There aren’t too many people you can listen to today where you feel all those sticky layers of hype just fall away from your brain, as this guy actually knows what he’s talking about and (as we English love to put it) he just doesn’t mince his words. So, after a terrific meeting with Hans-Christian (Chris) Boos, Founder, and CEO of leading AI platform vendor arago, I pinned him down to share some of his views with the HfS crowd…
Phil Fersht (Founder and CEO, HfS Research): Chris – you’ve been a terrific guy who adds so much energy and colour to the intelligent automation industry… but can you shed a little light on your story? How did you find yourself setting up the business in 1995? Was the focus on intelligent automation back then? I thought we were all going nuts about ebusiness!
Chris Boos (Founder and CEO, Arago): Phil – I originally wanted to do AI research at a university and then I saw how slow academic research is today with the way it is financed. I chose to do it inside a company instead. We could control the pace there. We setup arago to research general AI and my belief has always been that general AI is all about automation. If it is intelligence – even the quite boring artificial version – I guess you could say that smart automation was my goal, then.
Most people are surprised about the research phase. But if you look at most people who are doing significant work in AI they all plan or have done a roughly 20-year research phase. The one thing that is special about arago is that we financed it ourselves. We split the company down the middle, half was doing research and the other half was doing projects to get the money. That way we did not only get to do basic work on AI and make money to finance the work, but we also had a testbed for all our components in real businesses. A brilliant idea I cannot take credit for, it was my uncle who founded arago together with me who came up with the model. It worked out really well for us. We did pure research from 1995-2008, then used our own toolset to start automating IT operations and slowly turn it into a product and do some deployments till 2014, then scaled automating IT operations on top of more static approaches while collecting a dataset that is descriptive of all kinds of companies in all kinds of industries and 2017 we finally started applying AI generally in other industries and processes than IT.
By the way, 1995 was before the e-business boom started. I remember we did the first online banking on the web in Europe then and the page said, “your browser should support tables”. Can you still remember these days?
Did you ever expect to be where you are today?
Absolutely not. I am still being surprised every day. If you had asked me about feeding animals with an AI a year ago, I would have looked at you like you just tole me the aliens had landed. Now we are feeding animals with an AI. This is what is so absolutely fantastic about the industry, there is a new frontier to be pushed further every day.
Fortunately makes up for all the crap you have to hear because everything that has the slightest bit of math inside is called AI these days. I would like to reverse that saying: It is only called AI as long as it does not work. As soon as it works, it gets a real name like “facial recognition” ????
So you’ve been talking about some very real and honest stuff regarding machine reasoning… what’s this all about?
In the area of AI, we have made one mistake since 1954 now. Whenever we found a new algorithm or were finally able to actually apply an algorithm we found a long time ago, we declared this algorithm to be the one solution to everything. This one-size-fits-all approach is not only stupid but lead to AI winters which were periods in research and commerce when no one would touch AI with surgical gloves – except for the crazy ones of course; did I mention 1995 was during such an AI winter? We are making exactly the same mistake again, by declaring deep-learning equivalent to AI. One algorithm will not be a solution for everything, it is a solution for a defined set of problems. This means it will fail miserably at other problems and also have clear limitations in the scope it was originally built for. Let’s stick with machine learning for a bit. The clear limitation is data. At some point, there will not be enough data to describe “now”.
I believe there are three basic sets of algorithms to be considered when building a general AI:
Machine learning. The ability to learn to recognize patterns and associate positive actions with them. This is like evolution, everything that behaves favorably survives, everything else dies. Adding a temporal memory to this system was what started deep learning with long-term-short-term-memory networks. But there are many other learning algorithms.
In biology, we call this “instinct” and all species have them.
Natural Language Processing. Now this is where it gets tricky, because language has so much compression. Think of how many different pictures you can imagine on the 3-byte input of “cat”. Your implicit knowledge of context and an internal argument narrows what you understand when you hear “cat” in a conversation down to a very likely correct interpretation. Machines, unfortunately, do not understand anything, and they also lack all the context. This is why NLP is still one of the hardest parts of AI. There is no way to “learn” the meaning of language through machine learning (yet), especially because the context, is so volatile. This is why the hype around chat-bots has lead to a lot of disappointed customers. They work well if you can predict the dialog with a high degree of certainty, for example, if you offer a telephone line where people can call in sick you know that there are only so many ways to say “I am not feeling well” and the only result you want out of the dialog is “when will you be back”. But all other more general cases are very difficult. This is why you have to change your language structure quite drastically if you want Alexa, Google Assistant et al to do anything for you. There are a lot of very advanced algorithms in this area which are mainly very advanced statistics to create probable context, probable synonym, probable XYZ and then math this to a pre-determined understanding structure. These are the least self-reliant algorithms in the AI family.
In biology, language was the single differentiating factor that made us as a species outperformed everything else on the planet. We no longer had to go through long cycles of observation as well as trial and error to have only the ones with the right solution to a problem survive. We could simply tell each other “if you see a Tiger, run away” and no evolutionary iteration was needed. This is a huge advantage which machines are completely missing.
Machine Reasoning. The one you were actually asking about. This was how AI started. The idea was to make a logical argument to find a solution to a given problem. The first attempt was to use decision trees to “write down the one and only answer for every situation”. This does obviously not work, because the more interesting a problem is the more different ways of reaching a solution there are. The industry moved from decision trees to decision graphs. Then we found out that logic does not govern the world and that ambiguity, contradictions, overlapping information, wrong information and unexpected events have a huge influence on how to really solve a problem. The type of algorithms that create a solution by outputting a step-by-step execution instruction for a more complex task by choosing the best step to take out of an existing pool of options and then the next and so on are called machine reasoning. The limitations of these algorithms used to be in the knowledge base because the maintenance effort of such knowledge bases grew exponentially and the benefit grew polynomially.
In the world of biology, this is called “imagination” of if we want to be less philosophic the ability to simulate a bit of the future in our heads to make the right choices of what to do in order to reach a defined goal.
Looking at only one algorithm set to solve all problems in the world seems dumb, yet if you read about AI, it seems that machine learning has become synonymous with AI. This literally guarantees a bursting bubble once the limits of data availability are reached. My prediction is early 2019.
We have set out to combine these algorithms to produce a single engine with a single data pool to mitigate these problems and this is why we started in IT automation and are expanding to more and more complex automation across all kind of different industries.
And you’ve been quite poignant regarding your views on AI actually substituting human intelligence and how unrealistic a “singularity” is – can you share some of your candid thoughts here with our readers?
The entire debate about singularity does not make sense, Phil. We pretend that simply by rebuilding the electrical part of the brain we get a self-conscious self-reliant entity, why should that happen? If you build the skeleton of a dinosaur you don’t get a dinosaur either.
Ok, to put this down in numbers. A large neural network used in deep learning has about a million nodes today. Is uses up the power of half a powerplant. An average human brain has 84 billion neurons and uses 20 Watts. According to Moor’s law, we can achieve rebuilding this by 2019 and I am one of the guys who believes that Moor’s law will hold. Yet, that is not all there is to the brain. The brain also has a chemical system creating a literally infinite number of configuration of the brain’s 84 billion neurons. Infinite because the chemical system is completely analogue. And then for good measure, there are a lot of well-reviewed research papers arguing that the brain also must have a quantum mechanical system injecting probabilities. So there are two entire dimensions we are missing before we can really reproduce a brain-like structure.
And even if we could… We don’t understand or know what consciousness and self-awareness are, do we. So how do we think we can build it? Is “by accident” really a good explanation? “Build the field and it will come” is definitely not the answer here. This is why all the talk about killer AIs and ethical machines is far too early. I am not saying there will never be a super-intelligent AI, but not in the new future.
That does not mean that current AI technologies cannot outperform us at tasks we have already mastered. Tasks that we as humans already have the experience for and thus tasks we can transfer to the machine. But why would we mind? A crane is outperforming my weight-lifting ability everyday and I think that is perfect, I have absolutely no desire to become a crane, do you?
What will AI truly evolve into over the next 10-15 years, based on your experience of the last two decades? Is there any real reason why change will accelerate so fast? Are just getting caught up in our own hype?
What will happen is that automation leaves the constraints of standardization and consolidation. With AI systems based on today’s tech, we can automate tasks, even if they only occur once and even if they have never been posed like this before.
I think I was a bit too abstract here. I believe that AI will make any process that we have mastered and that is not entirely based on language autonomous. Machines will most likely do 80% of what we are doing today. Which means that our established companies get a fair opportunity to catch up with the tech giants. This is why I believe that we need RPA as a transition technology, because it basically puts an API to everything that there is in the corporate world. On top of that, we can use AI to automate almost everything allowing every enterprise the wiggle-room to actually evolve
So what’s your advice to business and IT professionals today, Chris – how can we advance our career as this intelligent automation revolution takes hold?
I think in IT we are in a unique position. What click-data was for commerce, IT ops data is for the enterprise. IT ops data describe everything a company is doing and thus forms the foundation of applying the next generation of automation and autonomy.
The only thing we as IT professionals really have to do is open our minds. If we do so, we can revolutionize much of the business and not be the “laggards” who are slowing everything down as we were in the ecommerce revolution. You know I am German, so I get to be blunt: I think we have to “grow a pair” and take on the risk of automating everything from IT, otherwise business will do it for us and then who needs IT?
And finally… if you were made the Emperor of AI for one week and you could make one change to mankind, what would it be, Chris?
Mankind? That is too big for me… It would have nothing to do with AI, I would force people to think rationally for at least 50% of the day instead of 0.5, but let’s not go that far or people will think I am a cynic.
Let’s say I was made king of AI in the enterprise world for one day. I would decree to stop every POC, POV, Pilot, or whatever other terms you can find for trying to be half-pregnant and force people to start doing things in production right away. There simply will not be enough speed if we keep on “trying”. As master Yoda said, “Do or do not, there is no try”. We really need to adopt this behavior pattern.
Thanks for your time today, Chris. Am looking forward to sharing this discussion with our community.
In this session from Annual 2018, Intercom COO Karen Peacock shares success stories, battle scars and practical advice she’s learned from growing scaling SaaS businesses from $1M to $500M in annual recurring revenue.
In case you haven’t heard, we’re building a completely immersive experience for SaaStr Annual 2019! With 3 full days of sessions, featuring over 300 speakers from the best SaaS companies around the world, SaaStr Annual will be filled with actionable thought leadership to help grow your business. Use this link to get your tickets to the SaaS show everyone will be talking about.
Announcer: Please welcome Byron Deeter, Partner at Bessemer Venture Partners, and Karen Peacock, COO at Intercom.
[music]
Byron Deeter: Hello, hello. Welcome back from lunch, everyone. Thank you for joining us on the opening day of SaaStr. I’m Byron Deeter with Bessemer Venture Partners, and I’m absolutely thrilled to be with you today, most importantly because of my guest to my right.
Karen Peacock is not only a friend, but a superstar senior executive, perfectly positioned to address our topic today of hyperscale, and in particular, this aspirational journey from the $1 million ARR mark up to $500 million and beyond.
She’s actually done it, both as an advisor with small companies, but also at Intuit as a GM, where she managed a multibillion dollar P&L, including over $500 million of ARR directly, and walked them on this journey to a decacorn status.
Most recently, she has joined Intercom, one of the hottest cloud unicorn companies in our industry, as their COO. Intercom, for those of you who don’t know, is a messaging product, a modern messaging product for sales marketing, support, and operations teams.
Karen, today, is going to give us some words of wisdom, but maybe first, give us a little color if you can about Intercom and what COO means, and your role there please.
Karen Peacock: Absolutely, happy to do that. Thanks very much, Byron. Thanks everyone for coming. Decacorn, I think we should officially attribute to Byron here.
A little bit of a background first on Intercom, and then I’ll tell you more about my role. I think it helps set that context. When you’re in a website or you’re in an app, and you see in the lower right corner a little message bubble, that is likely Intercom. That’s just one of the faces of Intercom.
Companies like Spotify use Intercom embedded in their app in order to send targeted messages to their trial customers and help encourage them to become paid customers and keep them engaged down the road.
Companies like Tradeshift use Intercom on their website to help them convert visitors to their website into qualified leads, and then turn those folks into paying customers, so driving more customers faster.
In fact, one of the things that we just recently heard, Byron, is that of the most recent Y Combinator class of all of the companies there who are using any kind of messaging or chat solution, 84 percent are using Intercom. Intercom is very much becoming a part of the default modern tech stack in order to help companies grow.
My job in Intercom is to help Intercom as a company grow in scale, just like we help our customers. From a functional perspective, I’m responsible for sales, marketing and support, which are actually a pretty common combination for COOs to work on. What’s probably a little bit less common is I’m also responsible for our San Francisco Engineering and Product team, and Data and Analytics.
That’s because of my background in product and in data.
Byron: Great. Talk a little bit about this pairing, if you could, with CEO and COO, dramatic lighting please.
Karen: Yes. We meant that to happen.
Byron: A lot of people in the audience — founders, CEOs — you’re probably going through this team-building question. There’s always this notion of what level executive do you bring in? How do you divide roles and responsibilities? What should the profile be?
People hear about the Sheryl Sandberg, Mark Zuckerberg pairing, or Dennis and Drew maybe at Dropbox in the cloud world. How do you think about your role and that interplay with the CEO, and maybe even the profile of a COO type for that CEO to consider?
Karen: Happy to talk about that. Before I joined Intercom, I was looking at both CEO roles and COO roles. People told me, “Don’t take a COO role.” I obviously didn’t listen very well.
The reason why they told me that is they also quoted figures like, “Did you know that the average tenure of a COO is eight months?” That’s terrible, right? I mean that’s just like…
Byron: You’ve beaten it over. You won.
Karen: Exactly, I won, done. All right. I dug into that and I wanted to learn more. I spent time talking to CEOs, successful COOs, to venture capitalists, to recruiters, and folks who were around that ecosystem, just trying to figure out why that was the case.
I’m happy to share with you today the number one reason why COO hires fail so that you can avoid that. I think the reason why it fails is because there’s a myth out there. People tell CEOs and founders to think about all the things that you love doing, that you’re great at doing, that you want to spend your time doing.
Great. Now, think about all the stuff that you hate doing, that you’re not very good at doing, that you don’t want to do, and go hire someone who likes that and is good at that.
If you only follow that advice, you will most likely fail. That’s because what you’ve just hired is your polar opposite. You end up in a situation where one person is over here, another person’s over here, it’s like oil and water. The first time you disagree, you start pulling the company in different directions.
That’s not good for anybody. I think what you should be doing instead is finding, yes, somebody who complements you and is good at doing some of the things that you don’t like to do as much, but they’re really important for your company, or you’re not as good at or is experienced that.
Find someone who can spread out on the playing field with you, like that, but also someone where you have some amount in common. If you could imagine like a little Venn diagram rather than sitting like here and here with your COO, you want to be in a place where there’s some level of overlap.
For me, when I was looking at…I met Eoghan McCabe, the CEO of Intercom, I realized that we had exactly that, the ability to spread out in the playing field. What we had in common was we’re both product people. We both care very deeply about customer experience. We both care less about preserving the status quo, and very much about building a very special business.
Byron: You heard it from Karen, conventional wisdom is totally wrong on COO spec, which is quite interesting. What about stage for when someone should think about bringing on a COO? Is there a right size, or stage, or scale? If Intercom had tried to bring you on three years ago, would it have been too early, and would it have failed?
Was there maybe not enough for you to do when you came on, and waiting two more years could have been the right model? How should people think about when to bring in that experienced senior executive to help the great founder culture?
Karen: I think that all very much depends but one thing that is certainly true is don’t bring on a COO until you are ready for that person to drive the bus, and while you drive the bus as well.
Just making sure that don’t be in a situation where you’re both trying to pull on the wheel. Do it at a time where you feel like there’s enough complexity in your business, that that person you need is a senior leader to run and operate one part of the business while you’re operating it as well, where there’s enough complexity that you need like two senior leaders both driving.
Byron: That actually feeds into this notion of stages, as a former entrepreneur myself and having spoken with a number of the founders in the room. So much of the focus is on these round numbers. This notion of, “OK, I’m at a million now. I’ve sort of made it but if I can just get to 10 million, then everything will be good and the world will be fine.”
Oftentimes, we actually find that people cut some corners or perhaps don’t get to 10 in the right way. Even though they hit where they thought was that next great milestone, they plateau. So many times, businesses will be on this rocket ship ride and then stall out.
What should founders think about to avoid those mistakes? What have you seen in terms of words of wisdom for the scaling challenge, specifically in that 1 to 10 journey?
Karen: That’s a great question because it’s very tempting to focus on those numbers, like, “I’m at one million. I just want to get to 10 million. Now, I want to get to 50, and then 100.”
The fact is the more you focus on revenue, the worse off you will be. Actually, I know… [laughs]
Byron: The irony of focusing on 10 million means that you won’t get there.
Karen: If you focus on revenue, that’s actually the last thing that you should focus on. What you should focus on first is value and engagement. I can talk a little bit about both of those things, tell you more about what we’re doing in Intercom there too.
Focus on value, and this is specifically really deeply understand the value that you’re providing to your customers. Make sure that you are clear on what that is. Make sure it’s super compelling to your customers. Measure it and get better and better at doing that.
On the engagement side, make sure that people are actively using your product. Make sure that every constituent, if you’re in a marketplace, make sure you’ve got both sides using your product or service. Value and active engagement.
I can tell you then, for Intercom, because I always think it’s…the theory of these things is very different than the actual. It’s helpful to hear a specific example I think.
For Intercom, what we focus on is on the engagement side tracking both how much people are using our product, and how much they’re using our product to touch and help their end customers. If we start with the first one there, how much they’re using our product?
We track active use. Today, Intercom has 91 percent of our customers who use the Intercom product and platform every single business day. Really strong engagement that we’re really good about that.
In terms of how much they’re then touching their end customers, we’re now at the state where we’ve got 500 million messages that our customers send to their customers every month. 500 million messages every month. We track that very closely, and that’s been doubling year-over-year.
We expect and hope for that to continue to double. That’s the engagement side. The value side, and this is something that we’ve only recently gotten a lot better at tracking. We’re very clear for each of our products and for each of the use cases that we saw for our customers on what that value is.
For example, one of the things that our customers buy us for is to help them take visitors to their website and turn those folks into qualified leads, get them to the right folks, whether it’s on the sales or support side, and then convert those customers into paying customers.
Across that, the key benefit metric that they’re really looking for is driving up conversion rates, like more customers faster. We track exactly that, how many customers are our customers converting because of using Intercom?
We find that our customers who touch their customers with Intercom actually end up converting at 83 percent higher. That’s awesome results. 83 percent lift in conversion is something that we would all sign up for every day.
We seek to keep getting that better and better. Our product team very much focuses on, and all of us really focus on, how can we keep driving that benefit higher and higher?
My advice to all of you would just be super clear on exactly what is the benefit that you are giving to your customers. Make sure it’s something that they really value. Be really crisp on that, and then figure out actually how to measure that and how to get better and better at delivering more and more of that value over time, and then revenue will come.
Byron: Interesting. The paradox of overly focusing on revenue first can drive wrong behavior as opposed to usage and intention will take you on the journey that you can then monetize.
Karen: If you just focus on the revenue side, you can end up in a hamster wheel situation where you’re just trying to do everything to squeeze a little bit more water out of whatever situation you’re in versus actually focusing on the long-term growth driver, which is around value.
Byron: You’re a math major, so the metric side may come a little easier to you, but for founder’s in the room that maybe aren’t as quantitatively oriented, can you talk about the role of data and metrics in the business, and in particular for earlier stage businesses?
When you were talking about the importance of usage, and retention, and these elements, obviously there’s a metrics component to it. How do you introduce that discipline in your business early on, but in a balanced way so you’re not overly focused on a scoreboard versus building the platform of the business in the right way?
Karen: I think that there’s always the art and the science to everything that you do, the quantitative and the intuitive side. It’s really important to have both of those in everything you do.
You have to start with the intuitive and the leap of faith and the problem that you’re solving. From there, you want to figure out how to hold yourself really accountable to that, like, “Am I really solving that problem well?”
You could come up with 100 different metrics and ways of measuring that. That’s why I would suggest to pick like one way of measuring the value that you’re providing, and then one way of looking at your funnel and assessing how you’re doing at attracting your customers, turning them into buyers.
You can look at your revenue from there, as well as things like retention. Just a very, very simple dashboard to start with, but actually do think that every company really at every stage needs at least a very simple dashboard.
That is not at all at the expense of focusing on what first matters, which is really understanding the product, understanding the problem, having that inspiration and that intuition, which really fuels the ideas that you then measure.
Byron: A lot of that touches on this elusive notion of product market fit, this idea that we’re all chasing this interplay between the right product for the right set of customers that will put you into the vortex of sales adoption.
Maybe going back also to your Intuit days and your work advising startups, what has worked for you? What are some of the important factors in finding this perfect market vortex for that storm that you want of sales and adoption?
Karen: I have to say I’ve learned a lot from Scott Cook, who’s a mentor and a friend of mine. Some of the mantras that I take and I share going forward are number one to fall in love with the problem, not the solution. I’ll talk a little bit about what that means.
To watch what people do, not what they say. I’ll share with you a story of when I didn’t do that. Hint spoiler, it’s not going to work out well in what happened.
[laughter]
Karen: A few years ago when I was at Intuit leading product for QuickBooks, I was out talking to customers, was an incredibly successful product. Hundreds of millions of dollars in revenue around it. People loved it. High Net Promoter Score. Folks were telling me things like how QuickBooks is great but the one thing it really needs, the one thing it’s really missing…
I’m like, “Yes. What is that one thing? It’s budgeting. OK. Tell me more.” We learned about budgeting. We learned exactly what it was that people wanted to do in their budgeting. We built a cool budgeting product. We brought people in to usability studies. We made it better and better.
They really liked that budgeting tool. We launched it. What happened is almost nobody ended up using it, and that’s because budgeting is tomorrow’s problem, not today’s problem. Budgeting is something that you’re going to do tomorrow.
For many people, that tomorrow actually never comes. We went back to the drawing board because we knew there was something there. People were really passionate about it and were asking about something.
We realized what we had done is fall in love with the solution, the solution that customers had said they wanted, the solution that we had been built and fallen in love with ourselves.
We stepped back and spent time thinking about what the problem really was. We spent time watching what small businesses actually spent their time doing today.
We realized that the real problem was cash management. The real problem was I can’t pay my bills. I need to figure out how to get my money in line so that I don’t lose this partner relationship that I have. It’s really all about cash management and having enough money to pay the critical bills when they were due.
As we deeply understood that, we were then able to build out a very different type of solution, which is a very lightweight cash management solution. We built that. We launched that. It was very successful. Now, hundreds of thousands of small businesses use that.
Byron: Excellent. It’s the aspirin versus painkiller versus vitamin.
Karen: The vitamin versus painkiller, so you’ll always do better in a situation when you are selling something that’s really mission critical, and necessary versus something, that’s a nice to have, an aspirational need.
Byron: Interestingly, sometimes customers themselves may not know that difference. They’re the aspirational then may be different from the day-in day-out pain that they’re feeling. That’s part of the product TrueNorth, the company has to have, I assume.
Karen: That’s exactly right. Nobody ever asked for an iPhone, or at least 10 years ago, they didn’t. Now, they do.
Byron: That’s a medium to long-term view in terms of building a company to last, and from platform, but do you have any quick hit advice for the audience here if you were to join them in a boardroom, or an executive team off-site? Is there a low-hanging fruit that operators today could implement, that you’ve seen your years’ experience?
Karen: Yes. I’ll share with you one of the first things that I have done in literally every business that I have run over the years. It has always worked. I’ll share with you guys because I bet it will work for you as well.
That is to focus on that magical time when a customer first comes to you or a prospect first comes to you and is interested in learning about what you do, and thinks they might want to become a customer.
Focus on that onboarding process for new customers and making that experience amazing, making it very clear what the benefit is that they’re going to be getting. We are talking about it in terms of value and streamlining and speeding people through the process as soon as possible.
There is a phrase that the Mint team developed that I really like. Mint, for those of you who don’t know, is basically a personal financial management solution. The first thing you do when you start using Mint is you basically plug in and connect your different bank accounts or credit card accounts. What happens once you plug those in and get those all hooked up is it creates a pie chart.
That pie chart is a distribution of all the things that you spent on. It’s done all sorts of cool things behind the scenes, machine learning to do different categorizations and auto-categorize things. It shows you, “Here is where your money is going.” It gives you recommendations on a lot of other things from there.
What the Mint team discovered is that for customers who get to that pie, they had this aha moment. You literally see people’s eyes light up the very first time they see where their money is going. That aha moment and that pie leads to much higher engagement down the road.
My advice to both myself that I take and to all of you is to figure out, what is your pie in your product or service? What is that moment that when customers get to that, their eyes light up and they say, “Yes! This is the thing that I wanted. This is why I bought the product and why I did all the work that I was doing.”
Figure out what is your time to pie. Figure out what is your pie. Figure out how you can make that time to pie as fast as possible, and just lightning speed through there. That’s one of the areas that I focus on, as I said, in every business that I’ve ever run. It always leads to good short-term results.
Along the way there, interacting with customers during that magical time when they are first considering your product, being as real time as possible also changes things in a big way.
As much as you can reach out to customers with your sales team within a minute of a customer coming, who is the right type of customer for your product, as much as you can reach out the second somebody has a question, answer that instantly.
We have seen this is one of the things that the Intercom product actually helps you do, and frankly, one of the reasons why I was so attracted to join Intercom to begin with. I saw the value firsthand. The ability to interact with customers in a real-time way during those magical moments can massively change the trajectory of customer adoption.
We’ve seen customers who have grown their conversion rates by as much as 4x when they interact with a customer right at that point of need, within a minute of that customer needing that. Figure out how you want to interact with your customers. Figure out how to do it as real time as possible. You will see great results.
Byron: Building on that, a lot of times in this journey, marketing budgets open up for the first time for these founders. How do you think about marketing spend and resource allocation? Maybe in that real-time construct, but life hacks and quick hits for that, lessons learned perhaps, and stumbles to avoid.
Karen: Absolutely. I can share with you a story of the very first VP job I ever had, which is the VP of marketing. I was leading Intuit’s payroll products. $800 million business, big business, very successful, my first VP of marketing job.
I got into the role. I spent about a month talking to customers, learning the product, checking out competitors’ products, looking at our metrics, talking to and learning from everything that everyone had already in their brains in the business.
After that time, I made my first decision, my first big bet. What I did is I took a big chunk of our marketing program spend. I used it to fund hiring an engineering team to focus on onboarding and first use, literally putting my money where my mouth is here.
Byron: You voluntarily redirected your marketing budget to engineers?
Karen: Exactly. My couple of…
Byron: Said no CMO ever, by the way. I’m impressed.
[laughter]
Karen: That was the thing. Basically, the CMO crew came to me. They were like, “Whoa! Careful here.” Literally, my peers, the other VPs of marketing running others of these multi-million dollar businesses, multi-hundreds-of-millions of dollar businesses came to me.
They’re like, “You know, I know you’re new to being a VP of marketing, but we don’t do that. [laughs] Don’t give away your money. Your money is your power. That is what helps you achieve the goals that you’re signed up for. [laughs] Don’t give like…we’ll just give you this advice.” This was behind-the-scenes conversations, people truly trying to be helpful.
I listened, asked a few questions. Then I said, “You know what? I am directing this money to what I think is going to lead the best possible customer acquisition results. I’m doing exactly what I think is going to be the best possible investment that I could do. I’m sticking with it.”
Actually, in the time, I said, “I’m sticking with it. In fact, I think this will be the best investment that I make this year.” I said, “Actually, I think it’s going to be the best investment that any of us make this year.” I got a few smiles on that one like, “Oh, yeah? We’ll see.”
That’s actually exactly what ended up happening. It was the best investment that I made. It massively increased the conversion rate, which increased all of the different effectiveness of all of the rest of my marketing spend. My customer acquisition went down dramatically. In the next year, everybody else did the same.
My point there is not a, “Don’t spend in marketing.” [laughs] My point is, “Make sure that you really deeply understand the customer experience and the funnel that you bring people into.” Think about the best possible ways that you can invest. Not just the things that are within your functional area. Not just the things that everybody else does.
Think about what’s really going to drive a difference in that customer experience and really drive rapid growth. When you’re to the point that your funnel is actually pretty strong…and it doesn’t have to be perfect. You don’t have to wait 10 years till your funnel is like a shoot. I’ve never even seen one of those. Maybe one of these years, I will.
Byron: [laughs] We’re still looking for one, too.
Karen: You don’t have to wait till it’s 100 percent perfect. When you feel like it’s a strong funnel and you can acquire customers in a cost-effective way, by all means, amp up your marketing at that point. At that point, there are three things I think about wanting my marketing spend to do. I want it to increase brand awareness and purchase consideration.
I want it to have some direct results. Those might be two different buckets of spend. I want some of it have some real clear, direct results. I want to be investing in always learning and trying new things so that you get better for the future. When you’re ready, absolutely go ahead and amp up your marketing spend. Just make sure you got the right funnel in place to do that.
Byron: That’s particularly relevant for the audience members here, founders and CEOs with that full-company view because not all VP of marketing or CMOs will be that visionary, I have to say. Oftentimes, it takes the full-company perspective to go through that resource allocation, to do what’s right for the company.
Maybe building on that in other surprising ways, is there advice that you’d give startups that is counter-intuitive or that may surprise them, distribution, intel or otherwise?
Karen: Yeah. One of the things a lot of startup founders like to talk with me about or have on their mind is, “What should I focus on? There are so many things that I could be doing. Where should I be spending my time? Where should I be spending the company’s resources?”
Oftentimes, it will be a story of, “Well, I could focus on this, which is my core product, my original idea, and has some very promising things that we’re seeing there. But on the other hand, there’s a big company out there that’s got a big name and a lot of customers.
“They’re really excited about what we’re doing. They’re saying that they could actually sell this product to all of their customers. What do you think I should do?”
I would just say, “Do not pin all of your hopes and dreams for growth on a partnership with a big company.” I’m not saying, “Don’t ever partner with a big company.” I’m just saying, “Go in, eyes wide open, and test first.”
At Intuit, we had a number of partnerships — let me give you an example — on both sides. For example, email marketing. I had this great idea within QuickBooks.
We would tie together the data in QuickBooks of the customers and what they purchase. Then with email marketing, we could do targeted campaigns out to folks who have built something super cool. A startup that we partnered with, invested a lot. We invested a lot. Guess what? Nobody bought it.
What I realized is we could have tested that with an hour of work. Figure out how to do the lean test to see whether anyone is even interested in it. I’m not saying, “Don’t partner with a big company.” Go in, eyes wide open, and lean test as you go. Intuit has had a lot of very successful partnerships, for example, on the financing side and other places, but test first.
Byron: Maybe just to double click on that, nine and a half years ago, Bessemer released their first 10 laws of cloud computing. One of those laws had to do with this notion of channel dependency and how hard it is to get channel partners to sell cloud software, because services’ attach rates are lower and the hardware attach rates are nonexistent. Do channels ever work in a cloud 10 years later?
Karen: [laughs] They do sometimes work. One of my favorite examples from the Intuit days is around financing, small business financing. If you pick a product that is adjacent enough, really, really close to what the customer is already doing, where you’re selling to actually the same person, not the same company but the same person…For example, with QuickBooks, you’re selling to the bookkeeper.
The bookkeeper or owner is often the person who is also thinking about lending. Selling to the same person, where that person is in that same mental space to buy the other product, it can work if both companies are really motivated to do that.
For example, through QuickBooks, there’s been about, I think it’s 800 million loans today gone through third-party partners, folks like OnDeck and Fundbox and others. It can work, but just be careful. [laughs]
Byron: Karen, last question. Marc Benioff and many others have been on record about this cloud unicorn trend and companies staying private longer, and have essentially come out and said, “Grow up already. Why don’t your companies go public? This whole nonsense of billion-dollar-plus private valuation is really manipulating the market,” or even some terms used.
When will Intercom go public? Why haven’t you gone public yet? What are you waiting for? What advice do you have for people in the room on that point?
Karen: Having sat on both sides of that — run a large P&L in the public eye, responsible for quarterly earnings, gone to play on the private side, which is so fun — I would just say that going public to many people can feel like it’s a finish line.
You are a founder and a CEO of a public company. You and your whole team are soon thereafter liquid. Amazing. Incredible finish line there. I would say, definitely an incredible milestone, an unbelievable success.
However, that is very much just the starting line. It’s the starting line to a whole new race with a whole new set of characters and stakeholders who care very deeply about different things than what you’re used to caring about, and care very much about things like quarterly earnings.
It’s very easy to get distracted and spend a lot of time trying to micromanage your quarterly earnings and forget about driving massive innovation, trying to break through new things that might work and might not work, and really driving value. If you end up getting to be so focused on your quarterly earnings, what will happen is you will turn into one of those companies that you seek to disrupt.
It’s very important to wait and only go public when you are really ready. You have the discipline to be able to hit those quarterly numbers and have the ability to think big, to innovate, to focus on value, and to do all of that together.
Waiting as long as possible is good. There’s plenty of ways to get large amounts of funding in the private markets today that you never used to be able to, used to only be available if you go public.
Take advantage of those things. Then when it’s time and when you’re ready to go public, we all here wish you all the best.
Byron: You navigated that one pretty well, maybe a future in politics after this tech stuff’s over.
[laughter]
Karen: I doubt that. Definitely not. That’s not going to happen for me. [laughs]
Byron: Please join me in a big round of applause for Karen.
Have you been watching the FIFA World Cup? I have been watching highlights. And peeks at an occasional game on Fox Sports Go. It’s humbling to think I will likely watch less than 1% of the 96 Group Stage games and maybe just a bit more of the games in the elimination rounds. Then I got a demo from Remiqz, which has analytics on soccer players – down to individual touches, strength of opponent and other metrics, and it was even more humbling. In the game today against Iran, the Spanish team had 720 passes. Impressive but well short of the record 993 passes Barcelona had in a Champions League game. Their database has analysis on thousands of such games.
We live in a world of instant analysis which is a summarization of staggering amount of little touch points. I was thinking about that when I read two stories this morning in our industry – one about SAP, the other about Oracle.
Teradata has filed a legal complaint against SAP claiming it “stole Teradata’s trade secrets (accumulated by Teradata over the course of four decades in the EDAW space), and used them to quickly develop and introduce a competing (though inferior) product: SAP HANA.” and “Upon release of its new product, SAP promptly terminated the parties’ joint venture, and it is now attempting to coerce its customers into using HANA only, to the exclusion of Teradata, by forcing its customers to adopt HANA in exchange for upgrading their ERP Applications. “
The period covered in the complaint goes back a decade. Having being involved in a few software cases as an expert witness, I started thinking how attorneys are likely to strategize.
Will SAP argue Oracle and Microsoft have long used proprietary databases in their application stacks and SAP decided with S/4HANA it was more efficient to do same? Will Teradata cite Indirect Access examples where SAP threatened customers who wanted to move transaction data out of ECC to analyze or for third party apps to access? Will SAP argue that with Business Objects, Sybase, TREX, MaxDB and other products it had plenty of its own analytical IP and talent?
Then I stopped. In a jury trial, appeals to layperson emotion often factor more than technical arguments. But the discovery process will involve looking at lots of data going back at least a decade or more. They cannot do instant analysis, they have to watch “lots and lots of tape”
I thought of that again when I saw “Oracle ORCL, +0.07% reported revenue and earnings beats Tuesday afternoon, but Wall Street’s enthusiasm for the numbers was fleeting. Oracle stopped breaking out its cloud business in its official earnings numbers, as it had previously, which led many to question whether the company was hiding something after slowing cloud growth had hurt the stock in previous quarters.”
JP Morgan had downgraded Oracle stock a few days prior based on “a survey of 154 chief information officers (which) revealed Oracle received the most indications for “spending contraction” this year. “
154 customers surveyed? Oracle has 430,000. I was also struck by a comment that “CIOs have clarified that they are migrating Oracle databases to MicrosoftSQL Server, Amazon databases and PostgreSQL” What about moves to HANA? SAP claims 23,000 HANA customers. Does the JP Morgan database have SAP customers?
Reality is all of us sample and want instant analysis. It is useful periodically to step back and consider the volume of little touch points. Another reason I write a book every year or so. It forces me to go back and look at lots of historical tape. Mercifully, not every team has 993 passes each game.
As you scale up in SaaS, one thing I can almost guarantee is that you are going to hire some VPs who were either fired or quit their last role. Especially in the Bay Area.
There are lots of reasons for this:
All your hires can’t either be (x) folks you magically poach from other companies and (y) folks who magically are leaving another great gig at the perfect time to join you.
And more importantly, change happens at start-ups as they scale. VPs that do a great job at $1m in ARR rarely are the perfect leader at $100m ARR. So many of the very best VP candidates are folks who turn over in high growth start-ups.
Passionate stretch candidates do quit when they are “topped”. I.e., when a boss is brought in above them. And sometimes, those folks can be the perfect candidates for your stage and company.
And finally, VPs make mistakes. They join start-ups out of passion and belief. But often, they don’t really have all the data and metrics, or even really know what they are getting themselves into. Sometimes they join impossible situations.
So you’ll end up hiring VPs who went through a significant transition at their last gig, sometimes an involuntary one. That can be great. Just a few thoughts of things to look for:
Be wary of candidates that bad mouth their last CEO. It can be tough to hold your tongue. But I’ve generally found that candidates who bash their prior boss in an interview tend to do it again at their next gig. Even best case, they tend to be less loyal and less reliable.
Be wary of candidates that take no accountability for what happened. If the last role didn’t work out, the best VPs are honest about why. They share their mistakes and learnings. The ones that don’t, often lack the self-awareness and maturity to succeed in the next gig.
Be wary of VPs that don’t have anyone to bring with them. If a transition happened for the “right” reasons, often, some of her team will want to come with her on the next journey. If a VP candidate has no one she can point to that will join her from the last role, that’s a flag.
Be wary of VPs that did odd things after a traditional role. I know some folks will challenge this, but if a VP went off and did something very different — be way. Exploring new roles and ideas is great. But if they were a CEO for a long time, or took a very different functional role (e.g., in customer success when they were in sales) … usually their heart really isn’t into it. Not always. But usually in my experiences. Definitely give these folks a shot. Just double check they really want it for the right reasons.
Be wary of too big a chip of the shoulder. We all have a chip on our shoulders. It’s what drives us in part to be great founders and startup executives. But too big of a chip can blind you to what it really takes to go big the next time. It’s hard to quantify this, but you can feel it. When the candidate has too much scar tissue, too much of an edge. Again, some chip on the shoulder is good. But a huge one tends to create teamwork and aligment issues in your VPs.
Finally, if you just aren’t sure … have your most trusted outside advisor interview the VP candidate. Her insights may not be 100% accurate. But usually it’s a great way to get a quick read if you have any concerns on these 5 potential flags.
You’re still going to hire VPs with some of these flags. Just go into it being clear about the issues, and where you’re going to need to backfill and help her/him succeed.
You have read analysis from me and others about SapphireNow. I wanted to get a post-conference perspective from a SAP executive and I caught up with Nick Tzitzon, Executive Vice President, Marketing and Communications
Overall Vibe
It can be tempting to look at so many different things and slice and dice the success of an event like Sapphire. I think we have to constantly come back to what should be the only true measure, and that’s what did our customers who actually participated in the event say about what they experienced?
On this measure I feel like SAP can be really proud of this Sapphire. Our customers said generally very positive things about the presentation we put forward. In past years, I felt like they knew we had the right pieces but they weren’t always seeing the full picture. This year, I honestly felt like the light bulb went off and customers saw from SAP not just a completeness of vision, but a completeness of solution. And those that really wanted a confidence inspiring plan to cement their belief in SAP for the next decade, I think those customers came away believing that we delivered it. In many people’s view, this was the strongest Sapphire we’ve put forward … if not all time, certainly in the last several years.
We’re getting close to 400,000 customers now … the temptation can be to think of our customers as one audience. But in reality, they’re coming at this from so many different perspectives. You have the customers that have been relying on SAP ERP for decades who, in many cases are the largest, most sophisticated companies in the world. You would have a hard time, hopefully, coming out of Sapphire not believing that SAP is prepared to deliver you a complete solution tailored to your industry. Alternatively, if you came to Sapphire because you are running one of our LoB solutions, say SAP Ariba or SAP Fieldglass, and you are looking for more of an introduction to the broader universe of what SAP can offer, I also feel very good about the presentation that we put forward.
International attendance at Sapphire is always an interesting thing. SAP is the most global company in the space. That makes our customer base particularly interesting. We always struggle in a North America event with certain constituencies. They don’t like the big show stopping approach in some cases as it doesn’t keep with their cultural norms. I think we’ve done a better job in the last few years being able to tailor the experience to those customers in a way that makes them feel more comfortable. But that’s also the benefit of SAP doing events around the world. Increasingly, we take advantage of the fact that we can deliver a Sapphire-like experience on nearly every continent, so every customer or prospect can experience the vision and the strategy of the company in a way that relates to them. If it’s not in their natural language, at the very least in a style that’s more accessible to them. SuccessConnect in Berlin this week is a great example of this approach.
I think people really liked having a second major keynote theater. So we have the main stage for the big keynotes and then we have a 500 seat theater where you can go for additional content that’s much more focused on specific topics.
We face this pressure when you do an event like Sapphire. Are we focused on just the three-and-a-half days where people are physically in Orlando? Or are we focused on an experience that lets people participate in Sapphire off site, at their leisure, in their location? And increasingly, if you look at the facts, we have big numbers in terms of who shows up. We have huge numbers in terms of who participates virtually. So it’s important that people be able to feel the excitement of Sapphire sitting in their office, sitting at their desk, sitting in their living room.
His favorite moments from the event
You always have to feel proud when the founder of your company takes the stage. We shouldn’t miss any opportunity to acknowledge that Hasso is a titan in this industry….one of the founding fathers of this industry. When he gets up there and he does what he does, there’s an amount of gravitas that I think is hard to find in many other tech conferences, if any other conference. If I’m reliving Hasso keynotes from years past, I don’t think he gets the credit he deserves for the in-memory revolution. I can remember having so many conversations with analysts and others who would say, “HANA, HANA, HANA. Customers have heard enough of that.” It turns out they hadn’t and Hasso has been proven right again and again. How do you build a business that’s capable of operating as an intelligent enterprise if you don’t have an architecture that can help you manage data without indexes and aggregates? Data from any source? Structured and unstructured? Transactions and analytics on a single platform? Everyone loves the data sound bites – new oil, new gold, new oxygen. Pick your favorite. But only one person was making this intellectual argument before it was fashionable.
Then there was the big announcement – introducing C/4HANA. The presentation Alex Atzberger (starting 19:30 here) delivered was confidence inspiring. I think if you were watching that … and the bar was set “Do I believe SAP has a credible argument that would force me to rethink how I rely on technology to transform my customer experience?” I think Alex not only cleared that bar, but I think he cleared it by a wide margin. And I think there’s a lot of interest, a lot of excitement around C/4HANA in the marketplace right now.
For people who really know SAP, who really watch SAP, there’s the question, “Okay, are they singing from the same sheet of music if you go off and talk to a development leader who is driving the agenda at an acquired company like a Concur or an Ariba, versus what you would get from SAP’s development team?” Seeing Bernd Leukert and Rob Enslin (starting 38:15 here ) together in one conversation with a lot of passion, share the same vision for how we’re integrating the portfolio of assets that SAP has assembled and create true end-to-end process capabilities regardless of the app you’re using – that’s a huge headline for us. At the end of the day, if you’re a customer and you’re thinking, “When I bought SAP 20 years ago, they gave me every functionality I wanted in one box. And I’m not necessarily saying I want it all in one box, I just want to believe that they have a vision to be able to cover all of the capabilities that my company needs.” Rob and Bernd gave them that confidence.
SAP’s increased openness
Kudos to Nicola Leske and her team who obviously focused on you as their customer. So in that way, we do look at you as a customer. But second, I think SAP, and I give credit to Bill McDermott and the executive board for this, has undergone a sea change in terms of how SAP views the analyst community more broadly. We view the analyst community as a gateway to our customers because customers are trying to sort through so much. Increasingly they look to you and to your peers to help distill it all down. If we don’t help you have a complete and well-rounded view of SAP, not only from our perspective, but from the perspective of our reference customers, we’re letting all of our customers down by extension. So that’s an intentional part of our strategy, and I’m glad you feel it. I’d also say the same thing about Geoff Scott and the user group. It shouldn’t go unmentioned that they are the co-host of SAPPHIRE. We embrace anyone who gets the company closer to its users.
Bill always says that SAP is at its best when SAP is at its hungriest. The company culture right now, and I think you felt it at Sapphire and in the lead-up, we are very motivated because we feel so strongly about the story we have to tell. We’re very much in a “don’t take anything for granted” phase. I love that scene from the movie Any Given Sunday with Al Pacino. The locker room scene where he says, “You go the extra mile for that inch, to gain every inch. It’s the difference between winning and losing.” We’re in a mode now where SAP is going to go the extra mile for every inch. And there should not be any situation where you’re asking us to help you cover SAP where we’re not able to come through.
His session with Jon Bon Jovi and Bill McDermott
I thought Jon Bon Jovi was remarkably candid. I thought Bill was too, but I know Bill and I know he is usually candid. I thought Jon’s admission about facing down dark times was profound. Just imagine if one of the most successful touring rock stars of all time who can walk into a stadium of 90,000 people and get roaring applause without even singing a note. If he can feel the dark pressure of negativity in his own life, I think those of us who are working away every day trying to make these businesses run well, which at many times is not a necessarily popular thing to be doing, it’s ok for us to be honest about our own challenges. I just thought it was refreshingly human in terms of the context.
Some of the human dimensions of technology in the enterprise, I think those are underplayed. I think these are inherently human conversations. Change management is a human conversation. Introducing new concepts and new ideas and asking people to have an open mind and try new things, these are human conversations.
We do sort of the instant pulse checks on audience sentiment. The reactions to that conversation were overwhelmingly positive. And if you think about the benefits of an event like Sapphire where you bring so many people together, I think the burden on any vendor is, what can you give attendees that is a unique experience that they’re not likely to be able to recreate anywhere else? If I were an attendee, I would want that standard to be met. And I don’t think you could have watched what Jon and Bill talked about and not feel like you were participating in something that was pretty unique
The fact that we balanced it, by the way, with what Adaire Fox-Martin did with Adidas (here) and Jennifer Morgan did with Costco (here) earlier on that morning, I thought was really important. Because I think if we hadn’t done that, I do think it would have been a missed opportunity. I thought those conversations were outstanding.
Partner feedback
I believe that they see our definition of the Intelligent Enterprise as a new frontier where they’re going to have a lot of unique opportunities to help our customers extract value. I also think, to the point of your recent blog post, they recognize that there’s a new bar, there’s a new standard. Speed, efficiency, automating what can be automated, and ultimately delivering value in new ways….that’s the pressure we all feel. If I were a partner of SAP and I sat through Sapphire, I would see a new wave of opportunity. I would want my SAP practice to be excited and motivated to focus on Intelligent Enterprise. But we also have to be really clear about what customer expectations are in this new world. I think we’ve made a lot of progress in the last several years. I think we’re going to make even more progress in the next several.
Concert Night
I’m the oldest young man you’ll ever meet. I find the concerts too loud in general, so I just stuff earplugs in. So I’m perhaps a lousy person to ask. But the people who I surveyed thought Justin Timberlake put on a fantastic show. My daughters were extremely jealous that we had him there, and that they didn’t get to participate. I told them they should buy some software
Otis designed the first safe elevator when he needed to lift heavy building materials, while converting a sawmill into a factory in Yonkers, New York. He made toothed wooden guide rails to fit into opposite sides of the elevator shaft, and fitted a spring to the top of the elevator, running the hoisting cables through it. The cables still guided the elevator up and down, but if they broke, the release of tension would throw the spring mechanism outward into the notches, preventing the cabin from falling.
I spoke with the chief information officer of the Otis Elevator Company to learn about the company’s digital transformation. Marcus Galafassi, the company’s CIO, was my guest on episode 292 of the CXOTalk series of conversations with the world’s top innovators.
This episode offers an inside look into the hidden world of elevators and the people who build and service them.
From my perspective, Otis is addressing three challenges that make digital transformation hard:
The first challenge lies in driving change through its globally distributed network of 33,000 field service technicians. As you read below, check out the comments from Marcus on the composition of modern change management.
Second, given the company’s age and history, changing established ways of thinking is also a major issue.
Third, customers expect Otis elevators and escalators to be safe, high-availability machines. The sheer size of the company’s worldwide installed base creates ongoing pressure to ensure safety and reliability without screwups.
The company’s digital transformation is a fascinating story that involves modern technologies such as sensors, internet of things, and even building interfaces between Amazon’s Alexa and elevators.
Watch our conversation in the video embedded above and read the complete transcript. Below are edited excerpts from the transcript.
And, if you want to learn whether the “close door” button on elevators works, then read on!
As CIO, you develop systems that affect the product directly?
Marcus Galafassi: Yes. For example, the apps. We have done a lot of apps for our mechanics. These apps, they are apps that are linked to the customer experience.
That’s the problem we have, the customer experience. We go into a service in a contract that we have with the customer. The customer doesn’t see that I came there, and a frequent question was, “Did you come here and do what was supposed to be done? I didn’t get any feedback.”
We just launched a very simple digital tool using text as a basis. I’ll tell you; the feedback we got was very simple. The feedback we got was great.
Again, when you do apps like these or also to our mechanics that can improve the right quality or can improve efficiency in the field like searching parts that I needed to order, this is a great opportunity where digital is beyond what I would call in a traditional company or the CIO boundary. We are doing things that go beyond our organization.
How does digital create opportunities to go beyond the traditional CIO role?
Marcus Galafassi: Sensor data is one thing that is addressing a lot of opportunities for us. In these two million units, from a contract standpoint that you have in the globe, we more than 300,000 connected today. We are harvesting this data from a sensors standpoint.
I think you talked about pushing the “close door” button, right? I bring the example of this “close door” push button. One of the major issues we do have in elevators is doors. Why? Because people are rushing in the day and try to arrive and then see the door closing. They try to hold the door. Then holding the door, again, affects the mechanisms we have, I mean the components we have in the door.
Sensors, we have put sensors in the doors, and you can understand that, throughout the whole data history, how much can you predict on this kind of sensor information, and how can we anticipate services to be maintained? Again, sensors providing this kind of data is very rich. If you look at doors, again as I said, 60 perceent of unexpected services are caused by this type of failure. If you can bridge the technology, the digital IoT capability along with the data analytics, it’s a very powerful technology for us.
We have done more than that. In our deployment for these 33,000 techs, we have now 17,000 done. We have established a very strong network in terms of change management. We have more than 1,000 people that know how to support the technicians in the field. They know how to help them to sort the problems out because, again, mobile for me is easy but, from a technician that has worked 30 years in the industry, it’s quite a challenge.
Again, that’s an opportunity, I would call it. The technology has been evolved. I think the CIO has an opportunity and has to take this and move forward.
That’s what we did two and a half years ago. We established a very nice strategy to transform and support our digital folks in the field. Then, of course, we’re evolving for IoT moving forward and clean up the baseline, our backend in the company as well.
What were the business reasons for these technology changes?
Marcus Galafassi: We have done a lot of assessments in Europe, mainly because Europe is our mature market from a services standpoint. Again, most of the comments and what matters from a customer’s standpoint is information. How can I make the information available to our customers, and how are they taking that information and, of course, helping them to drive?
I have a situation, for example. It’s a true case where a customer told us, “Look; I have one person that walks every day in the morning, in the afternoon, in the night.”
I ask, “Why? Why have this? To do what?”
“Just to walk in every level of my building and check if the elevator is running.”
So, we have a customer that’s telling you, “I have one person from my building walking every single day, every time, to check if the elevator is up and running.”
Again, if you can connect the elevator, get the sensors, predict if it’s going to be broken, or even more as we showed in the Shanghai Expo, we have what you call a customer view. We can show, in a dashboard, all the units that belong to the customer. Actually, the name of this is called the Campus View.
Instead of having the person walk and seeing if the elevator is down or is up and running, he can see the dashboard, and he can see it on his mobile, so think about it. Again, that’s the way that you address customer experience. That’s the way that you address the communication that was missing in the past. That’s what the customers are looking for.
You want to simplify the customer’s relationship to the elevator and its components?
Marcus Galafassi: We really appreciate technology. But, these 300,000 units, I told you some of them are still connected in an old-fashioned way. I would say ISDNs or corporate-based telephone lines. They’re still getting the sensors data.
But, when you look at these technologies and you see the data around the technology, we can still apply, I would say, analytics on top. We can still apply data patterns around that, and you can still have information helping us and us helping the customer. Definitely, one of the major points that we have done in some of the apps that we have built around is to improve the right quality.
In the past, we used to have a technician come if a Motorola broke, as I call it, you know, then connect a cable and hooking the cable into the control board. OK. Now we have a wireless dongle, and I can connect even in the lobby without even touching the control board in the elevator machine area. That’s one thing.
It improves safety as well, by the way. I don’t need to have a technician downloading all the data associated with failures or potential failures. I don’t need to touch the equipment. That’s my point.
All of this is in the cloud. We started cloud four years ago here at UTC, our parent company. We are the pioneers of the cloud in our business. Again, I think that’s the powerful information in the cloud at the hand of our technicians and at the hand of our customers. I think that’s pretty much our vision.
What agile approaches do you use?
Marcus Galafassi: That’s a great question. We started two years ago, Agile methodology. We learned a lot. It’s not easy coming from a traditional waterfall into an Agile method. I mean the learning process, what it means to split into scrum teams. How can you put it all together?
I think the great news on this is, again, the technology has evolved a lot. I was a COBOL programmer. Don’t ask me when I was. It was a long time ago. I remember I was sitting along with the other guy asking, “Can you do a report like that?” Then two weeks after, “Oh, by the way, I missed this.”
Again, it was kind of, you come; you ask me what you want. I think I know what you want. Then I do something. After, you just realize it doesn’t work.
Waterfall is over, from my point of view.
I think we can still use some waterfall technology or process to help us address, I’d call it, traditional IT systems. Some ERPs still require that. But, what we did, we actually have a very strong process with our parent company, UTC, and it is across all our business units. It’s called ACE, achieving competitive excellence.
ACE has one of the tools called passport review boards. It sounds very bureaucratic, and sometimes it can be bureaucratic, as long as you want to. But, what we have done now, we have merged some of the key fundamentals and what is a PRB, as you call it here are, at the end of the day, milestones. I need to have a minimal design. I need to have a gateway. After the design is done, what’s my build? After my build is done, what is my outcome that goes for production?
What did was merge the key gateways along with Agile to make sure that we would be fast with a sprint approach, creating scrum teams, but also controlling the quality throughout the process. These four apps, I think, work very well. We did eight apps in one year, pretty much. We deployed 17,000 phones, 17,000 mechanics, with an ecosystem using iPhone, and our MDM is AirWatch, pretty much at the same time, a year and a half. It was very, very aggressive, and we see the methodology for helping you, like DevOps or Agile. That’s crucial.
If you want to go digital and you want to do it fast, you need to have, of course, some change management along with your customers, internal or external. Again, external, we are having a lot of experience bringing some key customers to attend some of the sessions and providing feedback in the design. I think that’s the evolution.
Another important thing, we started this pretty much alone. A year ago, UTC, UTC Digital — UTXD, as we call it — has launched an accelerator in Brooklyn where some of these capacities were not present there at all. We started, again, an hour away from a notice elevator standpoint, but the capacities like design thinking, ideation, incubation, product management, not project management, product management and, of course, analytics. We are creating these capacities inside the house. You can go and show off the results outside, but I don’t think it’s healthy.
If you want to just really turn your company digital, you need to have this kind of capacity. You need to have a design and thinking process. You need to have Agile, DevOps. You need to have product managers taking care about the product evolution, the digital product evolution throughout the period. And, of course, in AI, analytics are components that can help you improve and enhance the product. Again, it’s a mix of methodology, capabilities that you need to have in-house, and you need to foster this more and more and more in our IT organization.
How do you change an organization that is 165-years old and so well established?
Marcus Galafassi: It’s, not all about technology. Technology is great, but it’s technology; it’s people; it’s process.
I think, what you have done, we addressed a very strong champions network to help us achieve goals. I’m talking to the apps aspect now. We have 1,000 champions across the world. I think these people have been trained. These people have been fundamental to help us turn this. I call it adoption because it’s really adoption.
You can give a very nice phone to a technician, and he can YouTube. He can do this; he can do that. But, at the end of the day, you want them to use the apps and make his life more efficient, the customer’s more communicated, and the experience better.
The key fundamental point is if you go to this technology and if it’s 165-year-old company or if it’s a six-month old company, it has to have a change management concept in place because, without that, the technology itself is not going to help you. People have to adopt. If people don’t adapt and adopt, then you have a problem.
I’ve got another example that our service leader gave me, and I was very happy about it because we deployed along with these 1,000 champions in our change management network. A lot of communicates decided on our Yammer setup.
There was a guy. I don’t remember his name. A mechanic, he was having a problem. It’s like China time zone back to California time zone. The guy was typing in Yammer. He said, “I have a problem, specific problem with this setup in this machine with this control board,” and so on and so forth. A guy overseas, he answered and said, “Look. I had the same problem. By the way, I did this.”
Think about the power of this. This is a true change management. [Laughter.] It’s a tool that is across the board. People are talking to each other virtually. They don’t know each other face-to-face. They never met each other face-to-face. But again, that’s, for me, the power of the technology. But, we had to create this network because, if we don’t create the network, if we don’t create the right groups, we just can create, as they call it, a little bit of confusion, you know. We need to use the right technology to help and evolve the newsletter to type it once in a true, digital communication.
Modern change management means collaboration?
Marcus Galafassi: Yes. Pure collaboration.
Pure collaboration and you have done some tooling as well, some tools where our mechanics if they have a problem, can call an expert. They can Skype themselves. They can show on the phone where the problem is, and someone is going to help them to address the problem.
Before it was someone trying to call someone. We are digitizing all of our technical information, which is the basis for searching parts and everything else. In the past, we used to have binders in the trunk, and you go back to the trunk in the car. You open it up and see what’s the part I need.
Definitely, technology helps change management, but we need to organize that and structure that properly and have the right champion network, have the right expectations how to use the technology, what can be done, what cannot be done, [and] create the collaboration. Collaboration is key. I think the technology helps, but if you don’t have structure, then it becomes another app that is not going to be used.
What metrics do you use to evaluate digital strategy?
Marcus Galafassi: You have to address adoption. Let’s talk about adoption metrics.
We have adoption metrics in terms of usage of the apps. We have a process also to collect, in our incubator, ideas that ties, again, with the KPIs that we have established.
I think one of the main concerns, along with the change management, is how can you drive adoption? Adoption, again, is relative. It depends on the person’s experience, the person’s expectation, but we have set up very nice KPIs around how the apps and the usage of the apps have been, on a monthly basis, collected.
We have a process in place. We have improved it with a lot of design thinking and improved the UX, the experience. We are trying to combine some of the apps to have the right business flow or process flow from a mechanic’s standpoint.
We needed to map personas. We needed to map our ecosystem where these personas are going to use these and for what purpose. Usually, I mean traditionally, we have not done it in the past. So, I need to put myself in the shoes of a mechanic, and I need to in a hoistway, which has no cellular communication at all.
When you build up an app and think, “Oh, an app is great,” oh, but there is no offline capability. Okay, I think it’s a big mistake, right? You are in a building, in a hoistway, completely closed, and there is no network coverage. You cannot build up an app thinking that the app is great if there is no offline capability.
We need to have, again, the persona. You need to put yourself in their shoes and have the right empathy to make the right process, the right tool, the right app for them.
When you design a product, and I talk about an elevator, we need to think in that perspective as well. How can we integrate the sensors? How does that sensor go into the cloud? What are the AI opportunities we have around that? Can I put Alexa to call the elevator? Yes, of course, you can, and we did it, by the way. You’re more than welcome to come here and visit us in our Bristol Tower.
Bristol Tower is in Connecticut, in Bristol, and it is the highest tower in North America. We have a prototype of that we show to customers. They love that. Again, these kinds of ideas, that’s what you want as a spirit, as a digital company.
How are you using the Internet of Things and why?
Marcus Galafassi: I mentioned before the Campus View, which is one of the customer dashboards that we have presented in the Shanghai Expo. The Campus View gives you how healthy the customer fleet, the elevators, are in their respective building.
You can see the available red and green dots. Why it’s red is because we can have an elevator or the unit down, shut down. Also, you can see, and you click. It can start to turn green to yellow, yellow to red, and you can move the time. The time means I can move ahead a little bit and see in three months that yellow becomes red. That’s what we can see. Of course, the customer has the information available.
We are using sensor data. We are feeding off this data in our cloud. We have done a condition-based maintenance to predict using, again, doors as 60 percent of our call-backs, as you call it, or unexpected visits are driven by doors problems. We have done very well, along with engineering and our research center here, prediction in how these patterns of failures could happen and then how they would happen. We can anticipate that failure. That’s what addresses not only deficiency in our site but, also, we prevent to have a unit in a shut-down mode, which is the worst thing that can happen to our customers. Customers need our elevators 100 percent of the time up and running. That’s pretty much the whole business value we see with IoT in our case.
Are the close door buttons on elevators real or fake?
Marcus Galafassi: If the customers ask you to shut down, we’re going to shut down the button. [Laughter.] That’s a customer request.
[When people force open an elevator door that is closing,] the whole mechanism [of the closing door] (sic) have to move back. If you have extra strength, it’s even worse. This completely interrupts the momentum of closing the door, so we don’t like it [and can cause the doors to require service].
It can be perceived as a fake button. But, I let you judge that. [Laughter.]
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Welcome to Episode 179! Dave Kellogg is the CEO @ Host Analytics, the leader in cloud-based enterprise performance management (EPM). Previously, Dave was SVP/GM of Service Cloud at Salesforce and CEO at unstructured big data provider MarkLogic. Before that, Dave was CMO at Business Objects for nearly a decade as the company grew from $30M to over $1B. Dave has also worked in various capacities with the likes of Breeze, GainSight, Tableau and MongoDB and previously sat on the boards of ag tech leader, Granular (acq by DuPont for $300M) and big data leader Aster Data (acquired by Teradata for $325M).
In Today’s Episode You Will Learn:
* Why does Dave believe it is foundational to be an ARR first company? How does Dave think startups can show their ARR first mentality from the first investor meeting? How does this help drive operational efficiency? How does Dave segment ARR into 3 distinct camps?
* Why does Dave argue that SaaS metrics are not nearly as simple as they seem? Which metrics does Dave believe most founders confuse? What metrics will the best VCs pick apart and dig deep on? How can founders respond with accuracy and confidence?
* How does Dave respond to multi-year deals? Under what conditions are they acceptable and not acceptable? How must they be reported in accounting? Where do many startups go wrong when considering multi-year deals? How important is it for them to be pre-paid?
* Why does Dave argue that renewals do not measure customer satisfaction?What is an accurate measurement to determine customer satisfaction? How often should this be conducted? What sample size of customer gives the right amount of data?
* How does Dave approach comp with regards to sales team cross-sell and upsell? Why is it not as black and white as boards often portray? Under which circumstances does Dave believe double comp is justified and not justified? How can you communicate this to your board successfully?
Harry Stebbings: We are back on the official SaaStr podcast with me, Harry Stebbings. The week has finally arrived. Yes, it is SaaStr Paris this week. What a show it will be. To see all things behind the scenes from Paris you can follow me on Instagram @hstebbing1996. It would be fantastic to see you there.
To celebrate the very special event being upon us, I have selected one of my favorite talks from SaaStr Annual this year with a prior guest of the show who, to me, is simply one of the greatest minds in this space.
I’m thrilled to welcome Dave Kellogg. Dave is the CEO of Host Analytics, the leader in cloud‑based enterprise performance management. Previously, Dave was SVP of Service Cloud at Salesforce and CEO at unstructured big data provider MarkLogic. Before that, Dave was CM of Business Objects for nearly a decade because the company grew from $30 million to over a billion dollars.
Dave’s also worked in various capacities with the likes of Breeze, Gainsite, Tableau, and MongoDB. Previously he sat on the boards of agtech leader Granular, which was acquired by DuPont for $300 million and big data leader Aster Data acquired by Teradata for $325 million.
You’ve heard enough from me. It’s time to get the notebook out and unpack some pearls of wisdom from Dave Kellogg.
[drumroll]
Dave Kellogg: My intent for the presentation is tops of the waves. It’s 10 things that will hopefully make you think.
The first one, and you can accuse me of, “Whoa, isn’t this a presentation on non‑obvious things about SaaS companies? Why are you saying you should run the company about ARR?” The answer is lots of people seem to think they do run their companies in ARR but they don’t.
Just last night I met with a very smart entrepreneur, very cool company who wanted to show me his financials. The first line was all about ACV that was mixing new ACV, upsell ACV, and renewals ACV. I couldn’t make heads or tails of it.
Another time, people, they show me gap venues. I’m like, “You’re a SaaS company. Why is your first slide gap revenue?”
If everybody thinks they want to be ARR first but you only know you are based on the answers of these three questions. One, if you ask somebody how big a deal is do they answer in ARR? If they answer in any other unit your company’s not ARR first.
If I ask what the forecast for the quarter is, if you don’t answer in ARR…It’s about what I don’t say. You say, “What’s the forecast?” Do you answer in bookings? What do you answer in? If you answer in ARR, that’s correct. Then you’re ARR first.
What’s the first line of the first slide of your investor deck or board deck? If it isn’t ARR, then you’re not ARR first. Lots of people think they do this. It’s actually a dangerous form of denial in my mind. If you want to be ARR first, make this the first slide of your board deck or of your investor deck.
It’s not only my opinion. I met a couple years back with Doug Leone, a top guy at Sequoia. I showed him some financials in this format and he goes, “Every SaaS company should present their financials in this format.” It’s not just me. I have a second opinion on it.
What this shows you is what I call a leaky bucket analysis. A SaaS company is a leaky bucket full of ARR. Every quarter sales pours more water in the bucket. Every quarter customer success tries to keep water from leaking out of the bucket. Therefore, you can say we started the period with 100 units of ARR. We added 50 units. We churned away 10, therefore we ended up with 140 units.
I can tell you that the value of your SaaS company is determined by the water level in the bucket and by how fast that’s growing. When you do this analysis it’s very important. You can see things like people who are…Say they sell two million in new ARR but churn 1.5, so it’s a big bucket and they’re having trouble keeping it full. That company’s not worth very much because it’s not growing the water level in the bucket.
It’s got a big bucket but it’s not growing. That’s why we have the three growth rates down below. New ARR growth, any ARR growth, which really is the single most important thing for valuing your company, and net new ARR growth, now much incremental did you do to the bucket.
Everybody agrees we should be ARR first. The question is are you? If your default unit isn’t ARR and if you don’t show your financials with an immediate focus on the ARR bucket and what’s happening to it, I’m going to argue you’re not ARR first. Lord knows, please don’t show up with a gap P&L. These things will hurt you when you try to raise money because a VC wants to know that you get ARR and you are an ARR first person.
That’s our first point. Second point, SaaS metrics are a lot more complicated than meets the eye. A lot of us are intellectually lazy. A lot of us assume these things are simple. You can get yourself in trouble if you don’t take time to think about what goes into these calculations.
VCs are going to be looking at your company through a lens of these metrics. They’re going to look at LTV to CAC. They’re going to look at CAC. They’re going to look at churn. If you don’t understand and have a logical argument for how you calculate them, you can get yourself in trouble.
The purpose of this presentation isn’t to try and do a two‑hour course in subtleties of SaaS metrics but I do want to point out a few things that maybe you didn’t think of that will hopefully make you realize, “I should dig into this.”
For example, the CAC ratio seem simple. Prior quarter sales and marketing divided by new ARR in the current quarter. What could be easier? Does that new ARR include upsell or not? Most people would say yes but some people may want to make a new business focused CAC that didn’t.
Is sales and marketing all of sales and marketing? Is it just a variable like the sales commissions and the marketing demand gen or is it the entire base salary, the PR team, the whole banana? For most people, it should be the whole banana because the question we’re trying to answer is, how much does your company spend to acquire a dollar of ARR? That’s what the CAC ratio is.
Typically, it’s all sales and marketing costs divided by all new ARR in the quarter. Should it include upsell? Yes, but who does upsell at your company? If upsell is done by sales, then, wait a minute. If you ask finance where do they put the cost of customer success, it’s in sales.
You need to pull that out and say, “Wait a minute, my sales team does upsell, so therefore when I do my CAC ratio I shouldn’t include the cost of renewals because my customer success team just does renewals in that,” or vice versa.
If your customer success team does do a lot of upsell and you’re including upsell ARR in the denominator then, yes, you should include their cost in the sales calculation because most finance departments will classify customer success as sales expense.
The other nasty thing about sales expense, and this is probably for slightly bigger companies, but commissions get amortized. There is a question of whether or not you want to restate this on a cash basis, to say, “Wait a minute, if I’ve got screwed up comp plans that are over‑rewarding sales, I’m going to take those and divide them over the duration of the contract. It’s going to be very hard for me to see this with a broken CAC ratio.”
If I reset and do this on a cash basis maybe I’ll see reality more clearly. These are little niggling subtleties that make something that seems so easy difficult. LTV to CAC, first LTV to CAC is the ultimate SaaS metric. It’s what you paid for something on the bottom and on the top what it’s worth. It’s the grand balance.
What you paid for it is the CAC ratio, or how much you pay for a dollar of ARR. On the top you’re trying to say what is somebody’s lifetime value in terms of subscription margin. I have to run this service so let’s do this on a subscription gross margin basis. Let’s invert the CAC rate to get the lifetime and then divide it by the CAC ratio. That will get me a number. The bigger that number, the more it’s worth relative to what I’m paying for it.
It seems like a pretty simple metric but the first question is which CAC? I just talk to you about give different CACs you can do. Which CAC ratio do you use? That can be the same argument on churn. Which churn do you use? There’s a lot of different ways to think about churn, as well. Lord knows, what do you do when churn becomes negative?
The idea behind churn rates is kind of like you use it as a discount rate in a net present value formula. If I have this bucket of ARR, then imagine I have no upsell. Every year 10 percent of it leaks out. It starts out with 100, then it’s 90, then it’s 81, then it’s 72. I’m using it as a discount rate of the value of my annuity.
That works really good except when churn is negative. Then, all of a sudden, your lifetime value is infinite. You can go tell a VC that but they’re not going to believe you. What do you do?
If you exclude upsell it seems too pessimistic because, wait a minute, we really do do upsell. I really do have negative churn. It breaks your LTV to CAC math. These are the things you need to think about.
Here’s an even more interesting case, which is most of the thinking about land and expand in Silicon Valley is I sell somebody a $50 steak, and then I sell them a $10 glass of wine, and if I’m lucky another $10 glass of wine. I have the big purchase up front and I’m getting these little things on the back end.
I met a guy last night who sells a $10 glass of wine and then sells a $50 steak, then another $50 steak, then another $50 steak. He has a problem that looks like this. If he spends 100 units to get a customer or 50 on that initial purchase, it looks like his CAC ratio is 2.0, which is not good. A lot of VCs will run away if you tell them your CAC is 2.0. Is his CAC .33? I can tell you reliably that two quarters later these guys who I spent 100 to get are now worth 150.
What is my CAC ratio here? The question is, really, what do you mean by acquisition? In this guy’s case if you can reliably prove that that pattern’s going to happen then I think he should count the sales and marketing divided by the first‑year customer value, which is an unusual way of looking at it but if you have a small land big expand model, maybe it’s the right way.
Here’s another example. This is a churn example, my last metrics example to talk about how things can get confusing. We’ll take this simple case. Somebody buys 90 units of product A and 10 units of B. Six months into it they buy 15 more units of A. They’re happy, and then the renewal comes up.
What are we renewing? What’s the denominator in the renewal rate? Is it 100 or 115? Your inner fundraiser wants to say it’s 100 because you want to say, “Hey, I renewed 115 plus units off a hundred.” That’s what your fundraising side wants to say. Your operational manager side says it’s 115. I’m handing a CSM a customer worth 115 units. I want to get 115 or more units out of that customer.
There’s your first question, what do you do about off‑cycle upsell? How do you think about that? An answer is you certainly want to tell the CSM, “Go renew 115 or more.” The 15 units of upsell, finance typically takes it when it comes. Thus far into the discussion of loss credit for it. It kind of went away because it went to offset churn in some other period.
More subtly, on day 365 is your company going to count that as 10 units of churn and 20 units of upsell or simply as 10 units of upsell? Most sales ops people, if you talk to them about this, they look at customers on a contract basis. They’re going to say the value of that contract went up by 10 units so it’s 10 units of upsell.
The underlying flows get lost. Most systems don’t track it. Most companies don’t track it. I call it account level churn. You’re looking at it through an account lens, not through a product lens.
What about those 15 units of upsell? How do I get credit for them? The answer is that’s why they made retention rates because retention rates are cohort based. You say, “Take all the people who bought in 1Q ’17. What are they worth now in 1Q ’18 in aggregate? That’s my retention rate.”
Those are good. This is a simple calculation. It actually shows what happens to a group of customers and how they expand or shrink over time. You don’t have to worry so much about the timing issues because you’re taking snapshots.
All this stuff, though ‑‑ This is just tops of the waves ‑‑ hopefully points out that, gosh, there’s a lot more going on here than maybe I think. It’s worth drilling into these things because when you’re raising money, VCs and private equity guys, they’re very familiar with these metrics. They’re going to ask those questions.
If you don’t have credible answers that are well thought out, you lose a lot of credibility. On the flipside, take my friend who sells the $10 glass of wine. Most VCs would run away from him and go, “Wow, he spent a bunch of money to get just this $10 order.” If he comes in with a good story that says, “Wait a minute, 8 out of 10 times they buy a $50, then buy a $50, then buy $50 again within one year,” his CAC ratio goes from 2 to 0.3.
They’re like, “Holy cow.” It goes from unacceptable to amazing, based on how he was able to frame it. This stuff matters. They do react to the metrics.
Third point, public CFOs may not get SaaS metrics. This was fascinating to me. I put it up here mostly as a bonus because one day I met with the CFO of a well‑known pubic SaaS company. He started asking me all these questions about CAC, and LTV, and renewal rates.
I’m sitting there thinking, “How can this be? This person is a CFO of a public SaaS company and he doesn’t understand a lot of these metrics.” The light went off and I’m like, “Wait a minute, he lives in the world where investors look through a veil at the company. They can’t see all the metrics that you show VCs and private equity guys. They look at the company through a veil, so he only understands these outside in metrics, like billings.”
Billings is revenue plus change in deferred revenue. It’s a way to try to hack bookings. It doesn’t necessarily always work, but that’s what they’re used to.
Even though he’s the CFO, by the virtue of his job he places himself outside the company and looks in because that’s what all his investors do. Therefore, he doesn’t actually know much about all these internal metrics that the VC world gets to see.
First, it was amazing to see. Second, I would say, “Look at how this might apply to you,” because boards love to hire the CFO you need three years from now. That’s great as long as that person can do the job you need done today. This guy can’t. This guy would not be a good CFO at a private company that needs to raise two more rounds before an IPO.
My advice is don’t let your board push you too far ahead and hire some CFO who’s going to be wonderful at the IPO when you’re three years from an IPO and need to raise two rounds. You need somebody who can do the job right now. It’s a fairly common pattern.
Number four, multiyear deals make sense in certain situations. This is heretical, so I put the heretical warning on it. If you say this in polite SaaS company, you are likely to offend someone. Hardcore SaaS purists think it’s all annual. Multi‑year deals are evil. You’re accounting TCV.
That scares me because TCV may or may not ever be realized. You’re taking your ARR and multiplying by five for a five‑year contract with annual payments. Who knows if you’re going to get the money? Are you inflating the size of your company 5x in the process? Scary, scary, scary. That’s the thought process that happens if you talk about multi‑year deals recklessly.
The reality is these contracts are effectively rolling the dice. If you’ve got a 90 percent churn rate, I’m effectively exposing you to an annual dice roll, where your contract comes up. We roll the dice. 9 times out of 10, it says, “Renew.” One time it says, “Not.” That’s the way we should think about the renewal rate.
If I were to offer you a discount that was less than that churn rate, am I better off? I can expose you to a 10 percent decay from the churn rate, or I can expose you to a 5 percent decay from a discount. My belief is whenever the discount I offer you for a multi‑year deal is less than the churn rate, that you win and I win. It’s actually a win‑win transaction.
At my company, we offer these to customers. We do it at the very end of the sales cycle. We say, “You’ve done a full evaluation. You’ve chosen Host Analytics. Would you like to save a little extra money?
You seem pretty sure it’s going to work for you. You just spent six months evaluating it. If you’d like to do that, we could talk to you about a multi‑year deal. Here’s a kind of discount we can do.”
Half the time, people say, “Great.” About half the time, they say, “No, thanks.” I don’t mind, because if I’m offering the discount at the right level, I’m actually fairly neutral. I’m like, “Go ahead. I’ll put you against the dice.” That’s roughly the discount I was offering, anyway. It’s mathematically equivalent.
That a deal needs to be prepaid, very important. I believe if you’re a sales force and you sign a multi‑year deal that’s not prepaid, and the customer defaults on you, you’re probably going to sue them. You can collect that money. If you’re a $10 million SaaS company, you’re not. You’re not going to have the money to sue them.
I believe that multi‑year non‑prepaid deals for small SaaS companies are a terrible idea. Why? Because they look a lot like renewals that are done by Finance, not Customer Success.
If it’s on a one‑year cycle, you’re going to tell Customer Success, “Go love this customer. Make sure they’re ready for a renewal. Do all your normal love process, so when that contract comes up, they’re ready to renew.”
If you hand it to Finance and say, “Hey, there’s a collection due in 365 days,” they’re not going to call anybody. They’re not going to be nice. They’re not going to treat it like a renewal. They’re just going to mail an invoice at month 11. If the customer is unhappy, they’re just not going to pay it.
All of a sudden, you’ve got effectively a renewal. Finance is going to say, “It’s a contract. You owe us the money.” If the customer is not using the software, they’re going to say, “Pound sand.” Then where are you? You’re nowhere. You gave away a price lock. You gave away a discount. You got nothing in return.
Our argument is if you want to play this game, the deals have to be prepaid. Multi‑year non‑prepaid deals to me don’t make a lot of sense for small companies. Your ability to collect those out‑year payments is virtually identical, whether or not the contract is in place.
If they’re using the software and they’re happy, they’re going to pay. If they’re not, they’re not. It doesn’t matter what the contract says. They can make sense in certain situations.
Another heretical idea is that bookings is not a four‑letter word. If you say the word “bookings” in a polite SaaS, you’re likely to offend. We must be careful when we say the B‑word. If you define bookings sensibly, then you can talk about it. Defined sensibly, bookings are things that turn into cash in 90 days.
Everybody cares about cash. They’re going to like talking about something that turns into cash, as long as you don’t mean TCV bookings, which is not prepaid. See prior sermon. If you’re talking about something you’re going to get collection on soon, then people are happy to talk about these.
At our company, I said about half the time, somebody will do a multi‑year prepaid deal. We end up, on average, with two years prepaid. If you look to the billed of our financials, I’d say in a period, we did 100 units of ARR.
We did 200 units of what we call “new subscription bookings.” That’s prepaid subscription bookings. Our NSB‑to‑ARR ratio is the, effectively, average prepaid contract duration, in effect. We add renewal bookings to new subscription bookings. That gets total subscription bookings. You add services bookings on top to get total bookings.
This is a great way to build this. If you’re smart, you put the focus on what I call “TSB,” total subscription bookings. If you care about cash, whether it’s a renewal booking or a new booking, if you have subscription gross margins of 80 percent, it’s going to generate 80 percent of that money in cash for you to go spend.
That’s not true for services bookings, as we’ll see in a minute. Most of you, 50K of services earnings generate 0K of cash. Let’s get that out of the way. Let’s focus on subscription bookings.
If you’re offsetting deficits in subscription bookings with services bookings, you may feel great about hitting your bookings target. You’re going to find yourself at a real cash shortfall, because they don’t have the same gross margin. Bookings is not a four‑letter word. If you think about bookings, it’s something that turns into cash.
Renewals. A lot of us feel like renewal is a proxy for customer sat. It’s not. It’s a pretty simple point. We lose customers who are very happy because they get acquired by a PE firm. The PE firm says, “Here’s our standard tool set.” They hired a new CFO. The CFO says, “We use Hyperion because I’ve always used Hyperion.” That happens in our lives. Those were happy customers.
On the flip side, you often have unhappy customers renewing, typically because they didn’t have their act together. They missed the auto‑renew, 60‑day thing in the contract. They were trying to get a new system up and couldn’t get it done.
You could find both cases, where unhappy customers renew and happy customers don’t renew. Let’s not pretend that renewals are a perfect proxy for CSAT. Let’s go measure NPS instead and then try and look at the relationship between the two. A pretty simple point. The net of it is go measure NPS. Do it ideally four times a year with a quarter of your base each time.
This one is fun. You can’t analyze churn by analyzing churn. This is a slide we show on our board meetings. This is what I call the “churn taxonomy.” It takes all the churn that happened in the period and talks about why 1,000 units lost to lost accounts, 300 to shrinking accounts, on the lost accounts, blah blah blah. The 750 was business related. 250 was product related.
It’s a way to show your board and to show your team churn by reason. What are the reasons people churn? Great slide. Useful slide for any board deck. The problem is it doesn’t actually answer the question you really care about. The question you really care about is, “What predicts someone churning?”
We’re going to use an example here, a fairly well‑known example about World War II. As bombers came back from missions, they would put little dots for where they’ve been hit on these planes. At the first order, people said, “Gosh, these are where our planes are getting hit. Let’s go reinforce them in those spots. Let’s make them stronger in the places that they get hit.”
One day, a very smart person came along and asked a simple question, which was what? “What about the planes that don’t come back? [laughs] Wait a minute. Shouldn’t we worry about what separates the planes that don’t come back from the planes that do come back? Maybe the planes that don’t come back are the ones that get hit.”
They complemented this pattern. They get hit in an engine, or they get hit where the pilot sits. There’s basically a survivor bias. We were analyzing how to make the plane stronger by only looking at planes that survive the mission, when we should have been looking at what differentiated planes that didn’t survive the mission from those that did.
When you analyze a bunch of customers that churn, you’re doing exactly that. If you just grab, “Here are all the customers that churned last quarter. Let’s go analyze the heck out of them,” you’re making this mistake.
What you want to do instead is go get a table of all the customers ‑‑ those that churned and those that didn’t ‑‑ with a bunch of input variables. “Who did the services? How big is the company? How big is the ARR? What industry are they in?” Things about the customers in the first columns.
In the other columns are, “Did they churn or not? Were they happy or not?” Then try and figure out the relationship between these inputs and those outputs to see what differentiates people who churn from those that did not. That’s what I mean by saying you can’t analyze churn by analyzing churn.
You need to analyze who churned and who didn’t and try to compare them. Finding your own hunter‑farmer model is hard. People do Hunter‑farmer because they want to focus their reps on new business. That’s a very noble intent. They want to pay lower rates on renewals and upsell because that’s less hard work than winning new business.
Now something to know if you don’t know it already, boards hate paying sales‑type commissions on renewals, and they’re right to. If sales people in SaaS make maybe 10 or 15 percent commissions, you don’t want to pay that on a renewal. Boards hate double compensation. Another word not to say in a board meeting is “double comp.”
If you say it, everyone’s going to sigh. It’s going to be a bad meeting for the next 10 or 15 minutes if you ever say those words. [laughs] Never say “double comp” in a board meeting because boards hate it. Sometimes they’re right, and sometimes they’re wrong. My opinion is we need to let intelligence not dogma drive this. The first thing, you need to be aware of the dogma.
There’s a lot of religion. If you’ve got a standard fries‑with‑your‑burger cross‑sell, it’s not really hard to sell the fries if you’re buying the burger. That’s what a lot of Hunter‑farmer is. They say to the sales guy, “Go sell the burgers. The CSM will go sell the fries.” It’s not that hard, so I can get a relatively low‑skilled CSM. That’s Hunters and farmers.
Well, say the expand is more sales‑y, that it requires more sales skills. Those are people often called account management. There’s some salespersonship required to do that. That might require a famers‑with‑shotguns model, we call it. We still have hunters and farmers, but the farmers are armed. They’re more sales and profile. They make more money. They come from a sales background.
Say it’s a really hard cost sell like we have. We sell planning and budgeting to the FPDA people. We sell consolidations to controllers. Different buyer, different product. It is definitely not fries with your burger. In that case for that sale we’ll use farmers track for hunters.
When a customer’s success manager finds a consolidation opportunity, we send the sales person right back in. If you don’t, if you send a CSM to try and sell consolidation to that controller, you’re going to end up with a dead farmer because you put your farmer against somebody else’s hunter. That’s something you don’t want to do. You need to figure out how your competitor is treating these models as well.
Finally, to beat the metaphor to death, if you have the small‑land and big‑expand like the guy with the wine‑steak‑steak, that person actually has an inside sales team that’s pretty cheap selling the wine glasses.
All their enterprise reps are install‑based reps. It’s a crazy model. He calls it hunters at a zoo because they’re in the zoo. They’re in cages. He’s got these enterprise reps shooting at them. It’s a great model for [laughs] that sort of business.
Number nine, you don’t have to lose money in professional services. I was shocked when I found this chart in the key back pack crest study, but only 20 percent of SaaS companies lose money on services today. I think it was a lot more in the past.
People have figured this one out on their own. To me, the right model is you have a relatively small team of high‑skilled high‑price people. You shoot for single‑digit margins, and things should go pretty well. You’ll set a nice price point to lead your ecosystem of partners. You won’t have the problems you have if you have heavy losses because heavy losses cause two problems.
One, they hurt your blended gross margins, which isn’t that bad because a lot of people will just look at subscription. The real problem is that I’ve seen this happen, a clever PE or VC guy will look at your services losses and add them back to your CAC.
That could be a very bad moment for you because you’re sitting there going, “Hey, I’ve got a pretty good CAC, but I’m losing 25‑percent margins on services.” They go, “Well, if it’s going to cost you a 25‑percent loss on services to sell that software, that’s actually acquisition costs. Hmph.” Then you’re like, “Oh, damn.” [laughs] Bad moment, right? Think hard about that.
If you think you can fool somebody by subsidizing a lot of sales cost in negative professional services, there’s a lot of smart people out there who’s going to correct for that error. Finally, the last point. Look. You need not sacrifice long‑term team members at the altar of experienced talent.
I’m a big believer that Silicon Valley boards are a little too quick to kick out the people who helped build the company. They’re a little bit heavy‑handed with them. I think we’ve been in a more relatively founder‑friendly era for the last 5 or 10 years.
As you face these moments where your VP of sales who’s been so good for the past two or three years is starting to run out of gas, what do you do? The board will very [laughs] quickly say, “Let’s bring in a new one [laughs] and get rid of the old one. There’s no way we can keep them.” I think if you’re creative, you can find a way to keep them.
In Salesforce, I wasn’t there that long, but they were phenomenal at this. They valued people. They valued talent. If you scaled out of your job, they’d try and find you a new one. They try a couple times typically because they wanted to keep you with the company. I think VC boards are a little too quick to boot people out. I don’t think you need to make these sacrifices.
These boards are correct in some ways, incorrect in others. I think the thing you can do to your company is create a culture of change, not a culture of stasis. If everything’s the same every year, it’s very hard to take one person out and move them down. If every year you re‑organize and say, “You try this. You try that. You try this,” then it’s much, much easier to do that.
You can get to a place where you can get everyone in your company to understand that they’re going to have more fun and make more money if they worry about being on the right bus, i.e. your company. Let’s worry about getting on the right bus. That’s how you make money. That’s how you have fun. It’s not all about the seat. It’s all about the bus.
If I want the VP of North American sales to run central region sales for a year and he or she doesn’t like that, just do it. In a year from now we’ll see what happens. Who knows what happens? I don’t know, but you’ll still be on the right bus. You’ll still be vesting your options. If you do great in that role and love it, great. If you don’t, we’ll talk.
Let’s talk in a year because we’re going to change everything anyway. It’s a great way to retain your people, which is really the most important thing you can do as you build a startup. Thanks very much. Follow me at Kellblog, and check out Kellblog.com.
[gong]
Harry: What did I tell you? You’re just such an incredible speaker. As Dave said there, you can find him on Twitter @Kellblog or on the Internet at Kellblog.com. That really is a must. Likewise, we’d love to see you behind the scenes for this very special SaaS to Paris week. You can join us on Instagram at HStebbings1996 with two Bs. It’d be fantastic to see you there.
As always, I so appreciate all your support. I cannot wait to bring you a set of wonderful episodes next week.
SAP CEO Bill McDermott: “We will not waver or bend until we have taken over the CRM market.”
In the interests of disclosure, I was writing this SAP piece as a brief part of a “Random Thoughts” post that would kind of mirror the format of my upcoming podcast – which will begin with the official launch of my website – the56group.com – in a month or two.
And then it — as “it” often does — spiraled out of control. Or into a long cycle of control, depending on how mad you think I am. (Mad as in crazy, not angry.) So, I split this into two parts. Random thoughts will be coming, but first: SAP’s pivot, with a perspective of what it means to the industry and to SAP as a company — not as a different version of their tech stack.
Here goes:
Industry News: SAP announces pivot to the front office – a formerly brief perspective
Ever since SAP announced their pivoting to CRM at SAPPHIRE a few weeks or so ago, the headlines have been rife with SAP positioning itself against Salesforce; SAP recognizing the value of the CRM market and its continued dynamic growth; and SAP’s determination to dominate the currently $40 billion CRM market. Bill McDermott, SAP’s long time CEO, in very dramatic terms is quoted as saying:
All nice, dramatic and warrior like – but performance art isn’t what makes this interesting nor is “we will not waver or bend” suited to anything less than assaulting a beach during World War II, not a software company announcement. Nor are these statements what was very important about what SAP did. But before I get too far into why this was the right move for SAP, let me frame this a little with history and corrections of history.
SAP was not the last to accept the status quo, it was the last of the big four to have a functional CRM suite, which it got when Bob Stutz, Jujhar Singh and company built SAP 2007, a highly competitive CRM suite in its day. That suite was the status quo, which was, at that time, what they (and the market) needed – actually a marginally more advanced version of the status quo. It did what CRM was supposed to do in 2007 – a sales, marketing, and customer service three pillars set of somewhat integrated solutions with a single data store.
What made it a bit more advanced – again for 2007 – was that it had one of the first “Google-like” user interfaces. It was what the world needed then and SAP, to their credit, were able to provide it. It made them at least a player in the CRM market, when prior to that they were an ERP company pretender in the market, providing what was mostly well known to be shelfware. That 2007 edition catapulted them into contention – a company to take seriously. Now, obviously, the stakes are higher and the needs greater. Think ecosystems and platforms.
This current pivot and the announcement associated with it has been three years in the making. It isn’t new. In fact, they made this announcement on September 15, 2015 with somewhat different but not all that different wording. To wit:
“New York — September 15, 2015: SAP SE (NYSE: SAP) today announced future integrated digital enterprise technologies that are intended to transform the relationships companies have with their customers.
SAP plans to unleash a powerful portfolio of SAP® hybris® tools that are envisioned to enable in-the-moment customer profiling, digital commerce and community development, empowering an organization’s front office to stay connected with the frequently shifting needs of its customers and prospects and enabling companies to go beyond customer relationship management (CRM) into a new era of digital connectedness, customer service and support.
“Companies can no longer rely on the costly, siloed systems of yesterday to engage with their customers, who are savvy, multidevice digital natives. They want their needs understood and met — right now and every time,” said Bill McDermott, CEO of SAP SE. “Legacy cloud-based CRM technologies create business complexity because their foundations predate the rise of social media and mobility. Companies today need innovative, integrated solutions that simplify the front office, making them easy to do business with and fostering greater customer engagement.”
In today’s digital world, businesses need to connect the front office and back office in real time — linking people, inventory, supply chain, pricing and customers together. This means that the new front office must go beyond the traditional marketing, sales and service automation functions and include integrated, real-time personalization, Web and mobile commerce, social customer service and more. Planned tools from SAP are envisioned to simplify the front office, helping businesses get a single, contextual view of their customers while giving each customer a consistent, personalized experience across all channels.”
Nothing really came of this, in part because it was made during Dreamforce and nobody read it; in part because the SAP Hybris group was transitioning into the company still at that point and there wasn’t a cohesive product suite that was ready to go to market to make this happen and in part because they were attempting to make ecommerce a fourth pillar of CRM — which it wasn’t and isn’t.
To be crystal clear: CRM is the operational core of a customer engaged business; ecommerce is the transactional core of that same customer engaged business. All in all, they weren’t quite ready to make the announcement that they did make – and made it again in a three-years-more-contemporary form this year – but they are ready now.
This is now….
I wasn’t at SAPPHIRE this year, I will be at Barcelona if they are willing to invite me. (I would have come but I was at PegaWorld with two speaking engagements.) However, I have digested enough of what was presented thanks to SAP’s good-hearted and highly capable analyst relations staff, to give you a brief first take on what I do think.
First, please, understand, I have been and continue to be a fan of SAP. They have been a company I have covered and one that I have been an engaged adviser to for more than a decade. I admire many of their senior staff, their innovation (you should see what’s coming out of the Palo Alto Labs – and I can say that anytime and be completely blown away by the innovation I see). I admire their thinking about community and their actual community in practice- SCN – one of the world’s largest and best run tech communities. I love their willingness (and their success) in co-creating with their customers. I admire their acquisitions. I think their M&A strategy over the years – at least when it comes to their major acquisitions has been minimally on point and borderline brilliant. I think it isn’t a coincidence they are one of the world’s most successful companies at least in the back office.
If you saw their interactions with their customers on a regular basis, which I do, you’d be surprised and, given their public image, amazed. They are among the most continually underestimated companies in the world – and, while I won’t cover it in this post except indirectly – there is a reason for that – and its on them.
Pivot = Pirouette?
When SAP announced this move, within literally minutes there were headlines about “analysts sour on SAP announcement.” One tweet, from MGI Research, a company I never heard of and know nothing about, had that comment and linked it to an article in Reuters quoting Gartner analyst, Ed Thompson, one of the best in the world. There wasn’t a single word in the article that was indicative of analysts souring. Here’s a screencap of the tweet. Then read the article.
In fact, if you look at the analyst community, it’s somewhat split on the move – though leans to positive with concerns.
Here are some who lean favorable but not wholly that.
Headlines like MGI Research’s tweet are misleading and are showing animosity from the headline provider not those quoted in the post. Not sure what their beef is, but I didn’t like what they wrote. Our job as analysts isn’t to twist reality. Our job isn’t to “show the vendors their baby is ugly.” Our job is to say “if you raise baby’s right face cheek up this much and lower the left one this much, they will be more beautiful.” Point out the flaws when necessary and the strengths for two reasons – one so that those we should be serving, the public, have a clear picture of what they are looking at and possibly for. And two, so that we help the companies be better – if our opinion means anything to anyone at all that is.
The venom that gets spit at vendors from some of the folks in my world is ridiculous. It often seems more personal (e.g. they won’t talk to me so therefore…). Companies, especially large enterprises like SAP, are complex and complicated. There isn’t all good or all bad about any of them. SAP, Oracle, Salesforce, Microsoft etc. all have strengths and weaknesses and while they compete and thus have a lot in common – if they didn’t they wouldn’t be in competition – each of them carries enough differences – ranging from their tech stack, to their culture, to their partners, to their customer success programs etc. to their R&D investments, to their relationship as a trusted advisor, ad infinitum, to give potential customers a choice in deciding what they want.
If I might pontificate for a moment, as analysts we have a responsibility not only to report but to opine — and to do that fairly with an understanding that none of these companies fall into the black or white part of the universe. What works, what doesn’t work, what might the company do to fix what doesn’t — and doing that without rancor but with regard for those who read what we write and listen to what we say is what analysts who are being fair should be doing. Its fine to be critical, just not fine to be venomous and misleading and let some personal slight be the determinant of the attitude one takes to the company.
Where I stand…
Let me be firm on where I come in here. I am squarely in the camp that this was the right move for SAP and — all drama aside — is what can propel SAP forward provided they are willing to address the market directly rather than address it through the lens of Salesforce – and providing they can produce what they need to make this the real deal.
This is the time to do it. It’s not just a matter of taking advantage of the opportunity available in the now largest business software segment – CRM – which Gartner said hit $40 billion in 2017 (and will hit $66 billion by 2021). It is also because, to effect digital transformation which as Esteban Kolsky so often rightly points out isn’t really “digital” transformation but business transformation – companies need to become more customer engaged than they currently are. The technology needed is the technology that operationalizes the customer facing efforts that the company has to make. That allows the company to design the strategies and implement the programs that both create and sustain the customer’s commitments to that company. But to be that, one way or the other, involves the entirety of a company, not just the technology, not just the design and execution of the strategy and programs, not just the culture, not just the actual interactions between the company and the customer – but ALL OF IT.
As a technology company, what SAP brings to the table, is that they offer enterprises, and even much of the mid-market an end-to-end technology matrix and are, for the most part – though with a major flaw (PRIMITIVE PLATFORM) (more later) – organized to provide it that way. Arguably, Oracle has that too, but their current way of organizing their technology offerings doesn’t support the idea of an end to end matrix or ecosystem. This can be a market advantage for SAP but there is a lot to do to make this happen.
So, let me start with what I like about the SAP move – and then what I don’t or am concerned about.
The name of the game is I like it like that…
I like the pivot of the company itself. This is an area that SAP has been preparing to focus on for three years – and, especially given my worldview when it comes to CRM, customer engagement, and customer experience – can be an area that they potentially can excel in. The commitment to the customer facing market is genuine and the resources are going to be made available throughout the company to make sure that what has to be done is done. I have no doubt about that commitment.
I like their global positioning around the Intelligent Enterprise – a lot. Its one that they can arguably make the case for – and can be a true differentiator for them – and that they can show to be more than marketing hype by their offerings in the front office, the back office and the supply chain including their very advanced customer-facing work in digital supply chain (done by the amazing Hala Zeine). This is SO much better than the rightfully maligned “SAP Runs Simple” messaging of the last few years since it decidedly does not. Intelligent Enterprise is one that while they are not uniquely suited for – Infor can make the claim, Oracle, stretching it could, but regardless, for SAP, it just works.
I like Alex Atzberger as the leader of SAP Customer Experience Cloud (more later on the name itself). He is universally well regarded, likeable, intelligent and respected throughout SAP and for those who know him outside of SAP, all that outside of SAP, too. His story, which I won’t repeat here, is well worth hearing. A great choice to run the this now most important effort at SAP. He is also making himself readily available which is something that was NOT at all an SAP Hybris leadership hallmark. He is a fast learner. Big thumbs up here.
I like that SAP Hybris is no longer SAP Hybris and that Hybris itself is now the Commerce Cloud. Absorbing the Hybris brand into SAP, regardless of all the very positive changes due to Hybris’ impact (there were many) is the right move. It’s been overdue. SAP acquired Hybris, not the other way around.
The SAP acquisition strategy led to two of the best acquisitions I’ve seen in many years – Gigya and Callidus Cloud. Both of these companies — which I had much more than a passing acquaintance with — were brilliant acquisitions. Gigya, the leader in customer identity management, not only provides SAP with 1.2 billion verified customer identities (almost 17% of the planet, people), but SAP has already used it to generate three GPDR-compliant products with proactive GDPR-readiness tools, SAP Identity, SAP Consent, SAP Profile. Callidus Cloud, a company that I advised for four years right up to the acquisition, provides SAP with the sales (and some marketing) enhancements for SAP’s more traditionally focused Sales and Marketing capabilities. For example, the Callidus Cloud sales onboarding application, built on the Callidus Cloud Litmos Learning Management System (LMS) is arguably the best I’ve ever seen and, from what I understand, not only will be sold by the SAP Customer Experience Cloud teams, but will become SAP’s internal sales onboarding system. Callidus Cloud is a perfect fit for SAP (or honestly, would have been for literally all the major vendors) and their unique blend of services and solutions will go a long way to differentiating C/4 HANA from the pack. Its arguably the linchpin for SAP’s customer experience cloud offerings.
SAP placing a bet on microservices is something I like – a lot. They have a microservices platform YaaS. While I can’t tell you how great it is or how bad it since I haven’t seen it in any depth other than a few demos, I can tell you that SAP has a strong commitment to making it a core piece of their current customer-facing thrust. I am a firm believer that microservices are one of the pillars of the future when it comes to engaging customers and when it comes to crafting customer experiences. I think Esteban Kolsky, in a white paper he wrote, sponsored by SAP Hybris in 2017, lays out the case really well. Here is an excerpt: “Microservices will dramatically redefine the future of customer interactions, evolving service from large, complex applications to multiple independent function. Enter microservices: the Swiss army knife of the cloud computing age. This cloud-plus-apps approach lets you rewrite the rules by letting customers create the experience they need, in a time and place that works for them.” I couldn’t say it any more clearly. An example of its great success is WeChat, the ubiquitous-in-China mobile platform. Their “appstore” is actually a microservices store where there are millions of “apps” that actually allow you to craft a series of services such as making airline, hotel, or whatever reservations, transferring money, etc. that can be done via shortcode and mobile messaging. SAP’s commitment is notable and important, and provided that YaaS is a) a true platform, and b) more than a series of demos, can give them a market leading position.
I like that they have revamped the offering and kind of categorized it into industry standard names e.g. Sales Cloud, Marketing Cloud, Service Cloud, and Commerce Cloud. I can’t say I like the rebranding of Gigya around the Customer Data Cloud. Customer data sits “horizontally” in an offering, Clouds are solutions or applications i.e. vertical. Nothing horizontal is a cloud. This isn’t just endemic to SAP – all their competitors do the same thing. A layer is named a cloud. Not wise. That said, the other four – might as well make them Sales, Service, Marketing, and Commerce Clouds. There are usually two options – a highly creative name that reflects what the products or platform layers do (e.g. PROS Monet, Salesforce Einstein), or, if not that, then the name that can be googled and you will come out in the search (as will your competitors). So the four clouds that SAP Customer Experience provides – are the same exact names as everyone else’s and that’s just fine. That puts them in the mix when research for a solution is going on.
What I don’t like….
Positioning their move as one to “take over” the CRM market from Salesforce is unwise and not only one that they won’t win but one that doesn’t do them, their customers, future customers or anyone else any good because it has no value in highlighting what SAP has to offer. It only does what does what all the other players in the industry do, which is to position Salesforce as the alpha – which helps Salesforce, not SAP (or Oracle, or Microsoft or any competitor of Salesforce for that matter.) They would be much wiser to work with their strengths.
Calling their overall CRM related or what they call their customer experience suite C/4 HANA First, it’s time to stop putting in HANA as part of an overarching product name. HANA, which for those of you who don’t know is SAP’s in memory data processing and management engine. It’s a vital part of what they do but by putting it in the name of their back-office suite S/4 HANA and now their “front office” suite, C/4 HANA they limit their world view and they make it seem that the suite itself is limited to working with HANA. I know they are in part trying to stop encroachment on their customer base by Salesforce et al but this name doesn’t help them stop it. C/4HANA is a very poor name because:
It is limiting with its inclusion of HANA in the name and implies no way to integrate with something outside SAP which in this day and age is deadly.
It is a colorless name and tells you very little except that you probably can assume that C means customer. Big deal.
Apparently the “4” means 4th generation of CRM, not “for” though of course, in the infinite cleverness of vendor naming conventions it means that too since I imagine in S/4HANA, the 4 isn’t for the 4th generation of “S” – whatever that is. Just doesn’t work for me.
I have no idea what the 4th generation of CRM is. I read a piece on it by SAP and still have no idea. That name means they’d better be ready to explain that – now.
C4 is a plastic explosive. Not something you want to be associated with – ever.
Talking about how we are undergoing a customer revolution as if this is a new revelation. It is not, it is over 10 years old and it is a fact of life at this point. Transformation of the customer’s needs, wants, demands, and control occurred due to the communications revolution that began more than 15 years ago. It is continuous as the technology evolves, the customers mature and the world changes, but its not a new revelation, it’s something that we all have been not just writing about but have been living for the last decade plus. Calling this customer revolution something new is like saying that mobile is a “trend.” They are how we live.
This is a company that can provide end-to-end (and back to front) technology. While on the front end I’ve seen them rename their offerings, I haven’t seen any indication of how they intend to knit the offering into a unified matrix that provides enterprise customers – theirs or otherwise – with the ecosystem they require from SAP. Meaning they haven’t proven to me or anyone that their products can do what they are claiming they can. Because they aren’t showing the products, just the messages. They need to move on this fast. Or their efforts will come to bupkis (literally beans in Yiddish. Colloquially meaning “nothing of value”).
What I’d like to see more of or more about
Moving from SAP Hybris to SAP Customer Experience is something that requires a lot more than just a name change. As I outlined in part one of my post on Adobe a few weeks ago, customer experience means a lot of things to a lot of people and a lot of things to just me too. Here are some of the differences in the use of customer experience where I distinguish between the overarching (my favorite word these days) customer experience, consumable experiences and brand experience – all of which are used in the service of customer experience by a lot more than just me. I need to see how SAP is thinking about this. They have gone from SAP CRM to SAP Customer Engagement to SAP Hybris Customer Engagement and Commerce to now, SAP Customer Experience. I thought when SAP went to Customer Engagement (not CEC) that they had nailed the market and aligned with it where it was as CRM morphed from its purer form to the operational core of a larger engagement protoplasm. I’m not as thrilled as I was then but I’m willing to listen. But SAP has to explain it. (More below on this too)
SAP is without a doubt a master of vertical markets. I’ve seen their industry process maps and their templates and their knowledgebase by industry and they are by far the best of any vendor’s I’ve seen. By far. They are dominant in the back office of many markets for many years, oil and gas being one of the paradigmatic examples of a 30 year (give or take) cycle of dominant market position. But they have given little indication of their vertical strategy re: the pivot. The implications of going at verticals in the front office are gigantic (I don’t use huge anymore. Guess why). First, Oracle CX is well positioned in many verticals, including public sector – a big SAP focus. Second, Salesforce partners are taking up the cudgel for that and you have companies like Veeva and Vlocity moving fast and doing a great job in encroaching on vertical territories. Microsoft has an enormous reach in verticals ranging from sports (though it is declining there) to healthcare and government also – even construction. But SAP still has the trust of many of those specific markets, so they have a leg up on a lot of the vendors. But I wouldn’t waste any time developing a vertical strategy and specific vertical market targets if I were SAP. So far, there is no indication they have done that.
Ecosystems and Platforms are the future and the present. All of SAP’s competitors have been moving in this direction. Oracle still has a way to go in both ecosystems planning and platform development – or at least the public announcement of that. Microsoft, with the release of PowerApps has the tool that all the other companies should envy and that with Azure et al cements them as a possible leader in platforms if they are smart enough to follow through. As far as ecosystems go, Microsoft’s partnership with Adobe is an indication of their understanding of ecosystems as a strategic GTM (go to market) effort, not a partner-in-a-marketplace tactical effort.t Salesforce has been focused on building the Customer Success Platform and its previous incarnations since 2002 and is learning quickly how to harness their organic ecosystem – the largest one I’ve ever seen in a business – strategically, rather than let is roil, roll and dissipate into slots in the AppExchange. So SAP needs to get on the ball now with that. SAP has always imperfectly but still better than most, understood ecosystems. While they seem to have the pieces for a platform (YaaS etc) I don’t see any indication that they are thinking that directly about it. If I were them, I’d publicize the platform and I’d run through an ecosystem building exercise to see what the end to end intelligent enterprise actually requires. But that’s just me.
Thought leadership is going to need a revamp. That said, I want to be clear that its not due to deficiencies in that area either in the back office or the front office. In the front office, their thought leadership site The Future of Customer Engagement & Commerce, aside from a ponderous name that I presume will be rebranded anyway, was the best in the industry. But they are pivoting the entire company around the Intelligent Enterprise and Customer Experience and that has decidedly NOT been their thought leadership focus for the last several years so they are going to have to build a substantial refresh of the content. Both internally and with the support of external specialists. There isn’t much there to support their new initiative. Plus, even though The Future of Customer Engagement and Commerce is clearly the site focused on the customer-facing efforts of the company, it can’t ignore the Intelligent Enterprise in all its thinking. Now that the company has decided to go after the emotional market that CRM and CX and CE represent, they are going to have to change a lot of things about the way they do their business – thought leadership, again, respecting the quality of their past material, needs a serious upgrade.
Follow through is the last one and the one that I’m most concerned about. I don’t doubt the seriousness of SAP’s commitment to take on this new direction. But, I’ve been waiting to see this more than three years now. Its now been announced. Been announced though isn’t the same as execution or transformation. The company has a lot of changing to do and actions to take which I am hopeful they will.
At the highest level, I like this move by SAP – its one I thought was long overdue. But I’m not complaining. They made the move and for that they should be applauded. I think that this benefits them, the industry, the market, and their current and future customers – if they actually stay consistent and execute well against their pronouncement. However, I am concerned for all the reasons stated above, but optimistic because of the positives that are already there and their new leadership. Its good to see this happen. I’ve been in the CRM industry for the last 25 years or so and have a pretty damned good knowledge of what it was, is, and will be – and what customer engagement and experience were, are, and will be. SAP is hitting many of the right buttons, because a. they are market aware and b. they smell the money when it comes to the CRM market. And I say, good for them. I hope it works but I am waiting to see and they still have a lot to do. But I am hopeful they can and all will benefit if they do.
“We want CRM,” says SAP CEO Bill McDermott. SAP’s chief has some valid points and perhaps CRM needs reinvention. The question is whether SAP has the next-gen CRM approach or is it a robotics process automation player.
I am often asked why I was tough on SAP in SAP Nation. I usually correct them and say I was tough on SAP’s partners and how SAP did a poor job monitoring and managing them.
I must say I groaned when I saw the SAP announcement where it plans to team with Accenture, Capgemni and Deloitte to accelerate verticalization in specific industries. I saw the tall signage of the partner booths at SapphireNow and went, Here we go again.
If SAP needs design input on the automotive sector, especially Tier 2 and 3 suppliers, they would do far better to watch this Plex keynote and work with the likes of PTC and Kors Engineering. They have so many customers in Germany which have been pioneering Industrie 4.0 projects – we wrote about several in The Digital Enterprise. If they want to hear about automation in the oil and gas sector, they should ask for time with David Truch at BP, one of their customers I profiled in Silicon Collar. He described pioneering work with robotic crawlers on rigs and drones to monitor remote locations. In The New Polymath I had described some of BP’s sensory networks going back over a decade – way before the term IOT was coined. If they want to hear about innovation in process industries there are so many innovative pharma, food and chemical companies in their customer base they can learn from. If they want grey hair on cloud implementations they should scour the Salesforce and Workday ecosystems.
Not saying they should not leverage their bigger SI partners but this time around they should expect much more automation in implementations. Oracle just announced their Soar offering which automates several steps in a migration, and I think SAP should push its SI partners to develop similar for migrations from ECC to S/4HANA.
Finally, I hope SAP systematically monitors its partners a lot more this time around. There are so many partner management tools, scoring tools, and yes, they should tap into the collective memory of so many botched projects and unhappy clients from the last round to remind them they have to do better this time.
BTW President George W Bush dispenses the advice better than the title of this post does. 🙂
Readers know I prefer going to vendor analyst summits compared to user conferences. I feel like I am intruding on customer time and access to vendor execs at the latter. But in many ways, SapphireNow last week managed to bend laws of gravity and as a result I really enjoyed the conference. Here is a post-mortem:
Pre-briefings – A-
I offer vendors the opportunity to provide a sneak preview on the blog. In the past Oracle and Workday have availed of that. I offered SAP that opportunity but we could not make that post happen in time. In exchange, however, SAP had a series of pre-briefings under NDA. A full day in NYC, and several phone calls in prep for the Orlando event. Impressively, they actually listened and modified some of their presentations based on our feedback.
Customer Access – A
I was blown away by the number of customer meetings SAP set up either one on one, or in small groupings of analysts. The one negative is that filled up my agenda and I could not attend some customer sessions or meet folks on the show floor I would have liked
Vendor Executive Access – A+
Having time with vendor executives tends to be elusive for analysts and media at user conferences. Yet, I was with Hasso Plattner in the same room three different times for a total of 4 hours! That’s a new record for an event. Other executives were available for several sets of panels or small group meetings. And the SAP AR staff tried really hard to set up even last minute meetings we asked for. I hate to think how exhausted the poor executives were given the customer meetings and social activities they are also expected to grace at such events.
Hotel and conference logistics – B-
Even for a Floridian, Orlando this time of the year can be miserable so I really appreciated staying at the Hilton with a covered walkway to the Orange County Convention Center. I also appreciated being warned the wifi at the OCCC was poor and the keynote theater a bit cramped so I watched couple of the keynotes in my hotel room and took screen shots of slides. BTW Shame on the OCCC – SAP has been a loyal, highly visible patron for a decade now and to not have decent wifi is inexcusable. I hope the SAP events team have an SLA with the OCCC and get some credits for future events there. As a balance, the catering at the OCCC was surprisingly good. Well stocked coolers and coffee stands and the meal buffets had enjoyable diversity. The open floor layout which has become standard in most industry events these days hurt SapphireNow this year. We had too many meetings where people had to scream to be heard.
Social activities – A
The best evening by far was a small group dinner our AR coordinator, Stacey Fish organized. I skipped most parties but enjoyed some quiet time at one that Franck Cohen threw with some of his friends from Cirque du Soleil. I tend to avoid concert night – usually past my bed time to be terrorized by the strobe lights and throbbing subwoofers. But I went this time to humor my daughter who has grown up with Justin Timberlake. Stacey managed to get her a ticket. The logistics of ferrying the audience to the Amway Center were impressive. The show itself : I was pleased to see everyone having a good time, but yes I did miss my nap and I was terrorized by the strobe lights and booming subwoofers. 🙂
Have you been watching the FIFA World Cup? I have been watching highlights. And peeks at an occasional game on Fox Sports Go. It’s humbling to think I will likely watch less than 1% of the 96 Group Stage games and maybe just a bit more of the games in the elimination rounds. Then I got a demo from 
So you’ll end up hiring VPs who went through a significant transition at their last gig, sometimes an involuntary one. That can be great. Just a few thoughts of things to look for:
In Today’s Episode You Will Learn:
SapphireNow: Event Scorecard
By Vinnie Mirchandani on June 17, 2018
Readers know I prefer going to vendor analyst summits compared to user conferences. I feel like I am intruding on customer time and access to vendor execs at the latter. But in many ways, SapphireNow last week managed to bend laws of gravity and as a result I really enjoyed the conference. Here is a post-mortem:
Pre-briefings – A-
I offer vendors the opportunity to provide a sneak preview on the blog. In the past Oracle and Workday have availed of that. I offered SAP that opportunity but we could not make that post happen in time. In exchange, however, SAP had a series of pre-briefings under NDA. A full day in NYC, and several phone calls in prep for the Orlando event. Impressively, they actually listened and modified some of their presentations based on our feedback.
Customer Access – A
I was blown away by the number of customer meetings SAP set up either one on one, or in small groupings of analysts. The one negative is that filled up my agenda and I could not attend some customer sessions or meet folks on the show floor I would have liked
Vendor Executive Access – A+
Having time with vendor executives tends to be elusive for analysts and media at user conferences. Yet, I was with Hasso Plattner in the same room three different times for a total of 4 hours! That’s a new record for an event. Other executives were available for several sets of panels or small group meetings. And the SAP AR staff tried really hard to set up even last minute meetings we asked for. I hate to think how exhausted the poor executives were given the customer meetings and social activities they are also expected to grace at such events.
Hotel and conference logistics – B-
Even for a Floridian, Orlando this time of the year can be miserable so I really appreciated staying at the Hilton with a covered walkway to the Orange County Convention Center. I also appreciated being warned the wifi at the OCCC was poor and the keynote theater a bit cramped so I watched couple of the keynotes in my hotel room and took screen shots of slides. BTW Shame on the OCCC – SAP has been a loyal, highly visible patron for a decade now and to not have decent wifi is inexcusable. I hope the SAP events team have an SLA with the OCCC and get some credits for future events there. As a balance, the catering at the OCCC was surprisingly good. Well stocked coolers and coffee stands and the meal buffets had enjoyable diversity. The open floor layout which has become standard in most industry events these days hurt SapphireNow this year. We had too many meetings where people had to scream to be heard.
Social activities – A
The best evening by far was a small group dinner our AR coordinator, Stacey Fish organized. I skipped most parties but enjoyed some quiet time at one that Franck Cohen threw with some of his friends from Cirque du Soleil. I tend to avoid concert night – usually past my bed time to be terrorized by the strobe lights and throbbing subwoofers. But I went this time to humor my daughter who has grown up with Justin Timberlake. Stacey managed to get her a ticket. The logistics of ferrying the audience to the Amway Center were impressive. The show itself : I was pleased to see everyone having a good time, but yes I did miss my nap and I was terrorized by the strobe lights and booming subwoofers. 🙂
(Cross-posted @ Deal Architect)
Posted in Business | Tagged Industry Commentary, microsoft, oracle, sap, sapphirenow | Leave a response