Tien Tzuo

  • December 14, 2015
  • COP21-logoForbes has an interesting post by Tien Tzuo, CEO of Zuora and one of the leaders of the subscription revolution in which he discusses the coming of age of the subscription economy. Coming of age might sound like a contradiction to say the least—where has everyone been for the last couple of decades? Subscriptions are down and in a curious way, this is the point.

    You ought to read the post almost as an echo of Mark Twain’s “Innocents Abroad” because it discusses Tzuo’s first encounter with international governmental organizations through his recent participation in the G20 meeting. To be very brief, the G20 is the group of the largest countries by economic output and its finance and political leaders gather annually to discuss where this planet and its economy are going. You might have also heard of the G7 or G8 (depending on whether or not Russia is misbehaving), which is an even more exclusive group.

    So Tzuo was invited to participate in some sub-group meetings for business and technology in Antalya, Turkey, site of the recent confab. Now you have context. Tzuo is happy to report that the word “Internet” broke into the collective consciousness in the form of a communiqué from the recent meeting with an assist from him. That’s how long it can take for an idea that we have regarded as foundational for over two decades to become so mainstream that it gets included in the thinking of the G20.

    This should surprise no one. When you are dealing with the planet’s economy and the 20 largest players in it, then it’s reasonable that only the biggest ideas bubble up and the Internet (specifically subscriptions) is finally breaking the surface. But the fact of this emergence suggests that the Internet and even subscriptions are no longer the disruptive innovation we’ve nurtured for much of our working lives.

    The technology revolution ushered in a world of data driven business processes, information sharing, social media, big data, analytics, tiny computers now called devices, and use of the word “online” as a prefix as in online shopping. It is now so integral to what we do that it is its own paradigm, rapidly replacing older structures and business models like face-to-face commerce, print media, and (gulp!) customer loyalty. Online everything is having enormous impacts on how we live and travel and it is now safe to say that the revolution is over.

    To be clear, we will not retreat into some dark age and technology will continue to drive the global economy for quite some time. But when you think of the power that you can hold in your hand in the form of a device today, you can see that it’s getting rather hard to make a technology product at a profit and there is an important lesson. Technology and information are commoditizing the way that everything else from textiles, to cars, to TV did. They are all important parts of the global economy today but none drives it.

    We shouldn’t mourn information technology’s passing and as I said, technology is with us now for better or worse. Interestingly another disruption that’s been on the horizon for decades got a major boost over the weekend when the global community ratified an agreement summarizing individual nations’ efforts to stem carbon pollution and save the planet from overheating.

    From here on the technologies that will have venture capitalists’ greatest attention will be those that reduce emissions, generate clean electricity, and even take carbon out of the atmosphere. This new paradigm will be the work of a generation and people in the job market today will increasingly feel the gravitational pull of energy and environment in information, finance, product development, sales and marketing, and much, much more.

    The new paradigm will be heavily dependent on the information management structures and tools that the current generation—all of us—have wrought. It is a worthy legacy.

     

    Published: 2 years ago


    There is no better company to look at to get a sense of the future of technology in business and society than Zuora. This might surprise many people because companies like Oracle, Microsoft, and Salesforce might come to mind more readily. To one degree or another those companies feature their products and services, which are very important but Zuora talks about business models, and today that’s even more important.

    It’s the business model that will determine the products and services companies will be able to provide and its behaviors around them. It is the frame for everything else the company does and what it considers important. Consider the dominant business model of the last century: manufacture millions of identical products and sell them through mass advertising.

    We took pride in the standardization and uniformity of so many products able to provide the identical user experience. That was a good thing too because it made interchangeable parts a reality. If you manufacture anything that’s a big deal, but it also leads to thinking that all customers are interchangeable too and that’s not so good.

    The old model was simple and direct but utterly without any meaning to the customer. Indeed we came to think of the customer as a mere consumer, one that takes from a huge but not unlimited supply and gives nothing back. A business model with consumers is unsustainable for the simple reason that sustainability demands that my spending is your revenue and vice versa. It is a round trip and it is what keeps economies strong. It is also the basis of Keynesian macro economic theory, which neo-conservatives often pooh-pooh but never seem to refute.

    But Zuora’s messaging at Subscribed 2015, its user meeting held in San Francisco last week, is that business models are changing. We knew this but perhaps we had a less clear understanding of its implications. If you take personalization and customer experience, add to it my idea of Customer Science, and think of what the world’s business models might look like if you move from mass production to personalized subscription, you get a sense of the vision Tien Tzuo, Zuora’s CEO, was offering.

    Tzuo’s keynote was smooth and well organized but relatively quotidian for its first half winding through nearly a decade’s worth of increasing progress in the subscription market. In the second half he wound up and delivered his big news, a 100 mile an hour fastball down the middle of the plate, a new product, Z-Insights. To simply call Z-Insights a new product though is to miss its importance. It extends the company’s idea of Relationship Business Management (RBM), brings more definition to the subscription economy, and extends the future of ERP squarely into the front office. Let me briefly unpack this.

    RBM

    The idea behind RBM is that to successfully transition from making millions of identical products to personalizing vendor-customer interactions, it helps a lot if you can provide your wares through subscriptions. Subscriptions provide the framework for capturing customer use and uptake data so that you can act authentically when involved in moments of truth with your customer. Prior to Subscribed 2015, I felt that RBM was more aspirational because it depended on vendors understanding (often guessing) what data to collect in order to act on its information content. There was a quality of dealing with known unknowns to borrow a Rumsfeld phrase. With Z-Insights there’s now a framework for all this and the software will do a good deal of the heavy lifting when it debuts later this year.

    Subscription Economy

    Much as I believe we’re in a subscription economy, I also know that the economy has successfully spawned a culture. Customers behave in the market and act towards vendors like subscribers—not because all vendors offer subscriptions but because nearly all customers have been exposed to subscriptions, to the ways that are superior to traditional relationships and they prefer the new culture for its greater intimacy and empowerment.

    Z-Insights aims to provide vendors with the information they need to understand customers better so that the two can meet in moments of truth. By collecting and managing customer use and uptake data vendors will have solid understandings of what drives demand. Understanding demand is the first step to providing adequate supply in a world that now requires greater personalization. It’s not enough to know that a customer might have a need for a solution unless one also knows how that solution will affect the user.

    ERP

    Much has been written (by me and many others) about the demise of ERP but the context is important. I don’t see how to get away from ERP since it supports so many vital back office functions. But the ERP we inherited from the last century is evaporating in the sense that pieces that were once thought to be foundational are being supported in best of breed situations and connecting with front office systems. Take, for example, Xactly, which also had a user meeting this week at the other end of Market Street. Xactly focuses on incentive compensation, which was once thought to be a part of ERP through HR or HCM, but all of these functions are breaking off and aligning with the front office.

    In a similar way, Zuora as a part of ERP that handles subscription billing, payments, and finance, is connecting more directly with front office CRM when it begins offering insights into customer behavior from essentially ERP data, which can drive alignment of the sales, marketing, and even support groups in the front office.

    So, who owns the customer?

    Many good questions on the minds at Subscribe could be reduced to who owns the customer in such a situation? We seem to default to existing answers like sales or marketing or possibly customer service in these circumstances. But really, it’s a jump ball, if we’re changing the vendor-customer paradigm is it necessarily true that the old structures will support the new framework? I suggest they won’t.

    I believe Z-Insights is possibly the opening salvo in a process that may evolve a new department at least in larger enterprises. I am calling it the customer science department because it will be the place where all customer data consolidates and vendors identify customer needs. In essence it will be the place where the business practices sociology on its customers, understanding the structures that keep them engaged with the group (and the business or brand) and looking out for the indicators of disenchantment that lead to attrition as well as opportunities for cross-sells and up-sells. This will drive specific directions for sales, marketing and service groups.

    This framework will enable everyone to take responsibility for coordinating aspects of the customer journey while a specific and neutral group has responsibility for customer knowledge. Note that ownership devolves into responsibility; its synonyms include bond, duty, accountability. As it should be.

     

     

    Published: 3 years ago


    many-asses1I was literally gobsmacked and I had to re-read the post several times.  Gartner analyst Robert Desisto—who I don’t know at all—wrote a short post last week saying that today’s SaaS vendors, “will resist the move to ‘pay as you go’ because it will have a very big impact on their business model predictability” and become “legacy dinosaurs” as his headline said.

    But, but, but! I stammered to myself.  How can that be?  I have been researching and writing about this space for fourteen years.  I was the first analyst to cover Salesforce and a bunch of other early entrants, and one of the first people to have a practice dedicated to SaaS.  They all had pay as you go models, at least back then.  Did I miss something?

    One of the real challenges of running a subscription business, and this includes SaaS companies as well as the Dollar Shave Club, ZipCar, and all the other companies that jumped on the bandwagon, is that you have very different revenue flows that must be accounted for.  Companies like Zuora have built big businesses and attracted hundreds of millions of dollars in venture funding to build billing, payment, finance and accounting systems that cater to this massive industry.  Now along comes Gartner with the clear implication that the pay as you go model is not in fact alive and well?  I didn’t get it.  Still don’t.

    As a sanity check I contacted Tien Tzuo, CEO of Zuora, a subscription billing, payments and finance provider.  In his previous life Tzuo was CMO of Salesforce and at one point had the job of inventing a billing system for Salesforce that operated the way subscriptions run.  Here are some points from Tien.

    • Just because some SaaS companies do three-year contracts that doesn’t make them enterprise software dinosaurs.  Every successful SaaS company realizes that keeping churn low is a core part of the model, and every successful SaaS company realizes that long term contracts do not equate to low churn—the only thing that truly reduces churn is to have strong adoption and customer success.  That’s why SaaS vendors invest in customer success while on premise software companies do not
    • Many SaaS companies actually don’t offer three-year contracts.  At Zuora, we see lots of companies with month-to-month models.  CDNs, cloud companies, API companies, point-of-sale systems—these industries all skew towards month-to-month.  Radian6 also had a month-to-month model.  The post also says doing three-year contracts makes SaaS companies vulnerable to other startups who choose to offer month-to-month … but there’s nothing to stop the SaaS vendor from changing their billing policy whenever they want. (my note: provided they have a product like Zuora that makes this easy to do the billing and accounting).
    • Customers don’t have to accept three-year contracts.  It’s naive to say that it’s the SaaS vendor that forces it on them—many companies actually prefer long term contracts once they are committed to the SaaS vendor, as this gets them the best price as well as longer-term price protection.  This can be a win-win scenario.
    • This does create havoc on revenue recognition.  Monthly billing makes billing messy but revenue recognition easier.  Annual or multi-year billing makes billing easy but revenue recognition very hard.  There’s no free lunch.

    It was such an odd thing to read.  It reminds me of some other chestnuts like, “If god wanted man to fly he would have given us wings,” or “We will never need telephones in England because we have such an abundant supply of messenger boys,” or “Someday every town will have a computer,” or my favorite, “640 KB is all the memory your computer will ever need.”  These are all such Luddite comments you just knew upon hearing them that they won’t stand the test of time.  Heck, this one didn’t survive a day before people started scratching their heads.

    Perhaps the last word on this comes from the most authoritative source—the marketplace.  On December 10, BrainSell, a Boston-based technology company announced it would offer an integrated solution of Intuit’s QuickBooks with bi-directional synch to Salesforce.  According to the press release, “What’s really great is that customers can get a Salesforce subscription from BrainSell with no contract, and the ability to pay month to month!”

     

    Published: 4 years ago


    In my last piece, I discussed with Tien Tzuo, CEO of Zuora, the vagaries of the subscription services market and how Wall Street analysts have a tough time dealing with subscription metrics.  But already I feel a need to go beyond the original piece to add some depth to the piece.

    The nub of the story, and it is not the first time I write about Wall Street and subscription metrics, is that many of the analysts use metrics that value conventional manufacturing era companies rather than subscription companies.  The businesses are different and the ways you measure them need to be different too.

    Just to boil it down a little, when you sell one thing one time and collect all the money then and there instead of repeatedly selling access to a company’s products or services, the money comes in slower and it has to be accounted for differently.  If you value a subscription company for what it brings in this quarter only, as you would a conventional manufacturing company, you are only looking at a small fraction of the value that the subscription company generates.  So, your analysis will be flawed as a result and the advice you give from that analysis won’t be worth much.

    For many years we’ve agonized over the fixation on quarterly results which the analysts pore over to get a sense of how to advise investors.  The problem with this is, of course, that no matter how small the time slice you analyze this way, it is rearward looking and it cannot tell you much about the future.  It’s like steering a boat by only observing its wake.

    But over the weekend I ran across this article in the New York Times by a Harvard Business School professor, Nancy F. Koehn.  “Lincoln’s School of Management” is part of a flood of all things Lincoln this year in which we celebrate the 150th anniversary of the Emancipation Proclamation and it’s worth reading as a buttress to Tzuo’s analysis.

    Tzuo is right in claiming that the analysts have the wrong toolset for the job of analyzing subscription companies, but the issue goes deeper — all the way to asking why we measure what we measure.  One of his points, which the Lincoln article seems to back up is that doing business, not turning somersaults for Wall Street, should be the main emphasis of any business.  It seems like common sense and when you put it this way you wonder why so few people appreciate it.

    Companies that focus on their knitting rather than the analysts in the grandstands do better for customers, employees and shareholders over the long run.  That’s what the Lincoln piece is about and it’s what Tzuo has been telling anyone who would listen as he has extolled the virtues of subscriptions.

    Published: 5 years ago


    You may remember the subscription economy from previous posts.  It’s one way to make sense of cloud computing and the many new and very different ways of doing business on the Internet.  We’re most familiar with software as a service and how different it is from conventional licenses; so familiar in fact that I don’t need to describe it for you here.

    But subscriptions as a way of doing business are just about everywhere; they’re not just in tech anymore.  For instance, if you want you can get your clothing as a subscription, and not only that but men (who as a group are notoriously lazy shoppers) have sites dedicated just to them.  You know the trend has arrived when something like men’s clothing is available as a subscription.

    Nonetheless, we’ve more or less glossed over everything below the waterline in this new approach to business.  It’s taken over ten years to get the idea of the subscription economy into our noggins but we’ve barely started internalizing what it takes to support it and report on it as a business.

    This all came into sharp focus for me last week when I reviewed Salesforce.com’s Q4 and annual earnings call with Tien Tzou, CEO of Zuora, a company that specializes in what’s below the subscriptions waterline.  Tzuo is also an alumnus of Salesforce having been its CMO and chief strategy officer before starting Zuora.

    As you know, subscriptions operate through customer payments on a periodic basis.  The industry became known by its per seat per month pricing but that doesn’t happen much these days because monthly billing got to be a challenge with big deals.  Today customers sign contracts for a fixed length of time and vendors invoice periodically.  A typical example might be a three-year contract with annual or quarterly billing.  Here’s where it gets interesting.

    The financial analysts and other Wall Street types—whom I have absolutely nothing in common with—are very accustomed to companies selling products rather than subscriptions and collecting the money net 30 or whatever and moving on to the next opportunity.  Subscriptions have a mixed bag of revenue recognition ideas that challenge the status quo (which has very well defined ways of recognizing revenue) significantly.  Product companies don’t have much when it comes to reliably forecasting future revenue streams but subscription companies are just bristling with information.

    Take the Salesforce revenue numbers from last week’s earnings call as an example, and here is where I am indebted to Tzuo for his insights:

    • Quarterly Revenue of $632 Million, up 38% Year-Over-Year
    • Full Year Revenue of $2.27 Billion, up 37% Year-Over-Year
    • Deferred Revenue of $1.38 Billion, up 48% Year-Over-Year
    • Unbilled Deferred Revenue of $2.2 Billion, up from $1.5 Billion Year-Over-Year

    If you are reading this (thank you very much) you have at least an intuitive understanding of revenue but deferred and deferred and unbilled revenue deserve explanation because who really cares about unbilled deferred revenue—isn’t that complete vapor?

    As Tien Tzuo said to me, think of it this way.  You do a deal with a company in which you agree to supply your service for three years for $36k or one thousand dollars per month and you agree to invoice once annually, in advance, for $12k.  At the very beginning then you have $24k in unbilled deferred revenue and, since you bill in advance, you also have $11k in deferred revenue and $1k in real live revenue which you can recognize.

    This $1k is also known as MRR or monthly recurring revenue.  Theoretically, if you add up all the MRRs on the books you can get very close to the forecast for the quarter.  But there’s also an upside possibility that you’ll sell something else.  If you do and you invoice for it, you’ll add to that pile of money.  Unfortunately, there is also a possibility that some of your MRR will go away either because the customer quit or because they didn’t renew or whatever.  We know this as churn so you really need to discount the MRR by the churn rate to get a better sense.  Life would be simpler if we could all agree on using a metric called the annual recurring revenue but, curiously, ARR doesn’t exist yet.

    So, all this has the potential to drive Wall Street types nuts.  They’re good with the $1k in MRR and they can tolerate the $11k in deferred revenue because it’s in hand, and the $24k in unbilled deferred revenue is sort of OK (but not really) because there’s a contract in place that defines the annual billings.  But this does have one effect that many financial types like—it smoothes out the revenue stream for months in advance.  Bookings might fluctuate but the monthly revenue stream should be rather predictable.

    Nevertheless, it’s bookings that have recently made some people skittish.  Sales has always been a lumpy affair.  Some months many deals get booked and other months not so much.  Early on the software industry trained its customers to wait until the end of the quarter to make purchases because that’s when they had leverage.  Finance guys didn’t like this but they got used to it.

    Today, the quarterly incentive is largely gone due to monthly recurring revenue but people still obsess over bookings.  What if bookings go down for a few months?  The logical answer is that future revenue would eventually feel it but it’s equally true that bookings could recover before real revenue took a hit in which case the fluctuation in bookings would not be seen.  Call it seasonality.

    Let’s summarize all this.  Salesforce has $1.38 billion in deferred revenue, which I presume will be realized in the next 12 months.  During that time they are advising us that the company will have revenues of between $2.92 and $2.95 billion.  This means that they have about 47 percent of next year in the bank.  They also have $2.2 billion under contract to be invoiced (unbilled and deferred) and some of this invoicing will be done at some point beyond the next year.  In the last quarter Salesforce had $632 million in revenue which grew at 38% year over year.  At some point in the next twelve months Salesforce could have a quarter in which it books revenue of $750 million which would give it a forward looking run rate of $3 billion.

    It’s still an uphill battle explaining revenue recognition and the difference between conventional companies and subscription companies but at least there’s a lot of black ink to do it with.

    Published: 6 years ago