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Most CFOs have already addressed the obvious question of 'should I invest in technology?', with 73% of CFOs anticipating an overall increase in tech spend in the coming year. The next important question is the more complicated 'what technology should I invest in?'
Let’s start with definitions. Horizontal Software, as the name implies, provides a wide set of generic solutions that are relevant for many types of customers. In contrast, a Vertical Software is built for a specific industry, customer type or use case.
Today, Finance leaders have much more vertical software options to choose from. Traditional finance systems are, slowly but surely, getting unbundled by vertical solutions companies that win market share by offering solutions that cater to a specific segment or size.
A great case study is the Corporate Spend category. Once upon a time, there was nothing between Bill and Coupa, meaning, mid market companies were stuck between SMB to Enterprise solutions. Ramp and others wooshed in by offering a consumer-grade UX/UI, with Enterprise capabilities, and low implementation barriers. Although ERP systems offer spend solutions, companies chose to buy this product separate from the ERP platform, due to a specialized product with superb UX//UI.
"it’s not an either-or thing. Vertical software will live in peace side by side with Horizontal platforms. Great horizontal solutions are market leaders and will probably not go away anytime soon"
Of course, it’s not an either-or thing. Vertical software will live in peace side by side with Horizontal platforms. Great horizontal solutions are market leaders and will probably not go away anytime soon. Salesforce and NetSuite are great examples for cornerstone software in the organization. They allow customization and can answer the needs of many industries and many company sizes. They can do that due to their generic nature - the processes and data they handle apply to a huge chunk of the market.
We like the solar system analogy - some horizontal platforms are ‘sun systems’ which connect to the vertical solutions, the ‘planet systems’. When thinking about making a software purchase, this framework helps.
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To help you make an informed decision, let's explore the differences between Vertical and Horizontal Billing.
First, let’s take a look at the Billing category evolution. Generation 1.0 brought billing online, by digitizing the process. Generation 2.0, added logic, these would be your subscription management systems like Zuora. Generation 3.0 is the vertical phase, where the billing system will be more industry specific. In parallel, competitive pressures and capital investment surge, and changing customer taste, brought forth product consolidation. No longer do customers have tolerance for point solutions. Usage Billing, Invoicing, Revenue Recognition, all these will come native in one system, not over multiple solutions.
"Generation 1.0 brought billing online,generation 2.0, added logic, e.g subscription management systems. Generation 3.0 is the vertical phase"
A good litmus test for where some companies might have a need for a Vertical Billing solution is when your company is at a Build vs Buy decision. We find that companies that think about investing huge resources into building back-office systems, usually gave up on finding a system that fits their needs. Vertical areas, such as billing, have been less competitive historically, since they had a false perception of being small. This left companies with a necessity to build bespoke solutions, or stick with manual work at scale (we see this more often than you might think).
Current Billing solutions come in two main buckets, horizontal and vertical. Your horizontal billing will include billing capabilities embedded with ERP and Accounting systems such as Xero, Quickbooks and Netsuite. They’ll be fine for young companies, or for companies with rudimentary needs. The Vertical bucket is a growing one. The most prominent companies in this category are the Subscription Management systems, which are primarily built, well, for subscriptions. B2C business or exclusively Self-Serve companies will probably do fine with these systems which are built around the automatic subscription. Now, there is an emergence of new entrants that tackle an industry or a company type. We at Received, for example, believe that the market is missing a great billing and revenue management system for pure B2B, with a Sales Led motion, or a mix of Sales Led and Self-Serve.
So, how do you know what’s right for you? Here is a checklist of questions you might want to ask yourself:
We always say that the reason why billing is becoming much more verticalized, is that the products and services you sell, shape how your billing processes look like. Think about the differences between inventory vs non-inventory; b2c vs b2b; a marketplace vs direct sales, and so on. Ask yourself two questions: a) will an ERP/Accounting be enough for your use case? b) if the answer is no, what billing system really builds for your use cases. You can’t force feed a B2B Sales led billing to a Subscription Management billing, it just doesn’t work. This is crucially important since your business has a logic, and you want a system that understands that logic as good as you do, builds objects and workflows for that logic, and integrates to other systems especially CRM and ERP) in a way that makes sense for that logic.
Ask yourself how much data is crucial for your billing process. In case you almost don’t need data to bill, let’s say with a linear recurring subscription, a horizontal system might be just fine. Data complexity usually comes with Usage pricing, but not necessarily. It can also apply when you need to account for service hours, or implementation timelines, or active account data.
In case you're a data edge case, say 3% of the market, where there are immense data complexities, you might need a billing system as well as a usage solution on top. We find that the vast majority of the market has data needs that can be answered by one unified system. In any case, once data becomes critical to the billing process, it’s time to look at vertical solutions.
There is definitely too soon for adopting a billing system. In other words, if you have 5 customers, you’ll probably do just fine doing billing manually, with your accounting system or with an augmented spreadsheet. We always find it funny that companies fight the spreadsheet as a default - the spreadsheet is great! We admire it, and even brought it into our system. Your horizontal accounting system will do just fine for your seed stage. Of course, some companies might need a billing system out of the gate (high transaction volume, or pure usage pricing). Investing in implementing a system 6 months before you actually need it, brings advantages of pricing and implementing on your own timeline.
Your Customer and contract structure are very important in deciding on a billing system, probably the most important factor. As we mentioned, Subscription Management tools are built for B2C use cases, where the contracts are consistent. In these Subscription GTM, contracts are unified and non-negotiable. You need to run a fully automated machine that starts with your website and ends with a payment.
For B2B use cases, this is not the case at all. If you have very simple pricing, and you’re not working at scale, for example, your ERP/Accounting might be fine. What we see in B2B Sales Led companies, is the Revenue Spaghetti, a plethora of complexities that come from different pricing schemes and bespoke negotiated contracts. Again, think about who is building for your type of Customers and Contracts, it probably is a world of its own, and you want to work with companies that immerse themselves in your particular world.
We’ve noticed that the issue of Partner billing has remained almost unsolved for. Almost every other B2B company partners with distributors to expand its reach, align synergies with companies in the market, and lower cost of customer acquisition. When you’ve grown enough, this is probably a main customer acquisition channel. If this resonates, horizontal systems will not do a good job in managing those partner dynamics and automation. We think that this is extremely important for B2B Software companies, and we’re working on making this a native part of your Billing system.
The decision ultimately hinges on your company's specific needs. Whether you opt for the broad versatility of Horizontal Software or the tailored precision of Vertical Software, your choice should align with the unique demands of your finance team.
If you feel like you haven’t yet seen a great Billing system for B2B Companies, we invite you to learn more about Received's B2B billing solution.