benefits of rolling out & sustaining a CPQ platform include:

1. Productivity savings (Shorter cycle time, commercial throughput increase etc., less keystrokes/quote)
2. Improved winning ratio (more purchase orders, more closed deals)
3. Quality of our proposals/documents (configuration accuracy, pricing integrity, marketing materials etc.)
4. More revenue (may not be directly, but definite impact on revenue)

Now, with all the benefits of a CPQ, big question comes up is that where does CPQ fit in the world of Commercial Digital Thread?

CPQ belongs to the Supply Chain Network of digital thread. CPQ is an integral part of digital thread, for:

1. CPQ enables the digital data transfer between CRM (Or Customer network) & CPQ, CPQ & ERP and CPQ & Analytics engines; eliminating duplication of data entry, improving accuracy of data and taking advantage of existing digitized platforms
2. CPQ streamlines the configuration & pricing across the globe, and can tap into Industrial Internet to make the digital thread even more robust
3. CPQ standardizes proposal (customer facing document) & contract management (may need different platform integration) across the globe, while keeping the sales forecasting always up to date

However, the success of CPQ platform’s ability to deliver fully digital commercial systems depends on several factors:

1. Getting the right CPQ platform to meet specific business need (key for CPQ success itself)
2. Integrating the CPQ with all other digital platforms (key for digital thread success)
3. Design the digital thread with CPQ in it (key for enterprises’ digital journey)

As we move more and more towards industrial internet, value of data transfer digitally is crucial for our success and CPQ can help us out for sure!

CPQ Success Factors-Infographics

CPQ Platforms: Configure, Price & Quotation platforms designed to help Sales & Commercial Teams with quotations and proposal generation.

When so many CPQ implementations are facing adoption challenges, we have achieved big success in not only deploying CPQ, but also proving to the business that CPQ actually delivers the benefits. Here are the factors which helped us with achieving success in CPQ projects.

CPQ and Big Data

While working on my MBA for Business Analytics Leadership, I’ve come across a lot of analytics and big data stuff, platforms (Knime, Tableau….), business analysis etc. CPQ, when used properly, can also help with the business analytics and here’s how.