SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

Archive for May, 2008

The Purpose of Strategy is to Make Winning Easy

Posted by Bob Warfield on May 31, 2008

What a great quote I came across through my CEO, Tony Nemelka.  He attributes it to Foundation partner Bill Elmore’s daughter. 

You couldn’t ask for a better definition of strategy.  And in fact, this definition is all about what Marc Andreesen’s Product/Market Fit concept seeks to accomplish.  A company that has achieved a proper Product/Market Fit has made Winning Easy.

it also applies to the old adage that startups need to fail fast, adjust, and then try again.  The definition of fail is determining that winning is still too hard.  When you get some easy wins on a consistent basis, you know you’ve found the right strategy.  Double down on it and exploit it as far as it will go. 

The potential pitfall of winning easily is you may have a strategy that works for a pretty small market.  At some point you’ll exhaust it and winning will no longer be easy. 

That’s why you have to keep trying new strategies even after you’ve found one that makes winning easy.

Is your company’s strategy making it easy to win?  If not, maybe it isn’t really a strategy after all.

Posted in saas | 1 Comment »

If Nobody Can Find You, Do You Exist? Google Can Do Better!

Posted by Bob Warfield on May 25, 2008

Interesting article by Ryan Stewart on how he was “erased” from the Internet.  In fact, it was just that Google quit indexing his blog, but that’s pretty scary if you rely on Google searches to direct most of your traffic.  It’s made Ryan a serious believer in the value of getting competitors in search so that one’s ability to be found on the Internet is not strictly a function of a potentially arbitrary and capricious Google.

There’s been a lot of argument lately from the Twitter audience that Twitter has become so important that it can no longer be left strictly in the hands of Twitter, and that it should be decentralized.  Isn’t Google many many times more important in this age?  And isn’t it growing more important day by day? 

One wonders when the anti-trust suits will start queueing up that argue that Google has altered its ranking algorithms in a way that is anti-competitive, for example, by exclusing Yahoo or other large competitors from its search index.

Ryan was able to get things restored (maybe, it takes 3 weeks, but he did track down what Google objected to), but if one were to look at this from a constructive, “What should Google do?”, standpoint, I have an idea or two.  First, it’s a good thing that Ryan was able to track through Google’s internal procedures to find the problem, but from his description, that process surely should be streamlined. 

My firm, Helpstream, makes generous use of search to help people get service when they have a problem.  The first thing the application does is ask them to describe the problem so a search can be performed and appropriate answers presented.  If all else fails, then a conventional support ticket is issued.  Now here is Google holding the keys to the search kingdom, and things don’t work this way.  Why not?  Why can’t I just type a multitude of problems, but especially, “My site was delisted from Google“, and see search results with Google’s support answers at the top?  BTW, if you click that link I gave, you’ll see that Ryan was far from the first one to have this sort of problem.  I mean heck, they banned the Disney blog for crying out loud.  How can that fit with, “Do no evil?”  I say that only partially tongue in cheek, because this is a serious business.

In fact, it is such a serious business that I have a second recommendation for Google.  They have a service today that Ryan used to determine what the problem was for his site.  Apparently the site was hacked and spammers inserted some bogus links that he wasn’t even aware of.  I sympathize.  A blog gets big and who spends time patrolling every post looking for such misdeeds?  My suggestion for Google is to offer a reporting service.  They could certainly charge for it if they wanted, because it is critical stuff for a lot of sites.  For a nominal fee, perhaps $5 or so a month, it should be possible to get an email alert whenever your site’s status changes with Google.  Whether that is a page rank change, or the more serious step of being delisted, you’d get an email when it happened.  I have to believe this would be a net profit generator for Google, as well as a comfort for those who rely on Google.

Lest you think this can’t happen to you, consider that search I provided a link for.  There are 348,000 entries there, including the poor Disney characters.  I can tell you from experience that I tracked Google results for SmoothSpan daily for about 6 months and they vary wildly.  It sits today at 16,900, but during that time it has varied from about 700 on up to the bigger 16,000’ish number for no rhyme or reason that I can see.  Google blog search is worse, and is all over the map, which speaks to Ryan’s issue of whether Google is an effective way to search his blog.

This is all bad news for Google.   First, that list of people who got delisted are unhappy customers, make no mistake about it.  Second, Google has no good mechanism in place to help them.  That’s really bad for a brand that prides itself as Google does.  Lastly, it provides strong incentive to consider the alternatives, as Ryan suggests he will. 

The other thing is, it’s tragically avoidable.  Google could easily implement the suggestions I’ve given, and they’d be a good thing for all.

Posted in Web 2.0 | Leave a Comment »

Salesforce Headed for Siebel’s Fate?

Posted by Bob Warfield on May 23, 2008

Fellow Enterprise Irregular Josh Greenbaum has predicted that Salesforce was heading for a fate similar to Siebel’s–namely that they would fall into decline soon.  In fact, we’re already past the point where his first such prediction should have kicked in.  A year after that first post, he’s sticking to his guns by saying that even though Salesforce appears to be growing (their latest quarter was a blockbuster), trouble in paradise is still inevitable says Josh.

Greenbaum’s dire predictions are based on the following fundamental flaws he sees with Salesforce, which are similar to flaws he saw in Siebel even earlier:

1) Salesforce CRM is not deeply integrated with ERP, and so it is easy to replace a CRM system.  They’re not sticky.

2) CRM competitors are doing deep integration with ERP on their own offerings.

3) Salesforce lacks a next big market play to give it legs on which to grow beyond the CRM business.

His argument for why the prediction has largely failed to date boils down to Microsoft and SAP being slow to deliver their SaaS solutions.

With due respect, let me disagree with all of this.

First, was Siebel killed by deep integration?  I don’t think so.  Siebel was killed by an inability to differentiate itself.  SAP and Oracle were steadily adding features to their CRM offerings to the point where it became really hard for Siebel to point to a killer feature and argue it was enough to justify adding an additional vendor for IT to support.  It’s the classic bane of any category–eventually the big suites achieve 80/20 parity so that the features 80% of the audience need are available in all the offerings.  At that point you wind up with a commodity, and the lowest cost wins.  Cost in this case, is Total Cost of Ownership, and dealing with one vendor with a suite is usually lower TCO than dealing with a suite vendor and a best-of-breed component.  Data integration for most of these big suites is useful, but it is often way over-hyped.  This is particularly true when we look at the killer data integration requirements for CRM to ERP.  There just aren’t that many, particularly not for Sales Force Automation.

Second, Siebel was both lucky enough, and unlucky enough, to be an empire built at an extraordinary time.  All of today’s big enterprise software vendors got big due to this extremely unusual time when the market gave them two external sources of rocket fuel for explosive growth.  First we had Y2K.  Then, just as we got a handle on that, the dot com bubble struck.  There can be little question that a lot of unnatural growth happens when market conditions conspire to compress what probably should have been 20 years of growth into more like a 5 year period.  When the dot com bubble burst, and IT cuts were the hangover price to be paid for the binge, a financial climate was created for public software companies that was ideal for the likes of Oracle. 

Suddenly, justifying that best of breed solution became almost impossible no matter what the features.  IT had not delivered on all the promises of the dot boom era, and skepticism was at an all-time high.  Siebel exagerated its customer satisfaction position as Greenbaum points out, but something much worse was also exagerated.  That was the promise that CRM software could radically overhaul the sales process and drive vast revenue growth for any company that bothered to deploy it.

My third point is based on this idea that complex CRM, the kind involving huge Siebel-era projects, had failed to show commensurate results.  It opened the door for the lean mean SaaS competitor in Salesforce, to jump in.  Deep integration, highly custom workflows, and massive customizations are all things that at least in the beginning were not even an option for Salesforce.  The amazing thing is that the world was tired of all that by this time.  It hadn’t really been worth it anyway.  That coupled with a strong push to commoditization was the perfect launching pad for Salesforce.  Even relatively large companies discovered that a straightforward deployment of Salesforce out of the box delivered nearly all the benefits of an expensive highly customized (and highly integrated) CRM solution at a tiny fraction of the cost.  In fact, let me perhaps coin a new term, the “Total User Experience” for the SaaS solution was much better. 

So where are we today?  Is Greenbaum right that Salesforce is headed the way of Siebel?  No.  Not yet anyway.  Siebel was the victim of a paradigm shift that came right as an extraordinary set of market conditions driving growth came to an end.  SaaS is the new paradigm.  Some analysts write about it like it’s just another feature, akin to this “deep integration” Josh mentions.  It isn’t a feature at all.  It’s a way of life that extends way beyond product.

All good things come to an end, especially for software companies.  Very few live through a paradigm shift of any consequence.  Microsoft is fighting valiantly to avoid the web paradigm shift toppling its empire, but so far has been ineffectual.

The new paradigm is SaaS and Cloud Computing.  It brings with it a host of benefits around lower Total Cost of Ownership.  In many ways, SaaS is the ultimate commoditization of on-premises software.  Aside from a lower TCO, it delivers a better User Experience by virtue of the fact that it is a Service, and not just dead bits on a disk that you have to animate yourself.  But perhaps the deadliest component of the new model for competitors is that its business model is completely disruptive to a classical software business. 

They know it is their future, yet they’re nearly powerless to bring about a transition.  The reasons are twofold.  SaaS largely demands single-minded focus.  Trying to sell both SaaS and conventional software introduces so many fundamental contradictions that no company has ever made a success of it.  Just getting transitioned over to SaaS if you’re willing to drop the old line software is exquisitely painful to a company’s internal operations, culture, and worse, financial metrics.

The lock-in that Greenbaum seeks has been transferred from investment in heavy integrations to the difficulties of even trying to sally forth and compete from a conventional software fortress.  Those delays that we hear about for SAP’s Business By Design are no accident.  If you’re into predictions, how about the prediction that those delays will get worse before they get better, and that even after the product is technically proficient, internal cultural factors will continue to slow the company’s ability to push it’s SaaS offering effectively. 

Greenbaum spends a bit of time shooting down the idea that Force is the next leg in Salesforce’s journey.  On this I tend to agree, although it has nothing to do with any PaaS stragies from Microsoft that Josh seems to favor.  Force has a number of cool aspects to it, but it takes a long time to prove out a platform and there are currently economic factors hobbling it somewhat. 

The mystery to me is when Salesforce will try some real acquisitions.  There has been talk by Phil Wainewright of the Four Horsemen of SaaS:  Concur, Omniture, Salesforce, and Taleo, making a neat acronym “COST”.  WIth Salesforce having the most valuable currency (Market Cap relative to revenues or earnings), it’s an ideal time for them to bulk up through acquisition.  This was a step Siebel executed well in its acquisitions of Scopus and nQuire (now called Siebel Analytics).  Each one, at the time, provided a healthy boost of new growth.  It could be time Salesforce followed suit. 

Meanwhile, I won’t be holding my breath for them to start failing anytime soon.  We haven’t seen the post-SaaS paradigm shift and the current  SaaS revolution has a long long way to go yet!

Posted in saas, strategy | 6 Comments »

My New Home At Helpstream

Posted by Bob Warfield on May 23, 2008

It’s the end of my first week at my new home:  Helpstream.  Joining a new company is such an exhilirating experience, and at the same time exhausting.  I didn’t plan to have a 3 day Memorial Day weekend lined up after my first week, but it’s a good thing it’s available!

My job at Helpstream is EVP of Products.  What that entails is Engineering, Product Management, and Operations.  In short, I own the User Experience.  That’s very exciting for me. 

What attracted me?  Two things.  First, the team there is just superb.  This is a group of people who are all-stars.  They’ve had careers and accomplished a tremendous amount before joining Helpstream.  The chemistry is infectious.  Having done it before, the focus isn’t on ego or individuals proving themselves.  There’s nothing better than a group of world-class players who totally focus their passion around great product, happy customers, and having fun.

The second big thing is the vision.  We’re doing some really cool things around SaaS, Web 2.0, the Enterprise, and the User Experience.  It’s breakaway stuff.  I recently was called on to visit a large company prospect who shall remain nameless.  It was awesome to watch their reaction to the product, and to hear them say it was the only thing they’d seen that was even remotely close to the vision of where they wanted to go.

So what is this product all about?  It’s a Customer Service application, but it’s really special.  Helpstream has the first Modern Web Application oriented towards this market.  The company has a deep bench of domain experience in the area of customer sevice.  Founders like CTO Dan Hardy are from Remedy, for example.  There are certainly other Customer Service applications out there, such as Remedy itself.  There are even some SaaS vendors in the space, like RightNow.  But what’s missing for these applications is the “Modern Web Application” focus.  They’re largely visions from the original days of Remedy and others when people used the web for a little browsing and email.  That was all stuff figured out 10 years or more ago.  Today, so much has changed on the web, and so much more is possible.  There is a lot of young blood in the workforce that expects the world to work differently too.  They’re demanding a Modern Web Experience, and vendors need to take note of that.

The product just launched in January and growth has been explosive.  Sign up for the free version and try it out if you like.  We’ve got customers that range from small non-profits (churches and schools) and business, up through medium sized companies, government agencies, and even a few large public companies.  We’ve got a couple of world-class VC’s investing.  Bryan Stolle from Mohr Davidow and Bill Elmore from Foundation are on the Board.  You couldn’t ask for more savvy investors with more real-world experience to help guide us.

We’ve got a fair amount of hiring to do in the near term too.  Not all the positions are posted yet, but take a look at our Careers section on the web site to start or send me your resume if you’re interested in a developer position, operations, or sales.  We’ll get the word out on these positions through LinkedIn as well as that Careers page shortly..

There’ll be lots more to talk about over time.  Only a tiny fraction of the ultimate vision or potential is visible in the product today.  Over time we’ll be looking to customers to help us temper and refine our vision as well.  The SmoothSpan blog will carry on as well, and likely won’t change focus too much.  It’ll be a bit slow here while I’m ramping up, but hopefully not too bad.  Things of general interest to this readership will stay here, and I’ll also be posting to our corporate blog for things very specific to Helpstream and its industry.

Posted in saas, Web 2.0 | 4 Comments »

Mark Cuban’s Simple Plan to Unseat Google Won’t Work

Posted by Bob Warfield on May 15, 2008

Mark Cuban has a plan.  He wonders what it would cost to deny Google access to the best search results.  What if you pay the top 5 results for the 25K most common searches NOT to be accessible by Google?  What if you paid the top 1000 sites $500K apiece not to be on Google?  It’s only $1B, which is doable for the likes of a Yahoo/Microsoft.

Here’s my problem with this.  Aren’t some of those most popular sites so popular that $500K means nothing to them?  Is it worth $500K to the world’s Global 2000 companies, for example, not to be seen in Google searches?  No, of course not.  What about the 1000 most important trendy and best selling brands?  I can’t see that $500K being attractive enough.  Would Nike or Apple stay off Google for $500K?  Would George Clooney, Madonna, or Britney Spears accept $500K to go dark on Google?  Maybe, but I’d think you need to go much further down the celebrity food chain before they’d opt out for that money.

People say that Google is the Internet’s front door.  What is it worth to your business to force people to go to the back door instead of the front door they’re used to?  How do you get enough businesses to switch to the back door when there is no history to show them it will be okay?

BTW, lest we forget, Google can monetize traffic better than anyone else to date.  Translation?  They can afford to pay these site owners more than Yahoo/Microsoft or whomever else Cuban has in mind to do this deal.

Google has the luxury of forcing all the risk onto the would be implementors of this plan, and then jumping in at the last minute to take it away from them if the plan works.

I am reminded of conditions in the oil industry during my youth in Texas.  There is a ton of oil in Texas to this day.  But for a time, it was shut down and manipulated until the oil patch practically turned into a ghost town.  How?  Well, a good Texas oil well produces about 100 barrels a day.  To get that out of one, you’ve got to pay to drill it, the well may be fairly deep, you have to pay for a pump on top, and you probably pay for a fair amount of “reservoir engineering” to help the oil to flow freely.  In Saudi Arabia, by contrast, an average well is shallow and flows perhaps 1000 barrels a day.  No pumps needed, just a valve on top.

What do you do if you become annoyed at competition and you are the Saudis?  You just open the valves, drop the oil prices, and wait until rigs have all rusted and the oil operators have gone out of business.  Then you crank the prices back up again.  What’s it today?  Well over $100 a barrel.  The oil business is back to gangbusters in Texas, and they’re even drilling new wells like crazy.  Not sure this time if it’ll work to crank open the valves.  There’s a lot more demand today than there was then.

Related Articles

Raganwald gives us a vintage 1977 speech by Carter on the energy shortage posted just as I finished this post.  This would be the point just before those valves were opened and the oil industry in Texas shut down.  Today there is not so much talk of a shortage (we should’ve run out by Carter’s estimation and usage is far in excess of what was predicted then).  Rather it is an issue of too much consumption leading to Global Warming. 

Of course then there are the various scuffles over sites that don’t want Google to have access to various aspects for various reasons.  I agree with Om Malik, this one is hilarious.

Posted in strategy, Web 2.0 | 2 Comments »

Carl Icahn Goes Into Yahoo and Workday Closes Biggest SaaS Deal Ever

Posted by Bob Warfield on May 14, 2008

That new generation I talked about in my last post on the HP/EDS deal is coming faster than ever it seems.

Workday has landed a 200,000 seat deal with Flextronics, marking the biggest SaaS deal ever.  That’s a definite shot to the On-premise wheelhouse.  Given that it’s a Human Capital Management deal, it’s also kind of a shot in the wheelhouse for the other SaaS HCM vendors like Taleo and SuccessFactors.  The system replaces 80 disparate HR systems deployed in 30 countries.  This is the kind of job SaaS is ideal for.  Getting through such a blizzard of legacy systems takes some real streamlining if you’re going to live to tell of the story.  The savings potential on such projects is enormous, but the risks around a conventional On-premise install are what led to the phrase “boiling the ocean”.  Choosing SaaS minimizes that risk.

Another fascinating aspect of the deal is that a lot of the impetus to go Workday had to do with how easy it is to customize the system.  Flextronics CIO David Smoley had this to say:

“What we’ve seen with object databases, is it gives you an incredible amount of flexibility in how you access and manipulate data, which translates into a much more powerful ability to create interfaces with less technical people, and update and modify as necessary,” he said. He likes that Workday will “create and maintain interfaces [with benefits providers or other partners] so that customers don’t have to.”

Other factors included off-the-shelf integration with providers of employee benefits (integration has played out before as a huge competitive opportunity for SaaS players), and the realization the HCM software is not really an area of innovation for companies, so why not go SaaS?

What does all this have to do with money man Carl Icahn?  Mathew Ingram says it means Yahoo has hit the big time, or at least that’s what his headline implies.  I think it’s a good deal less pleasant than that.  If a pure money man who made his bones making moves on companies like RJR Nabisco (aka Barbarians at the Gates Nabisco), and other low tech properties is interested, it means he thinks you’ve got an easily understood commodity business that’s only good for flipping to the next highest bidder.

Traditionally these characters have avoided the world of High Tech out of fear they couldn’t understand the business, sustain the innovation, or manage the geeks.  You know you’ve got another version of the New Generation phenomenon if they come knocking at your door.

 

 

 

 

Evidently Icahn has managed to acquire about 50 million shares of Yahoo and is contemplating whether to launch a proxy war for control of the company.  This guy helped define the term “corporate raider”. 

Posted in saas | 2 Comments »

HP Acquires EDS: More Cloud Computing Fallout?

Posted by Bob Warfield on May 13, 2008

Much hullaballoo in the blogosphere over this acquisition as one would expect from a major transaction like this.  The pundits can’t decide whether it is too small to place HP on a plane with IBM for services (“They should have bought Accenture or one of the offshore players”) or whether it is too big and eye-off-ball for what should be HP’s main mission–software.  From HP’s perspective (make that Hurd’s perspective), the deal is a slam dunk on the numbers.  What that means is that it is obvious to the HP planners how to cut costs so that EDS becomes a profitable new jewel in HP’s crown.

As I sorted through all the write ups, I couldn’t help but be struck by the similarities with Oracle’s acquisition game and how this all relates to the Big Switch (Nick Carr’s term for a movement to Cloud Computing) for IT.  I come away with a sense that EDS was struggling a bit, swimming against the current as it were.  This is not unlike the legion of On-premise software companies that Oracle has snapped up.  They weren’t exactly failing, but they were tired swimmers and it looks like the current will only grow stronger.  EDS is very much the services equivalent of a Peoplesoft or Siebel in this sense. 

When faced with a major paradigm shift, big companies have to decide whether to double down and invest in keeping up with the shift or whether it makes more sense to fold.  Folding is advantageous for the biggest players who can scale through M&A and do so profitably by cutting from their acquirees.  Cuts are straightforward once the mission changes from profitability to growth.  Just think how many projects your own company has going on that are future-focused and haven’t reached critical mass.  Nearly all of these will be ended together with the usual infrastructure cuts (we don’t need 2 finance departments, 2 HR departments, 2 CIO’s, yada, yada).  So HP and Hurd, and Oracle/Katz/Philips can do what they do best and act as shrewd number-crunching consolidators.  It’s all part of making the market relentlessly more efficient.

It’s not a bad deal for HP.  Protestations about acquiring Accenture to the contrary, they now become the #2 IT Services provider.  Apparently there is some synergy in the area of automating data centers–EDS was the largest customer for HP’s OpsWare suite.  Automating data centers is a good cost reduction move for IT, but it still can’t compare to the 16:1 cost advantage SaaS brings.  Companies will likely always have some activity requiring their own datacenter, but smart companies should be working to reduce that with SaaS as much as possible, hence there could be competition for a dwindling pie here at some point.  And, as Jeff Nolan writes, there is also the opportunity to bundle in other HP offerings, especially hardware, with EDS’s outsourcing business.

Who knows, maybe HP can push this into a higher level strategy to get into the Cloud Computing game on their own.  Certainly EDS has been very active in the application outsourcing business, but historically that’s been an ASP’s game and has not been very competitive against true SaaS offerings.  Dana Gardner seems to feel this is exactly the right move when he says:

HP with EDS has now clearly staked its future on the top prize in IT: next-generation IT operations efficiency, proper outsourcing methods, cloud computing services management, and high-level consulting as the onramp. This amounts to business transformation via IT transformation via IT multi-sourcing.

I’m a little less enthusiastic.  Being an admitted card-carrying member of the SaaS religion, this all feels like a bit of rearranging the deck chairs more so than actually addressing the Cloud Computing threat.  I am respectful enough of Mr Hurd’s (and his lieutenant’s) expertise not to see this move as a bad thing at all, it just feels more short term/tactical/number massaging than big bet/long term/game changing.

Some folks I was chatting with saw this as another signal that the IT world has fundamentally changed, that IT is now a commodity, and that the future is what Oracle and HP are doing.  In short, there’s little hope for smaller companies and innovation.  Someone else in the conversation observed that most of the Big Enterprise plays made their bones with big customers. The SMB market cannot afford to do things that way, and it’s a huge market. SaaS can tap into it very effectively.

Whether the new generation is going after a fundamentally different market, or whether even the old market is headed for the new generation, I don’t see things as “total commoditization and less opportunity” at all.

One generation is mature, and a new generation is off and running, growing like weeds.   I would hate to be at an on-premise perpetual license company right now.  Even mighty Oracle eventually was unable to innovate, they were unable to take much share with their apps business, and so they needed another alternative.  SaaS was closed—the business model was absolutely corrosive to Oracle’s existing model.  What to do?  Do what the last guys did when client server was eating the prior generation’s lunch.  Follow the CA model.  Become the hostel for over the hill software (and services it seems) companies.  Get some smart investment banking or financial executives on the team and you’re off to the races.

The real question here is what happens when the M&A feedstock runs out?  The consolidators are in a race to keep their M&A currency high (PE or Sales/MktCap, your pick) while acquiring stalled companies with lower valued currency.  Will it enable them to transition to SaaS by buying their way in through acqusitions?  Way too early to tell, but these guys are stuck in the cross hairs between open source and SaaS any way you look at it.  The good news is they’re really smart and have played the game incredibly well so far.

It’s funny to ask people who the big software companies were before Oracle, SAP, et al.  Huge empires can vanish in the mists of time surprisingly quickly when the new model is compelling enough.  Why wouldn’t SaaS and the rest of the Cloud Computing montage be at least as compelling as the Client Server wave that made Oracle what they are?  What we’re principally missing so far is the double witching hour of growth acceleration that included Y2K and the Internet Bubble.   Perhaps not having those urgent events will provide enough time for the old school to morph gradually enough this time.

Posted in saas | 1 Comment »

Let Customers Try the Good Seats

Posted by Bob Warfield on May 10, 2008

In a sense, software companies and airline companies are at completely opposite ends of the spectrum.  Airlines sell a perishable resource: seats on flights.  If the seat doesn’t sell, the flight goes anyway, and most of the cost (fuel, personnel salaries, etc.) is incurred with no offsetting revenue.  Software, by contrast, can manufacture as many “seats” as demand will bear, with the occasional hiccup due to scalability concerns if demand is too fast and furious.  Traditional manufacturing is somewhere in between.

Imagine my amusement when I read a recent tail (sorry for the pun!) of United Airlines by Ed Cone, which Jeff Jarvis elegantly calls “an airline’s exquisite stupidity.”  United offers “economy plus” seating for an extra $30 on the flight Ed Cone was on.  Curiously, on this particular flight, economy plus was empty and the rows behind were packed.

Passengers started out asking if they could move and were quickly told they had to pay for the seats.  Then, enterprising passengers wanted to take United up on the offer.  Immediately.  After all, Cone muses, you can buy a drink for $5 on the spot, why not a seat for $30.  But no, the attendants were not amenable to that either, saying they were not set up to take reservations.  Heavy dose of disbelief here.  There is no “reserving” involved really.  The doors close, the plane rolls down the runway, the wheels come up, and nobody else is getting on that flight! 

So what could United have done?  Lots of obvious choices.  At the least, they could have agreed to sell the seats for $30.  While I’m sure there are complex pricing algorithms in United’s reservation system and the airline may not always offer those seats for $30 more, offering people a chance to upgrade “in flight” for a fixed fee on any United flight would seem like mighty nice customer service policy to have in place. 

A step beyond that would have been to offer to upgrade frequent flyers before the plane was boarded.  Airlines have tons of miles racked up and getting them off the books is beneficial or you could just give it to the customer for even more impact.  I have actually been fortunate exactly once in my years of business travel to be offered a free upgrade without asking, but it sure put a smile on my face to be called up to the desk and offered the upgrade to First Class. 

In my mind, even better would have been to have the attendants empowered to parcel out the seats without strings attached once it was clear they would not be needed.  When was the last time an airline did something that thoughtful?  Yes, there are potential problems.  There may not be enough seats for everyone, but surely there was a strategy that would make people happier than staring at a big block of empty seats they were barred from using.  Perhaps offering the poor sods seated in the middle seat the first opportunity would have a certain fairness.

But as I think about this, the software world comes back to me, and darned if there aren’t times when we do exactly the same thing to our customers.  Consider the area of self-service.  Do you make it easy for your customers to self-service their way into everything you sell, or do you insist on your equivalent of the “reservation system” these attendants were so worried about?  I remember trying to get more disk space from my ISP for my family web site.  They’re not set up for self-service.  All of their self-service is focused on new customers.  In fact, it turned out to be quite an odd ordeal to add disk space.  Few people had evidently ever needed more than the standard package allowed, so they weren’t set up well for it.  I had to spend a lot of time on two different phone calls to get it taken care of.  Nothing more annoying than businesses who make it hard for you to give them your money for a service they clearly sell.

Contrast that with a conversation I had with 3Tera.  They related that if you make it easy for customers to provision, they will provision a lot more.  Things it may not have occured to you they would even be interested in will suddenly be selling.  I’ve heard this sort of story from multiple places.

And what about the customer experience?  What if you have a many-tiered collection of services, and you were to go to some of your best customers in the lower tiers, and offer them a chance to try the better tiers for a time at no extra charge?  Isn’t that the exact analog of these seats on an airliner?  If you were that customer, wouldn’t that make you happy?

I remember Seth Godin saying one time it’s worth stopping and thinking about the one thing of value you could give your best customers without their having to ask or do anything.  Just take it and give it to them, with your thanks that they’ve supported you.  It’s not for everyone, and it doesn’t happen often, so it leaves an impression.

The biggest thing the Web brings us is choice.  What is scarce in a world of endless choice?  Real customer service.  A great experience.  Choice is all about the going in, but experience comes after the choice.  What are you doing to deliver an exceptional customer experience?

Posted in Marketing, strategy | Leave a Comment »

A Tale of Customers, Employees, and Investors: Balancing the Constituencies

Posted by Bob Warfield on May 9, 2008

I try hard not to stray into politics or religion in this blog, but recent posts by Mike Loukides on O’Reilly and now Larry Dignan chatting with Vinnie Mirchandani about the constituencies a corporation serves and the relative value of each force me to step close to the line.  I confess neither posting sat very well with me in terms of balance.

First, Mike Loukides didn’t even mention the customer consituency in his post which was title, “The Corporation’s Two Bodies.”  Is it any wonder that sometimes investors or employees can forget one of the other constituencies in the heat of trying to get what they think they’re entitled to?

Vinnie, by way of Larry, starts out on a good track by asking whether Technology companies cater to Wall Street interests too much at the expense of a good strategy.  SaaS presents us with a brilliant example there.  Most conventional public software companies are incredibly hobbled in the pursuit of SaaS because of the fact that it delays revenue but not expenses so that a company in transition to SaaS suddenly looks like it is doing very poorly according to Wall Street’s yardsticks.  But then Vinnie crosses the line for me when he asks whether the customers and employees are more important than the shareholder interests.  He suggests that there are outcomes that are great for employees and customers and terrible for shareholders that actually really good.  And finally he asks why we listen to Wall Street when they can’t seem to manage their own business, given the woes with the ledning system.

Of course it’s the Microsoft-Yahoo (shouldn’t Yahoo’s name come first?  the fact it almost never does tells us something) drama that brings this nascent topic to the surface at this moment in time.

First, there is a lot of knee jerk in these posts.  Many scenarios are presented and acted on in isolation of a real doctrine or philosophy to guide judgement.  It makes for interesting reading, but it’s situational ethics, which seems to me is something the writers would think of as the shareholder’s dangerous modus operandi.

So, let me put forth a philosophy or point of view.  Each of these three consituencies has made a contract with the corporation:

- The employee will work in exchange for his wages and benefits.  She may receive stock options, and hence be made a shareholder of sorts, although most shareholders who buy long shares see the options as a very cheap way in.  Put that aside, there is a fair bargain that was entered into by both parties.  Services in exchange for consideration.

- Customers receive a product or service in exchange for whatever the company is charging.  If they work on an advertising model, the payment is in the form of attention (from the good ole attention economy).  More typically, cash is the medium of exchange, although many things are certainly possible.  A customer might contribute content or there may be a barter system of some kind in place.  But, once again, there is a fair exchange agreed to by both parties.

-  The evil investors (I call them evil because the posters above seem to view them as such) have also agreed to a fair exchange.  They have provided investment capital to the company in exchange for their shares.  This was done in the expectation that the shares would appreciate and hence the investor could make a profit. 

That’s pretty straightforward and above board.  Now let’s look at some of these terrible scenarios in light of the bargains made.  I want to understand who is breaking their bargain, because to me, that’s the source of the problem.  For a particular constituency to simple expect the bargain they made be upheld seems to me entirely reasonable, and not evil after all.  Can you see where I’m going?

Start with what set Mike Loukides off.  That was The New York Times quotes Laura Martin of Soleil Securities, as saying “This is management putting its employees and its job security ahead of current Yahoo shareholders’ interest.”  Well sorry Mike, but aren’t the investors simply reminding the company that a bargain was struck and that in their view management is now ignoring that bargain so that one of the other constituencies gets a better deal?  Of course Loukides immediately blows the shareholder position out of proportion by suggesting, “Where did the notion arise that management’s sole responsibility is to its funding sources?”  But that’s just puffery.  How was management being asked in any way to make its funding sources their sole responsibility?

So too with Vinnies remarks (again via Larry Dignan):

- Isn’t what a company does for customers and developers (employees) more important than shareholder interests?

Why is it more important Vinnie?  When the bargain was made, the company wanted the capital.  It did not make a bargain that says, “You can put in this capital, but you’re going to take a secondary role to customers and developers.”  Such bargains are possible.  Two tiered stock schemes say essentially that, as does subordinated debt.  But that wasn’t the bargain made.  Let me turn the question around.  Why should shareholders be asked to forget the bargain made with them so that a the other constituencies can get more than they bargained for?

-  Why listen to Wall Street at all? 

Oh come on, that was uncalled for.  There certainly are no end of folks in any of the three constituencies whom we could conclude are indicative that we should never listen to an employee or a customer by this logic.

Larry’s examples of why it’s bad to honor the contract with shareholders are equally as uncompelling to me.

- Microsoft-Yahoo:  Most of the world seems to think both Microsoft and Yahoo ought to do something.  Shareholders are voting with their own pocketbooks what that ought to be.  Am I now suddenly not entitled to sell my shares and make Yahoo’s stock go down if I don’t like their strategy?  Makes no sense.

- AMD:  Same story as Microsoft-Yahoo.  I get to vote with my shares.  It’s a free market.  What could be more democratic and less evil than that?  Moreover, I get to speak my mind to management.  Again, where is the evil there?  Lastly, part of the bargain inherent in the governance of the company is I get to vote the board.  Why should you be allowed to change the bargain I made and have already paid for because you happen to like their product?

- Amazon:  Taken to task for making investments that involved too much capital spending and resulted in lower share prices when that wound up being Amazon Web Services, a really good thing.  Let’s be real, it was a really good thing in 20/20 hindsight.  The investors never heard about it nor bought into the vision.  They just saw lousy profitability compared to similar businesses.  And they voted their shares.

It’s times like these when I am reminded of this quote:

“It has been said that democracy is the worst form of government except all the others that have been tried.”
Winston Churchill (1874-1965)

I might paraphrase it in this way:

It has been said that capitalism is the worst form of economic system except all the others that have been tried.

But there is a good one for that too:

Capitalism is the unequal distribution of wealth.
Socialism is the equal distribution of poverty.

A good corporation will honor the bargain made with each constituency and not at the expense of any constituency.  Perhaps that’s a good interpretation of a “do no evil” corporate charter.

Posted in saas | 2 Comments »

Interview With Rally Development’s Tim Miller and Ryan Martens

Posted by Bob Warfield on May 7, 2008

I had the pleasure recently of interviewing Rally Development’s CEO TIm Miller and CTO Ryan Martens.  I’ve mentioned Rally before as a company who I think does an exceptional job (particularly for a startup!) of leveraging the web.  In the wake of my recent Steve Singh interview, I wanted to continue to follow up on how SaaS companies are doing customer acquisition, and what they’re doing that really sets them apart from the crowd by using the web.

Give us a little background on  yourselves and on Rally Development

Ryan and I have worked together for 17 years and this is our third startup together.  Rally Development is a company focused on delivering a workflow product for Agile Programming.  Agile Programming is an engineering lifecycle process that is analogous to Lean Manufacturing.  We’re helping companies using traditional waterfall development to make the big step forward to modern Agile software development.  Companies today need to deliver in real time almost, and this is particularly true for SaaS companies.

We’re 110 employees, and we’re hiring 25 employees a quarter, so we’re aggressively expanding.  We’re at the tail end of closing another round of financing.  We have 375 customers and 15,000 users.  We’ve been growing 40% quarter over quarter for the last several quarters and expect to keep doing that into 2008.  Our largest customer has over 1000 seats.

Wow!  You guys are really growing. How did you manage that?

We modeled our company after Salesforce.com in every conceivable way.  The exception is we don’t have a Marc Benioff, but that’s appropriate.  We sell to engineers, not sales folks, so we need to be a bit quieter.

Like Salesforce, we’re multi-tenant from the ground up, we have nearly the same Average Selling price, same revenue per customer, same seats per customers, and we’re both workflow oriented products.  The difference is our product implements workflow for an engineering lifecycle–Agile Programming.

<At this point we talked a bit about Agile.  I shared that I have some background there since James Coplien wrote one of the papers that led to Scrum based on his study of my Quattro Pro team at Borland and how we were achieving enormous productivity.  For this interview, I wanted to keep going on the customer acquisition theme though, so that’s where we focused.>

Tell Us How You Go About Selling

Up until recently, we had a traditional inside sales model.  No outbound calling, very reactive to leads we created.  Over the last 3 years we’ve consistently reduced our cost per lead from well over $50 to about half that now.

We’ve been very successful selling to ISV’s, and started with almost all our customers being ISV’s in 2005.  In 2006 we started reaching large corporate IT departments, and such customers became about half our business in 2006.  By 2007, we were 2/3’s IT.  We haven’t gone head on into IT or changed our selling process yet, but we anticipate doing that soon.  This may increase our cost per lead given the publications IT read.

Over the last couple quarters we started getting out in the field more.  Unlike most companies, we’re not trying to turn an Enterprise sales force into a volume inside sales force.  We’re doing just the opposite.  A big deal for us is any deal with more than 50 seats.  Over the last 3 quarters we did 15 big deals, then 30 big deals, then 45 big deals.  Such deals require more face time, and we’re not shy about getting on an airplane to go visit someone.  We have both East and West coast sales people.  Eventually, we’ll get to Europe.

<At this point I mentioned how many SaaS companies I talk to are going through this evolution.  At one time, nobody wanted feet on the street.  Now companies are pushing hard up market and finding they need a real sales force.>

What are your thoughts on Sales 2.0?

You can’t just use feet on the street.  You need a volume business that lets you hit your number even if you don’t close any big deals.  You need both, and you have to feed them both.  Traditionally, half our business is big deals, but last quarter we didn’t do a single one and we still made our number.

When you sell to engineers, they don’t want to be hounded by a sales guy.  They want to download and try it and get educated, and then have sales come in and answer any remaining questions or help them scale and roll out Agility more broadly in their organizations.

<At this point, they made a passing mention of some “secret sauce”, so I had to follow up!>

What’s your secret sauce?

Agile is an open source methodology.  We can help scale lots of small teams onto 2-4 week cycles, ultimately distributed around the world.  We have users in 35 countries although we have only ever sold in 3 or 4 countries.  That’s the great story around SaaS–the reach it provides.  Worldwide, big deals, small deals, it all works for SaaS.  Selling to small customers scales to big customers because that’s how we grow incrementally and it’s how we make sure the product works for everyone.  That’s how we get to do the whole long tail.

Walk me through your customer acquisition and download model

We started with a single edition of the product, with demand generation driven lead acquisition, feeding those leads to volume reps, and now most recently we added a tier that feeds the leads to territory reps. 

We added a lower price point version than the core, called the Team version.  It worked okay, but wasn’t the right fit.  We needed a free version to take all the friction out of the initial acquisition.  So, we created the community edition, which is limited to one project.  Because SaaS lets us precisely target who uses our software, the free version didn’t have to be a bastard step child that was bad because you took out all the features and got something that didn’t work for anybody.  With SaaS, we can offer customers all the modules, but focus them to just a single development team, up to 10 seats.

That was a huge deal for us.  We launched last summer and it has been a rocket for growth and our sales organization then converts the free users to paying customers.

How do you talk customers into converting to the paid version?

We encourage customers to take as many community editions as they want.  In fact, we almost insist they start there and understand how Agile works for a single team.  As a result, we take all the selling barriers out and then we have upgrade incentives to convert.  We make it easy to migrate to the full-fledged product.

We know a customer is ready to convert when they have multiple community editions in use.  They get near their 10 user limit, and so then we call.  When they’ve already gotten a lot of use out of it and learned the value, they’re ready for a sales call.   A hard sell would be counter-productive, and it isn’t needed at that point anyway.

How do you guys do customer support?

Agile Commons is our support piece.  It’s a Web 2.0 community site providing expertise around Agility.  One of the top level menu items is Rally Community.  You don’t get to see a lot of that if you aren’t a customer.  Inside, we have things like an idea voting system similar to Salesforce’s IdeaStorm, we have dialogs with customers on features under development.  Customers get to see actual prototypes.  And, there is single sign on between our application and the Commons.

It’s been amazing the level of feedback we garner, the attention before shipping, and the way that gives us the ability to prepare and educate the installed base on what to expect from the next release.  We can instantaneously form beta groups this way and make customers a part of the product development team.

It builds trust, loyalty, and helps customers get what they need.  Customers can create their own topical areas and comment as well.  We’re about to let any member invite other members too.  Also, if you go through Agile University you get to join the Commons.  Many of the materials you need for University are found in the Commons.  Partners get to have sites in the Commons too.

<It’s clever to use community access as a way to drive upgrading to paid versions of the product.  What’s even more clever is the way they’ve tied together all of these ingredients to create virtuous cycles.  Customers help out with new version feedback, and beta testing, and in the process get educated so they’re better users of a product.  The University/education piece is tied in.  To get your “degree” in Agile programming, you have to learn to function in the community.  Lastly, letting members invite others to the exclusive club is very much along the lines of Social Networks.  I don’t remember seeing it done this well by a business before.>

That’s so creative, how did you guys come up with this?

We use HiveLive, another Colorado-based company, and that helped us grasp what was possible.  Their innovation was to remove all the admin problems with creating groups and permissions by empowering users to do that.  All the templates are configurable.  You take the IT resource out completely and push it to the users.

Once we saw that we were able to leverage that product.  We sell CommunityManager.  it takes the Hive Live platform, which is sort of a Ning/SocialText competitor, and we added on top of that all the templates needed to run the support org for a software company.  We added voting capabilities to that and built it into our Product Manager module.  PM’s love being able to access the voting feature.

It’s very powerful to integrate all these platforms.  Software is going from a linear product release business to a continuous flow service business.  Agile is the methodology that enables that.  SaaS is the delivery vehicle, and it is sold more as a continuous flow.  Community Manager brings this continuous process mentality to support.

Who else does this?

Salesforce has some of this in SuccessForce and IdeaForce.  We have a better community system, but theirs is a bigger community.  We’re in a completely different niche though.  We’re really tied to the operational flow and the product side of software driven organizations.  Salesforce is so CRM focused with little brand extensions off that core.  We work well with SFDC.  They’re a good partner more than a competitor.

Do you see this whole ecosystem as a way to do Viral Marketing for SaaS?

We sell ourselves as the experts in Agility.  We do that through content, white papers, webinars, and all those traditional pieces.  We push that first, rather than product, and that’s a key differentiator.  The content leads the product.  In fact, we give away the product for your first 10 seats.  We totally cannibalize that end of the market.

While we push being the experts, we dont’ charge for it.  But, when you retrieve our content, we get a warm lead and it builds our house list.

<This, I think, is their real secret sauce.  Content, and specifically being the experts at the best practices, sells the product.  Every company has the opportunity to be the experts with their own products, but how many really take the time to do so and give that expertise back?  What a powerful selling and community-building tool!>

How do you get good at producing content?

We’ve had since day 1 a services arm on our staff that produce this kind of content.  We have some of the world’s best Agile coaches, so we have a ton of content produced for keynote presentations or training.

But, even so, it was hard to keep the see rising.  To keep the sea rising around Agile is too much work for Rally alone.  So, creative commons open souced the content, we share it, and we let others use it for their own businesses so long as they don’t compete with us.

Now many people are incented to help create and disseminate content around Agile programming in our community.

<And here is the other half of the secret sauce.  Using open source for content gives them tremendous leverage over having to create all the content themselves.  Plus, it aligns a bigger ecosystem around their product offering.>

What else should we talk about this interview?

We’re going through the Geoffrey Moore lifecycle process  with our first product.  Now we’re starting to look at the platform space.  Not a wide horizontal SaaS platform, but one that our customers can develop on and mash up.  We’re not ready to announce anything, but we’ll be in touch!

<Despite a radically different scale of company and a totally different market they are very much on track with what Concur’s Steve Singh said about his public software company’s approach to customer acquisition.  Lots of interesting lessons to take away from these guys:

- You can use the web to take a prospect all the way to highly qualified status where there is little question they’re ready to buy.  It takes a free version of the product to get started with, a community, and a best practices university offering content.

- High value content is the starting point.  Some of it you have to develop.  Once you get a critical mass, a community and open source can help you crowdsource content for your company or cause.

- There are a number of virtuous connections and feedback loops between product, community, content, marketing and sales.  Make sure you’ve got them all wired together to emphasize this!

- Lots of ways to incent desirable behaviour, but they key here is incentive.  Rally uses exclusivity (only paying customers get full community access), free valuable content, referrals, partner incentives (you can use our content and you can plug into our community), and I would bet a variety of other incentives.>

Posted in Marketing, saas, strategy | 3 Comments »

 
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