Satya Nadella was recently named Fortune’s Businessperson of the Year. It’s well-deserved. I’m old enough to remember Microsoft as being sort of like the Star Wars franchise: It started off great, then had a really rough middle patch, and now it’s back on track in a big way.
But Microsoft’s resurgence obviously didn’t just come out of nowhere. Roughly five years ago, Satya Nadella made some very smart (but also very unpopular!) decisions and investments that set up Microsoft for success in a cloud-based world. In shifting his company away from static hardware and on-premise sales toward a subscription-based cloud model, Satya Nadella swallowed the fish.
Let me explain what I mean by that.
In their book Technology-as-a-Service Playbook: How to Grow a Proﬁtable Subscription Business, Thomas Lah and J.B. Wood refer to the transition period from on-premise to SaaS as “swallowing the fish,” as the revenue curve temporarily dips below the operating expense curve before climbing back upward again.
The ﬁsh is what happens when a traditional company starts to shift its revenue mix from an asset-purchase model to a subscription model. During this period, the company experiences a string of quarters where top-line revenues shrink as revenues from large, pay-up-front deals are replaced by recurring subscriptions without the big up-front payment. This has happened to lots of big enterprises, like Adobe, Cisco, and software company PTC.
Successful enterprises don’t just get lucky.
At the same time as revenues dip, the company must make investments in many of the new capabilities and structures that are required for a proﬁtable subscription-based model. The traditionally proﬁtable and stable mix of more revenue than costs on the left side of the chart is replaced with a tumultuous period of costs exceeding revenue.
The end result, however, is that this period of investment and restructuring results in greater efficiencies and higher revenue growth, thus completing the fish curve: