July, 2017

  • July 31, 2017
  • So much is happening as we approach the end of Q2, our industry’s busiest quarter, at least by some measures. I’m flying around seeing things but not always able to comment from a middle seat on a red-eye. So this piece is an attempt to catch up and set some markers for the traditionally slower summer.

    Last time, I was searching for a word to describe a new category I see. You can call it various things like on-demand services or even services as a service which somewhat distinguishes them from things as a service such as SaaS but it’s also confusing.

    SaaS has led the way in things as a service and while it’s a perfectly good descriptor the rapid evolution of IoT, Internet of things, has introduced some confusion. Things as a service describe any traditional good delivered as a service, such as software or a car or a cell phone. Services delivered as services often don’t have a physical component or that component is of a different type, perhaps not even human.

    For instance you can get software as a service but the training or consulting that needs to go with it is very different. First, it’s delivered by people who show up, do a job, and disappear; you don’t employ them and you certainly don’t own them and their work product is pure service, often leaving behind only thoughts in other’s minds or software code.

    Another example, and my favorite right now, is earth moving. Various makers of things like excavators and bulldozers now offer earth moved as a service obviating the need to purchase the big device. The difference is that the service is intentionally and decidedly temporary. These companies calculate amount of earth moved (in a simple example) and charge by a meaningful metric such as tons or cubic yards moved. Moreover, these are short-term services; the equipment and people to run it show up one day, do a specific task and then are gone. Or perhaps they are idle for one week per month—how do you charge for this?

    In a SaaS model you might buy a specific number of seats per month and that’s it, if your people don’t use it, too bad. But in the earth-moving example, an idle machine still has overhead for a vendor. How does the vendor capture revenue when the device is idle? It’s not hard to do but it gets into some branching logic that typical billing systems might not cover. So very quickly, we see that service as a service is different from a thing as a service. What do you call that? And what’s the name of the business model and how do you account for these services?

    My thoughts include words like precision services or discrete services. Each conveys a sense of the ad hoc, a temporary, specialist thing that won’t become part of the status quo in the sense that it will be gone at some point. Just think of the earth-moving equipment required to build a tall building and understand that it’s not there any more once the building is completed.

    So that’s one thing I’ve been noodling on. Send me a note with your thoughts.

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    Also on the docket have been Oracle’s results for the last quarter. It’s only important to look at the direction, which is up and to the right of the graphs, to know that the company has hit stride on cloud computing. I am happy for them and have previously written that their model is uniquely suited to their customer base. It includes all phases of cloud computing including infrastructure, applications, and platform to support customers in various stages of the move.

    Oracle’s big footprint attracts lots of competition from Amazon’s AWS at the infrastructure end to Microsoft, Salesforce, and SAP on applications and platform. I am not even sure if they all agree on what platform is and that’s important. It tells us that the tip of the spear is platform and that’s the competitive landscape. It’s also the metric that we need to use to analyze and understand the quality of any software vendor’s earnings.

    Infrastructure is heading toward pure commodity status and it’s getting close if in fact it has not already arrived there yet. But ironically, you can’t be wildly successful in the other phases of the game if you don’t have a credible infrastructure offering. So you have to look with great interest at Oracle’s infrastructure number which equals just north of $400 million on what I believe is a $1 billion cloud base. Is it a good thing? I think it’s a necessary thing and it might set the company up to do well in other phases but that jury is still out.

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    Finally, there was a piece on AI in the New York Times Sunday Review, “The Real Threat of Artificial Intelligence” by Kai-Fu Lee that I am in complete disagreement with. I’ve seen the argument before: AI will swallow up jobs leaving a large and unemployable group of people who will require some form of guaranteed income support. But rather than offer an opinion, let me supply an analysis and some data.

    Massive income assistance has never worked well in human history. You might go all the way back to the Roman Empire and recall the idea of bread and circuses as an example of such welfare. But if you do, you also need to factor in that it didn’t work out well for guys named Caesar. In modern times the top earners have always objected to the confiscatory taxes needed to make such a scheme work.

    This kind of analysis is too dependent on straight-line thinking. What’s missing is any sense of the dynamism of free markets in a democracy. Free markets enable innovation and entrepreneurship and with them come new industries and new jobs. I know things look kind of bleak for people with high school educations or even people with BA’s in literature or philosophy. But the fact of the matter is that since the Industrial Revolution there have been 5 ages when an industry or a clutch of them took off and did really well for a few decades only to fall back to earth later killing some of the jobs it created in the name of efficiency and commoditization.

    What we’re going through with AI is cyclical and not one of a kind. I just wrote a book about it and it’ll be out in September, a time when we come back from the beach and put our game faces back on and rediscover that a machine really can’t do what we do.

    Published: 7 years ago


    A lot happens in a decade. Bill Gates, among others, once said that we over estimate what we can do in two years and underestimate what we can do in ten. 2017 is a particularly good time to stop paddling and look back at what’s been going on in the last decade and while we will all have our favorite memories, there’s one in CRM that stands out more for me than others.

    After all 2007 was the year of the iPhone as well as the year before everything in the financial world began going down in a big way. There was barely any social media to speak of—Facebook was founded in 2004 but only in 2006 could anybody over the age of 13 join. Twitter was founded in March of 2006 but while social was making waves in 2007, the introduction of the iPhone helped make it the huge part of our lives it is.

    But as one who has been writing about CRM and especially SaaS, 2017 marks the tenth anniversary of Zuora’s founding. You might think that wasn’t significant but just as the iPhone made social networking a big deal, Zuora had a similar effect on the SaaS business. Sure there were already big companies like Salesforce.com in the space by 2007, they’d even gone public a few years before.

    But there was a looming problem in SaaS that was either being ignored or avoided, and it was creating drag on the whole industry. The problem was that although SaaS businesses were successful, they were scrambling each month to get their billing out. In 2007 even the best SaaS companies were using a combination of spreadsheets and archaic ERP systems that couldn’t fathom the idea of a recurring charge. ERP could do services but not the recurring part and spreadsheets aren’t systems, at best they’re the equivalent of life vests for business processes.

    So along came K.V. Rao, Cheng Zou and Tien Tzuo, veterans of WebEx and Salesforce to tackle the problem. I am not certain if Zuora was the first company of its kind, but it certainly put a floor under the industry in a way that competitors didn’t. That floor looked a lot like Salesforce. When Salesforce got started subscriptions were thought to simply be another delivery mechanism for software and not the revolution they turned into.

    Similarly, Zuora didn’t simply approach the subscription billing problem as, well, a billing problem. Zuora saw a revolution in the making and not just in software as a service. They saw subscriptions as a new economic entity, a way to bend the cost curve downwards that would expand markets by vastly increasing demand. Importantly, though, the subscription difference has been that while markets expanded they did not necessarily commoditize, which might have been the first time in history that’s happened.

    Under more normal conditions that have prevailed throughout history, commoditization involved elements of mass production as well as finding ways to cheapen a product. Mass production takes labor out of making something reducing costs. Cheapening products can take many forms, for instance, you can remove features or substitute materials or components in the process shortening the product’s useful life. You can also curtail services, which are expensive to provision when using employees rather than systems.

    Until subscriptions, that was the reality of commoditization but by their nature, subscriptions do none of that. The same grade of product delivered as a service is available to all, though the current reckless actions by the FCC to degrade net neutrality may be a retrograde step in the direction of cheapening the Internet. Everyone also pays the same base price though there’s still opportunity for creativity when it comes to volume discounting. Most importantly, development and maintenance in many subscription industries are ongoing and if they aren’t, like when you subscribe to a car through a lease, at least the service level remains high. The reasons are all the same, subscription vendors are always in the hunt for the renewal.

    Zuora saw subscriptions as the revolution they are and that’s one reason they’re one of Silicon Valley’s unicorns, a startup worth more than a billion bucks on paper. Undoubtedly, we’ll see that valuation tested at some point through a public offering but for now it’s worth recalling that the revolution is continuing. U.S. and international financial accounting boards that set standards for how businesses report their financial activities have recently (after more than a decade) announced standards for how businesses report on recurring revenue, which goes to the heart of the industry.

    The new rules ASC 606 (U.S.) and IFRS 15 (Europe) begin going into effect next December. As I’ve written previously, Zuora has acquired Leeyo a revenue recognition specialist company to prepare its customers for the transition. It’s not the first acquisition for Zuora, which has been steadily innovating and acquiring businesses as needed to build out its platform and support the subscription economy.

    Zuora has come a long way since its founding ten years ago but so has the industry, so have we. Gate’s original insight should probably be amended because not only do we underestimate what can be done in a decade, we absorb new technologies so fast that a decade can cause amnesia about the way things were just a short while ago.

    Published: 7 years ago


    I don’t know why more subscription vendors don’t do this. Subscription companies collect mountains of data from their customers and analyzing the aggregations can deliver profound insights virtually for free. Yet too often subscribers are reluctant to let their data be stripped of identifying characteristics and used for research. Too bad because there’s gold in that big data.

    One subscription provider that isn’t afraid to do the analysis or to ask its customers to contribute to generating new knowledge is Xactly, the sales incentive compensation ninjas. For many years the company has captured data about sales performance and provided concrete information to its subscribers about things like attainment vs. quota and how they compare with peers. One of the early findings they released was that women sales reps were more loyal and were better at delivering on-quota performance. Yet they were paid a little less. Sad.

    Xactly has been doing this kind of analysis because they have the data and because their customers understand the value of seeing how they compare to the averages. Good on them. The most recent data to come out of Xactly involves understanding the nuances of different cities as places to plant your next sales office. That might sound a little in the weeds but I guarantee you every sales VP thinks about it at some point.

    The data concretely shows that cities on the west coast and in the south have a lot to offer while some of the big cities of the North and East are surprisingly…different. Conventional wisdom says that you simply must have an office in New York and/or Boston and Chicago, yet these cities have some of the lowest average staff attainment rates—New York 60%, Boston 54% and Chicago 46%. Interestingly turnover in these markets is very low relative to other places with New York at 16%, Boston, 19%; and Chicago 24%. Compare places like Austin with turnover at only 20% but attainment at 75% and Austin isn’t alone. The west coast has some of the most productive cities but Denver, at 83% attainment, takes the cake.

    Xactly also tracks things like the cost per square foot for real estate, which you’ll need to plug into your cost calculation when aiming to open a new office. But what does this all mean?

    How do you analyze this?

    It would be easy to say that sales reps in the Northeast are terrible and the people on the west coast have it all together but maybe not. It takes more than meets the eye to analyze this.

    First, everyone wants an office in the big cities especially in the Northeast where there are loads of big corporate headquarters—a condition one of my sales managers once described as target rich—so the region attracts sales managers and their people. But if everyone has the same idea this also drives up competition to the point that no one really wins, which is one interpretation of the data.

    Second, variable pay is a much larger share of compensation in the East than the West. For instance just over $47k in New York but only $8.8 K in Seattle. This leads me to wonder about turnover; it’s 41% in Seattle and only16% in New York. Do people leave more readily in Seattle because there’s never much on the table? Or flip it around—are companies reluctant to fire people in the Northeast because they’re all taking serious draw against commissions? Fire people and say good-bye to the recoverable draw.

    You can understand a lot from a few charts but as a manager, you need to make the right calls when hiring and expanding. A compensation plan has to be competitive for the market the office serves or you’ll risk not being able to hire good people because their perception will be that another offer more in line with local norms is better.

    Real costs of real estate

    The least expensive cities for real estate costs per square foot are Atlanta $23.51, Denver $25.80, and Chicago $30.13. So at the end of the day you find yourself calculating quota attainment vs. real estate costs vs. fixed and variable costs per rep. At some point you need to factor all of it into the actual cost of a rep and play that against expected revenues. But still you’re not done because as good as these numbers are, they are all largely extraneous to most businesses.

    You still need to understand where your customers are and how they like or expect to be treated and for that there’s a big overlay of experience and industry clustering. So as good as this information is, we need to take it as a first cut when determining where to situate the next sales office. That’s not particularly surprising. What’s great though is with this information and more to come, we can begin to rely less of gut instinct and manage better by the numbers.

     

     

    Published: 7 years ago


    Mobile technology has delivered a lot of useful functionality to vendors and their customers enabling the parties to be more frequently on the same page. But the screen size has an inherent drawback; it only shows a very narrow slice of a reality—typically one idea at a time. The problem is especially acute in two key areas, sales and service.

    There’s nothing worse than getting “help” from an app that misunderstands your problem or its role. It can be a source of pain, frustration, or even customer churn that a mobile app can’t deliver help that the customer values and we’d be kidding ourselves if we didn’t see that problem. The advent of good AI and machine learning have done a lot to help vendors to ensure that the sales offers they place on customers’ small screens are the ones that customers actually value.

    The same need exists in customer service—putting the right information before a customer but it might not need AI. However, because the screen will only support one idea at a time it’s critical that the help is, well, helpful. There’s less to wonder about in a help situation and therefore less need for analytics. What is needed is simply step-by-step help as a customer traverses a process.

    Helpshift, an emerging company in the customer service space, has been supporting service processes with an innovative approach to placing help at every step in a service process. This approach ensures the app’s help keeps up with the customer’s need.

    This week Helpshift did something really cool, the company announced integration with the Salesforce Service Cloud and made the integration available on the AppExchange. Importantly, Helpshift FAQ’s are mapped to and managed by the Salesforce knowledge base making it possible to manage Helpshift from the Salesforce dashboard. At the same time, when a mobile user initiates a chat in a Helpshift powered mobile app, it automatically creates a Salesforce case. The case contains all of the metadata and data from the user’s phone saving time and increasing accuracy and time to resolution.

    It’s not hard to create a first level integration with Salesforce and many vendors do this. What’s interesting about this approach is that Helpshift has created an integration that not only satisfies the end user in the moment, but it goes on to work within Salesforce to enable knowledge base updating over the life of the mobile app. From here you can imagine more functionality being added over time. For instance, how long before natural language processing becomes part of the interface?

    Customer self-service was once thought to be the peak of customer empowerment but we soon discovered that self-service systems were, in some cases, the same support systems used by agents but possibly with nicer front-ends. That didn’t work at least in part because there’s a lot of knowledge capital that agents have as employees that customers by definition don’t. So customer self-service had a rocky start and customers who used those systems could easily be discouraged.

    But today’s self help exemplified by Helpshift does away with old style self-service while really empowering customers and if an issue needs escalation, that’s a standard part of the solution. Conventional indirect service channels have been highly successful with better than 80 percent of customers checking them before calling a service center.

    That’s resulted in fewer calls but the ones that get through are often more complex and require the help of a real person. So don’t expect this or any service automation to replace the agent, the real benefits of the Helpshift integration will be two fold. For customers it will provide fast answers in a channel that might have lacked them before. For vendors, it might be another way to limit the high costs of customer service. Given people’s propensity to solve their own problems this should be a benefit to all parties.

     

     

    Published: 7 years ago


    CFOs have a new 800-pound gorilla sitting in the corner, as if they needed another one. Actually, the really lucky ones who oversee operations in Europe and the U.S. will have two. ASC 606 and IFRS 15 are new accounting rules that describe in great detail how subscription vendors should recognize beginning in December 2018 and we should all care about them.

    Since the dawn of the subscription economy companies like Salesforce, Zuora, and loads of others have preached the advantages of buying things as services rather than as traditional goods. Subscribers pay only for what they use, never worry about some of the more intricate and arcane aspects of implementation, change, and maintenance because just about all those things are responsibilities of vendors. But although subscriptions have been a staple of business since the turn of the century, there have been few standards to guide the pioneers.

    One of the great debates and just plain conundrums of subscriptions has been how to recognize revenue. If a subscriber pays monthly that’s pretty basic. But often vendors want to lock customers into multi-year contracts with annual invoicing. So a typical subscription might call for an annual invoice, recognized in monthly increments by the vendor with the unrecognized revenue sitting in a bank waiting to be dinged. But that’s not the only possibility, in fact there are probably as many ways to recognize revenue as there are vendors and until ASC 606 and IFRS 15 came along, there was no authority to say which was better.

    As you can imagine, a world without ASC 606, “Revenue From Contracts With Customers,” could lead to chaos especially given the metrics that the industry has auditioned and used over the years. Annual Recurring Revenue, Monthly Recurring Revenue, Unbilled Revenue, Deferred Revenue all have specific meanings but if your company doesn’t use one or more of these metrics it can become very difficult for financial analysts to make comparisons with other companies. Without comparisons and standards it’s harder to attract investment and to report to shareholders.

    So 17 years into the subscription economy, after most of the software has been built and refined, we finally have standards for revenue recognition and that’s a good thing. You might quibble that this should have been done sooner but I’d disagree because in an emerging market it’s hard to know what will have staying power and what will be gone next week. So the standards come along at a good time.

    Less wonderful is that the standards would like to be taken seriously beginning with annual reporting periods starting after December 15, 2018, just around the corner. Yes, we’ve seen this coming since 2014 and no, most of us didn’t do anything about it. Truthfully, did you even know about ASC 606 or IFRS 15 before reading this?

    Now we have before us a perfect accounting storm the likes of which have not been seen since the late 1990’s when businesses en mass took on the four digit date format. Back in those good old days, people worked day and night trying to rip and replace financial systems to meet deadlines. Many of those people are managers today and they’re in no hurry to repeat the ordeal and fortunately they don’t have to.

    Several ERP/accounting software vendors are advertising their ASC 606 capabilities, which might undersell the problem. More than simply having a way to recognize revenue from subscriptions it’s also critical to first have the ability to invoice and bill subscriptions as subscriptions rather than as some special case of a product. So the ASC 606 and IFRS 15 standards are really about an end-to-end process starting with invoicing and ending with revenue recognition. In between there’s a lot of change management to deal with as well.

    So this is a big deal for subscription companies as well as those that bundle subscriptions with traditional products and services. But according to PwC http://www.pwc.com/us/revrecsurvey most companies are not prepared for dealing with the new standards. Furthermore, this change to accounting rules could be as profound as the four-digit date change.

    Into all this Zuora, Inc. a leading provider of accounting and billing software for subscription economy companies, has launched an effort to manage the entire process. On Wednesday Zuora announced its intent to acquire Leeyo a leading provider of revenue recognition software. Over the last three years the companies have worked at numerous customer engagements providing customers with that end-to-end order-to-cash support that subscription companies all need.

    Leeyo RevPro will become part of the Zuora product set as Zuora RevPro and Leeyo will become a division of Zuora. Since the companies have worked together to deliver this integrated solution for over three years, delivery of the combined system should be unexciting. However, as a separate division of Zuora, Leeyo will still have the ability to sell its products and services independently and that might be exciting.

    The opportunity is sizeable. Starting with an assumption that almost every subscription vendor will need some form of solution to help comply with the new regulations, this merger is well timed. MGI Research estimates that the total addressable market (TAM) for what it calls Agile Monetization Platform software is over $100 billion between now and 2020.

    Zuora and Leeyo expect the deal to close shortly.

     

    Published: 7 years ago