Understanding the Quote-to-Cash Process for Enterprise SaaS

By Eric Mersch

What is Quote-to-Cash?

Quote-to-Cash (Q2C) refers to the entire lifecycle of a deal. It begins by providing a prospect with an initial quote and ends upon receipt of payment.

Q2C requires cross-department collaboration to ensure the success of the company’s go-to-market (GTM) success. Chief Financial Officers must understand the full lifecycle process to be a true business partner to the CEO and executive team.

The Q2C Process: Configure, Price, Quote

In the world of SaaS, the Q2C process starts with a prospective customer requesting a quote on the software offering. This request kicks off a set of steps called Configure-Price-Quote, or CPQ.

While the CPQ process is managed by the Chief Revenue Officer (CRO), I recommend that Chief Financial Officers (CFOs) understand the process in depth. Through this understanding, the CRO and the CFO will build the relationship that is so critical to the company’s GTM success.

Here’s what CPQ means:

Configure 

The proposed configuration lists all software and services prospective customers want.

The process of developing the specific software configuration to meet prospective customers’ needs involves several sales team members.

The Account Executive (AE) has already worked with the prospect to determine the pain point that needs to be addressed and is responsible for managing the account relationship.

The Sales Engineer (SE) supports the AE by managing software functionality, pre-built customizations, and leveraging available integrations with other systems.  The AE brings the SE to demo the software and answer specific technical questions. An engineering team member often gets involved to answer more profound technical questions.

Together, this team develops the software configuration for the prospect. This work could be as simple as determining the number of end users using the software. It could also be more technically complex and involve planning many integrations. The prospect may need additional software, such as an onboarding module or other specific capabilities.

Price

The price management workflow starts with the Deal Desk. For the uninitiated, the Deal Desk is a specialized team or function within a company, usually in SaaS organizations, that assists the sales team in structuring, reviewing, and approving complex deals or transactions. It serves as a central hub where pricing, legal, finance, and sales considerations converge to streamline deal processes, ensure compliance, and maintain profitability. The Deal Desk Manager coordinates with all departments. As Michael Anderson, Global Head Of Commercial Operations & Deal Desk at Talend explains,

The deal desk function is the strategic backbone of revenue generation in a tech company, and a skilled deal desk manager ensures every transaction not only aligns with company goals but also maximizes value, balancing customer needs with business priorities to drive sustainable growth.

For pricing, the Deal Desk evaluates the unit economics for each deal. While prices are fixed for each component that makes up the configuration, sales will often offer some discount to the quote. Discounts require authorization that will depend upon the amount requested. The highest level of discount approval resides with the CFO.

Ideally, each quote should have a profitability analysis to rely on when making a discount. Some deals are large enough to move the gross margin and should be evaluated to determine the impact. This situation is rare, though.

Last year, I was interim CFO for a $600M revenue hybrid SaaS business with a Deal Desk that did not produce a deal profitability analysis. My finance team would complain about low-margin deals, but finance didn’t get a say in the pricing analysis. And I didn’t have the financial context to understand the impact on margin properly. I initially tried pushing back on the AE but did not have the early insight into the sales motion to be effective. The solution was to implement a robust Deal Desk function in finance to help alleviate and solve such conflicts.

Quote

Once approved internally, the AE presents the quote to the prospective customer. The Sales Operations team updates the prospect’s status to a higher-probability conversion stage in Salesforce or another customer relationship management platform. Maybe it’s a “Proposal Price Quote,” and this stage may have a 60% probability of closing. This stage weighting varies widely at different companies.

The prospect typically signals approval verbally or via email, but this usually follows weeks of negotiation. The purchasing and sometimes procurement departments will get involved for large customers. Usually, the AE handles the negotiation and brings in management team members as necessary.

Contract

Now that the prospective customer has placed the order, the Sales Operations or Deal Desk prepares the legal contract using the quote terms from a template. The draft contract circulates through senior sales management and legal. It’s usually too late for finance to get involved at this stage because the prospect has already seen the quote.

Once the contract is sent, Sales Operations updates the prospect’s Sales Opportunity status to Negotiation / Review, which may have an 80% probability of closing. The prospect starts its internal legal, finance, and purchasing department review.

In legal terms, one common issue is proof of insurance, particularly cyber insurance. The prospect’s legal team may want to see higher limits. Most enterprise companies typically need to purchase additional insurance.

Meanwhile, the finance department must evaluate all vendors’ financial stability using Dun & Bradstreet reports. Some enterprises ask for financials. Others may ask for the Altman Z-score, a formula-driven approach for predicting the probability of bankruptcy.

I always prefer giving out the Z-score to giving financials, so I offer a Z-score instead. Purchasing will ask for more discounts based on benchmarking data sources they use. I’ve never had much trouble purchasing, though; the department usually doesn’t have enough internal political power to stall deals.

An important step here is to store the contract in a folder or, even better, in a system. I like SpringCM, ContractWorks, and Ironclad. These platforms host the contract itself and link to the Salesforce Opportunity for that customer. Legal can also tag each contract with meta-data for ease of access.

Once the customer signs the contract, Sales Operations changes the stage to “Closed/Won,” and finance records a booking number for the deal.

Customer Onboarding is a Key Part of the Q2C Process

The customer onboarding process starts as soon as the customer executes the contract. The team responsible for onboarding depends upon the complexity of the software and service. The Professional Services team typically manages projects when the software requires technical integration or training conducted by specialized engineers.

The Customer Success team will manage onboarding if the implementation is straightforward. In many SaaS companies, especially small and mid-market businesses, the onboarding can be as simple as sending the login credentials and providing a short training scenario.

The goal of customer onboarding is to get the customer fully active on the platform, a point in time called the Go Live date. For complex integration and training, the software must work with all of the customers’ systems, and all end users must fully understand how to use the software. The Go Live date is vital;  the CFO needs it for revenue recognition, and the Customer Success team needs it to indicate customer satisfaction and onboarding success.

We use four metrics to measure the success of customer onboarding: Time To Live (TTL), Time To Grow (TTG), Time To Value (TTV), and Time-to-Second Value (TTSV).

Time To Live (TTL) is marked when the customer is live and active on the software. If the time it takes to get the customer to TTL is longer than average or, as presented, we’ve not met the customer’s expectations, which may negatively impact future expansion opportunities.

Time to Grow (TTG) – Once we get the customer to TTL, we will work with them on expansion opportunities. Completing an expansion contract is called Time to Grow (TTG). The time between TTL and TTG indicates customer satisfaction. The shorter the time, the better the satisfaction rating.

The expansion can be a combination of upsells and cross-sells. Upsells refers to an increase in customer utilization of the original software. For example, adding more seat licenses or moving a customer to a higher-use tier. Cross-sells refer to selling related or complementary software or service subscriptions to the same customer. Selling to a different entity of the same customer can also be considered a cross-sell.

Time-to-value (TTV) is the time it takes for the customer to realize the total value of the software. For example, the customer may only use some seat licenses or software products. This excess capacity may imply the customer will contract at the next renewal. Customer Success should encourage customers to utilize the software’s full functionality and capacity. As hard as it may be, the company should amend the contract to adjust the Annual Contract Value (ACV) to the proper utilization level. Of course, amending the agreement will require issuing a discount and recording churn. TTV may occur before or after TTG. If TTV occurs after TTG or the customer never reaches TTV, the prospect of churn or contraction is even higher.

Time to Second Value (TTSV) Some companies expand on the Time To Value (TTV) metric by adding a second metric called Time To Second Value. In this situation, TTV is defined as a lower level of value achieved, and TTSV is a higher level of value.

The main difference between TTV and TTSV is the percentage of active users on the product. When using both metrics, ensure that you define the value gained from the product and not just the number of logins. Customers ultimately don’t care if employees frequently log in to your product, only if the employees get value from the product.

Revenue Recognition

We recognize SaaS revenue when we satisfy a performance obligation, which occurs when the following criteria are met.

• The customer contract is executed.
• Performance obligations are identified.
• The transaction price is determinable and fixed.
• Collectibility is assured.
• The measurability of the revenue and expenses is complete.

Enterprise SaaS revenue recognition has unique challenges, mainly driven by the definition of satisfying the performance obligation. The contract governs the performance obligations. The agreement states the price, and we know our customers have the money to pay us.

However, I’ve seen various methods used to determine the point at which a SaaS company satisfies performance obligations. Revenue may be recognized when the customer can access the software, when the technical implementation is complete, or when all training and enablement have been completed.

Enterprise SaaS companies that bundle multiple software products into a single contract need to apply a specific revenue recognition accounting process. The relevant accounting guidance can be found in the Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, colloquially referred to as ASC 606, which applies to all entities that enter into contracts with customers, and IFRS 15 Revenue from Contracts with Customers, which applies to all entities with customer contracts (except for insurance contracts).

Under these rules, each software product in the bundle must be assigned a Standalone Selling Price (SSP). For example, suppose a SaaS contract includes several software products and a service offering. In that case, the CFO must assign an SSP to each type of software sold and the professional services work.

The Final Stage: Invoicing 

The invoicing process is often complex. Here are some critical considerations:

Sales and Use Tax

The June 2018 Supreme Court decision in the South Dakota v. Wayfair case changed the game. Before this ruling, SaaS companies only paid tax on software sales to jurisdictions in which the company had nexus, i.e., a physical location in the jurisdiction. The ruling allowed states, cities, and even counties to levy taxes on software sales to residents and corporations in those jurisdictions, even if the company did not have a nexus.

The change in taxation rules adds tremendous complexity to sales tax calculations. A tax automation solution dramatically increases the efficiency of managing the patchwork of state and local taxes. One of the most popular solutions is Avalara, a comprehensive regulatory and tax compliance solution.

In my experience, SaaS companies need to comply faster with the new tax sales requirements. Growth rates are typically so high that the sales and use tax liability becomes material once the company reaches scale.

Proper documentation

Enterprise SaaS companies require a purchase order before issuing payment. The customer’s procurement team will manage this process. Since this team is separate from sales, it may not get the information on the purchase. This happens all the time, in my experience. You will need to train your sales team to ensure the PO is issued. Or, at the very least, the team must provide contacts within the procurement team.

Payment portals

Most enterprise companies use payment portals to submit invoices. Customers use differing systems, including proprietary software, which can make managing the invoicing process difficult, so you must ensure that someone on your team learns to master the customer’s portal

Collections

A best-in-class collections process starts early in the sales cycle by engaging in the Deal Desk review process. Here are my specific recommendations:

1. Ensure accounting gets contact information for the procurement and payables employees. Doing so helps establish rapport and enables easy access to the right people if payment is late.
2. Perform credit checks using one of several different agencies. Dun & Bradstreet, Experian, Equifax, and Nav provide a business credit report and score.Some companies start the payment terms at the portal submission date, not the contract date. So, any delay in submitting the invoice will push out payment.
3. Act as a business partner to the Sales, Professional Services, and Customer Success teams by assessing payment risk arising from the nature and type of deployment. For example, if a contract requires extensive implementation, then there may be the risk that the customer does not ultimately use the software. Work with these teams to assess this risk and incorporate the assessment into the financial forecast.

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A structured and streamlined quote-to-cash process empowers SaaS leaders to deliver an exceptional customer experience. It also enhances operational resilience and accelerates time to revenue. However, leading a successful Q2C process requires expertise and domain over many critical components that only an expert finance team can manage. Leadership that understands the intricacies of each step will successfully foster cross-functional collaboration, particularly between CFOs, CROs, and Deal Desk teams, so that companies can streamline their operations, mitigate risks, and optimize revenue recognition.

Learn more about how your organization can optimize its Q2C process by connecting with the expert CFOs at FLG Partners.

About the author

Eric Mersch has 25 years of finance experience in the technology industry, including CFO roles at public companies and numerous venture capital and private equity portfolio companies. He has worked with over 40 different SaaS companies and compiled his experience into his book, Hacking SaaS—An Insider’s Guide to Managing Software Business Success. His goal in writing the book is to educate SaaS professionals, thus shortening the apprenticeship of those new to SaaS.

His book, Hacking SaaS – An Insider’s Guide to Managing Software Success, is available on Amazon.