A new business model with help from CRM
I have been writing about Salesforce for 20 years. That’s incredible for me because aside from marriage, there’s nothing in my life I’ve done so consistently for so long. Perhaps like a marriage, the thing that’s been attractive about Salesforce is its constantly changing nature.
The company went through a more or less typical adolescence for a startup but beyond that it always had a sense of mission that it was changing the world. It was the first successful cloud company and in its rise most of its early competitors fell by the wayside leaving it with the uncomfortable position of being a small branch on a big tree. It was susceptible to strong winds that luckily never materialized and so a new generation of cloud companies joined it eventually.
Along the way Salesforce began branching out beyond simple cloud apps. It became a marketplace and a development platform, and in the process remade itself many times. It is still remaking itself today though, guided by co-founder and co-CEO Marc Benioff, it is more outward looking than ever.
For several years now, Benioff has dabbled in the changing aspects of economics and business theory. Starting with his advocacy of a Fourth Industrial Revolution in which he argued for a new beginning in the tech sector based on analytics, machine learning and IoT. Today he’s also trying to assemble multiple parts he sees in society into a new vision of business.
In his new book, “Trailblazer: The Power of Business as the Greatest Platform for Change,” Benioff is combining his significant knowledge of business and economics with his long term affection for philanthropy into a vision for what Capitalism can become. He’s been vocal recently in telling us about the end of capitalism. In so many words Benioff recently told an audience in San Francisco that “capitalism as we know it is dead.” He also reiterated those views in a New York Times Op-Ed this week.
His opinion is well informed. Benioff was referring to the profits-only focus of the mid-20th century, Milton Friedman era and suggested that a new capitalism based more on a statement issued by the Business Roundtable, of which he is a member, was coming into view. Simply put, the statement said that the monolithic corporation, oriented only toward making profits for shareholders, is passé.
The roundtable embraced the idea of corporations having multiple stakeholders: obviously shareholders, but also customers, employees, partners and suppliers, and importantly the communities where corporations abide. With that orientation it’s just as unacceptable to think about profits without thinking of employees and their welfare, as it is to consider production without also contemplating its impact on the environment.
Some might complain that this positioning is just a distinction without a difference, but it is more. We do what we think about and we achieve what we can model and the Business Roundtable statement on the purpose of a corporation is a new model for new times.
Benioff and his book are about change and it must be said that change isn’t always the order of the day. Social scientists have a term that fits just right here, “punctuated equilibrium,” which simply means that there can be long periods where little changes and others when everything is up for grabs. To exemplify, consider your EKG. We think of our hearts as constantly beating and that’s true but there is a relatively long period of rest between beats. The rest is the flat line, an equilibrium, and the beat is the punctuation.
In business we’ve been through a period of orderly progress, thanks to Moore’s Law, of improvements on the basic idea of a computer on a chip. Chips got more dense and powerful and, yes, less expensive, during that time, but the overall direction has been a more or less straight line.
Today is different. We’re confronted by multiple global challenges and global goals that will take all of us to invent our way out of and most of them don’t directly involve computers and software. But they all involve coming together and thinking outside of the box we’ve become comfortable in.
The vision of a new capitalism isn’t secure, at least not yet. An article in Harvard Business Review about a month after the BRT statement observed that,
“Despite clear opportunity, CEOs in 2019 acknowledge that business execution is not measuring up to the size of the challenge of the Global Goals—or to their previous ambition.”
The sticking point is investors. The old school Milton Friedman-esque purpose of a corporation still obtains. According to new research from Accenture and the UN Global Compact, that examines attitudes of 1,000 global CEOs, “The Decade to Deliver: A Call to Business Action,” which was quoted in a Harvard Business Review article “What 1,000 CEOs Really Think About Climate Change and Inequality,”
“No matter what the BRT statement says, most companies won’t act aggressively unless they believe investors value their sustainability efforts. And while there is actual movement in the investor community of late, as CEO of EDF Energy, Simone Rossi, says ‘There is a great disparity between the public statements put out by banks and investors and their apathy towards sustainability behind closed doors.’ No wonder only 12% of the CEOs cite pressure from shareholders as a motivation.”
Whether you call it the Fourth Industrial Revolution or something else–I reckon we’re beginning the Sixth Industrial Revolution but why quibble? The dominant theme of the next few years is likely to be change, the punctuation. New models are likely to proliferate and what’s not to like about one that recognizes the primacy of ordinary people as stakeholders? It’s the ultimate act of CRM.
Salesforce birthday notes
February 26, 2019
Salesforce will be celebrating its 20th birthday on March 8. Where did those decades go? “Time flies like an arrow,” said Groucho, “fruit flies like a banana.”
There it is.
Last week a respectable chunk of the analyst community that follows the company converged in San Francisco inside its cavernous new headquarters to hear about its plans for the year ahead. I’ll get to some of the non-NDA ideas floating around the sessions momentarily but first, some impressions of the first (or last?) 20 years.
In many ways, Salesforce has executed a typical and nearly flawless grass roots maneuver of the kind explained by gurus like Geoffrey Moore and Clay Christenson. They entered the market late, after Siebel was already a billion-dollar company but their entry was not of an also ran. From the beginning Salesforce positioned itself as fundamentally different because it was what would become known as a Software as a Service, or SaaS, company.
Competing with an established player can be hard. Initially, the Salesforce app comprised just four tabs while Siebel had so many that Marc Benioff said they were so numerous they were useless. That’s nothing you’d hear from Salesforce today with its numerous clouds. Salesforce was selling something that every company wanted at that point and it had little to do with the merits of its CRM–quick delivery and low costs.
You see, Salesforce arrived at the start of the century just as the smoke was clearing from the traumatic change of financial systems to accommodate four-digit date formats. Conventional CRM in those days was largely a custom programming market and implementation cost metrics often stipulated that the total cost of ownership in CRM would be 3-4 times the software costs. They weren’t wrong and there was a kind of fatalism, at least among large companies, that that was the way things would be.
But you can’t grow a market or a category like that. If prices had not come down, CRM would have become a not very good major corporation play thing. Prices had to come down and functionality had to expand in order to get CRM into the hands of medium size companies and even those smaller. SaaS, with its very low cost of ownership fit the need precisely.
Salesforce changed that equation and in so doing gave itself and multiple other dot-com companies running room. Still it was amazing to me even then that the CEO’s of most of the other CRM competitors offering SaaS services failed to understand the importance of what they had. Most simply regarded SaaS as another delivery mechanism rather than the revolutionary commoditization of IT that the industry badly needed.
IT in the earliest decade of the century was ripe for commoditization. It was traditional and highly manual. There were no smartphones or social media then and analytics was a failed idea from the 1990s in need of greater CPU horsepower and data storage before it could take on its natural role. Much of this comes together in one observation. If you wanted to brief me, or any analyst, about your company, products, and strategies in the hope that I’d write about you, it was necessary to fly to Boston to do that in person. There were no products like WebEx yet. It was a long time ago if you’re basing your analysis on such things.
So, into that milieu Salesforce launched in 2000 after a year of software development led by co-founder Parker Harris but what’s interesting is that the company hasn’t changed that much in the intervening decades. Instead the industry has continued to play catch-up over numerous product cycles that have included basic SaaS, social media, mobility, platforms, customer journeys, analytics, and machine learning.
Corporate social responsibility
Always lurking in the background has been the company’s famous 1:1:1 approach to corporate social responsibility. It still donates one percent of its people’s time, its equity and product to charity and most interestingly more than 2000 companies have taken the hint and developed similar programs. They aren’t all small companies either. Google instituted such a program before its IPO and on the day it went public automatically spun up a large charity.
Lately Salesforce has described the four pillars of its business as trust, customer success, innovation, and equality which neatly ties together its attitudes about customers, employees, the community, and its responsibility to deliver innovative products, which brings us full circle to last week.
Commoditization of IT hasn’t ended. Salesforce might have taken advantage of a nascent trend at its inception, but the need was already pronounced. Understanding that trend in relation to the IT industry is important in part because it seems like cloud computing is now the thing that’s commoditizing.
Closing the frontier
My observation today is that not only Salesforce but most of the industry is built out. That’s far from saying there’s nothing left to do though. It’s more like closing the American frontier in 1890–there’s no more frontier but there’s still plenty to be done internally. In Salesforce’s case, as well as much of IT, we’ve entered an era of efficiency and effectiveness meaning that we’ve now produced various automations and our focus now is optimizing them.
Fair enough. But this also means that the importance of product announcements and making release dates begins to recede into the background. What takes prominence are the services needed to help customers to be successful and we’ve seen Marc Benioff harping on this aspect repeatedly. So rather than big news items, we’ll be on the lookout for more individual customer accomplishments.
For example, for several years already, Salesforce has been edging toward the position of change agent and corporate culture transformation maven and you see it in the discussion of digital disruption. No one buys digital disruption, there are no products labeled as such just as there are no cans of whoop-ass (a technical term) on store shelves that you can pour on an IT problem.
If you go back to the company’s four pillars–trust, customer success, innovation, and equality–you realize that only one is about technology. The others are about how you encourage people to take the leaps necessary to achieve digital prowess, to have the courage to become data driven and to make better business decisions. It’s culture change.
That’s what I think last week was about and I think one data point neatly encapsulates this. They told us that this fiscal year 55 percent of the sales team will be focused on industries like insurance, financial services, health care and more, and that number is trending. Working that angle, you can expect more things like My Trailhead, a learning system that can deliver knowledge about anything to a user that’s relevant to a business process.
My two bits
Despite its great success, Salesforce is not the CRM industry; it has revenues of $10 billion in an market that generates $80-ish billion in revenues. But, in Salesforce’s history, you can discern all of the industry’s major inflection points. Looking at CRM today you can conclude that it’s mature and that major systems are already in place. But there’s still ample room for growth and in a mature market you typically see vendors working to make their products easier to use through more service offerings such as in industry versions.
In line with this, CRM will continue enabling users to be more effective. This enablement will become increasingly fine grained as the vendors reach into industries with detailed solutions for specific business problems.
I think the next big milestone for CRM will be inter-vendor–inter-process communication, something beyond integration. It will take the whole industry to solve that challenge just as it took the whole industry to come up with SQL and the relational database. Based on what I saw last week, Salesforce is already working on it.
Salesforce’s just announced Q1 FY 2019 results beating analyst estimates and causing the stock to rise 3.9 percent. The company had been advising investors that it expected to grow to $12 billion and in the fiscal year and the Q1 results of $3.01 billion keep it on track. That’s a 25 percent increase year-over-year with first quarter operating cashflow of $1.47 billion up 19 percent.
The company adopted an alphabet soup of new regulations in the quarter including ASC 606 which deals with how subscription companies recognize revenue. From the press release:
Unearned revenue, representing ASC 606 deferred revenue less the cumulative timing differences of recognized revenue from ASC 606 adoption, on the balance sheet as of April 30, 2018 was $6.20 billion, an increase of 25% year-over-year, and 23% in constant currency.
That’s an important measure, before ASC 606 subscription companies had various approaches to recognizing booked revenues that had been held in reserve to pay future subscription fees. This points out the power of the subscription model. In contrast to conventional revenues that start at zero each fiscal year, subscription customers commit to purchases well into the future making it easier for a company to hit its growth targets.
The rise of subscriptions had caused some inconsistencies in revenue booking across the industry and ASC 606 and other regulations will help regularize that process. Look for other companies like Oracle to go through a similar adjustment as their cloud strategy takes hold.
Salesforce Q4 earnings on target, again
They did it again. Salesforce exceeded its year over year quarterly earnings by a tidy amount. The numbers are 24 percent YOY growth on revenues of $2.85 billion. Full year revenue was $10.48 billion. Next year their guidance to financial analysts is revenues of $12.60 to $12.65 billion.
Stop for a minute. Do you know how hard this is to pull off? It’s not just that Salesforce exceeded $10 billion for the year, which was an important goal. It’s that they’ve been a growth company for almost two decades. Every year more corporations buy into Salesforce’s version of cloud computing for CRM, for ancillary applications from the AppExchange, and for building their own apps from scratch for a variety of platforms (all at once) ranging from the handheld device to the (dare we say legacy?) desktop.
Forgive me for going on, there will be no free steak knives at the end of this, but Salesforce has for many years been on of the very best companies on the planet to work for. And, again no parting gifts here either, they have built a business model that has philanthropy, a.k.a. doing good while doing well, built in.
To paraphrase Paul and Robert in “Butch Cassidy” “Who are these guys?!”
Okay, okay, they aren’t perfect. They change their marketing strategy as fast as most people change their socks. They’ve been a hosted CRM company, a SaaS company, a social company, a cloud company, they’ve embraced analytics and IoT as if they were the second coming. They’re also into teaching, training, making it possible for ever more people to use their stuff. They’re hard to keep up with.
But Salesforce, more than any company I know about seems to luxuriate in the idea of destruction as a means of creation. If something doesn’t work out exactly right, they have no problem scrapping it and finding something better. They grow because they embrace the new and the difficult.
But back to the degree of difficulty. It is hard, hard to put up better numbers year after year and do the other things but lately that’s become part of their appeal. Other, larger companies now go to Salesforce to discover their secrets and because their secret sauce is embedded in their software and how they use it, selling Salesforce is no longer about product. Actually, it’s still that but now it’s also about knowledge and culture transfer. That, combined with a subscription model that gets customers to commit to multi-year deals, suggests that this growth curve can extend well into the future. We’re seeing something special happening.
Revisiting show season
Show season changes the CRM market, it always does. One day you’re in the vanilla application software space and a week later you understand the need to incorporate social media, or analytics or machine learning or you see a need for enhanced integration and development through platform services. It goes on.
Today, in the wake of Oracle, Salesforce, Microsoft, and many other companies’ trade shows, we’re again taking a look at the available suites. But this time, we need to think less about what’s been added and how well integrated the components are.
With Oracle now a year into rolling out its cloud strategy, we can’t say we’re in cloud computing’s early days any more. We’re in a race to computing as a ubiquitous utility like electricity, water and natural gas.
Oracle was the last cloud holdout, the last company that led with its legacy on-premise products. Today they’ve reinvented themselves to offer infrastructure, platform and applications or any combination as services. They might talk a good game about supporting legacy customers forever, and that will be necessary, but they’d like nothing better than to convert the legacy base to cloud infrastructure. And make no mistake about it new cloud based apps is the eventual goal. Much the same is true of Microsoft whose end user products like Office are now being delivered by subscription even if some of the software still resides on the desktop.
Salesforce was, of course, born in the cloud and it hasn’t suffered through a transition though for almost 20 years it has been undeniably causing one. The disruption impacted everyone else but the next disruption, or whatever we’ll call it, is affecting even Salesforce. With typical poise Salesforce is taking it all in stride and is even taking a leadership position.
The disruption turns form purely delivering technology to focusing on how it is used. The focus is very important to Salesforce and all the others because it will have a direct impact on how much of its services (we used to call it software but this is now) get bought and deployed.
So we see increasing emphasis on learning how to develop apps and administer them even to the point of opening up the training platform, Trailhead, to enable partners to develop training programs for their custom apps.
In the background there’s also an effort to standardize on processes that deserves attention. Back in the day, a process was carved in stone. Your organization used a 7 step sales process or maybe a 5 step one. Introducing a 7-step process into a 5-step organization was enough to set off a riot. It was something you did only very carefully if at all. In that era there were sales methodology companies (still are) and there were software companies and each would tell you their products were agnostic. They were too, with a little coding.
But today it’s different. The introduction of AI and machine learning has made both methods and applications secondary. Yes they’re still important but, no, they don’t rule the roost. Everywhere sales people seem to be sidestepping the argument about which method is better in favor of adopting an attitude of doing what the AI system suggests is the next thing needed to advance a deal. As it should be.
Platform based CRM with robust partner communities and their apps have brought us to the point of fully integrated and automated business processes. Customization has never been easier thanks to the platform too. The next step in our journey will be inventing new business processes that derive from our need for, and attempt to be, more agile, to flexibly approach new opportunities.
That’s what has been most interesting to me about show season. Each vendor has, in it’s own way, made a tacit nod to the primacy of data and analytics for automating processes. In that event, they’ve also begun closing the door on business processes that momentarily pop out of the automation sluice and into a spreadsheet or other manual thinking.
The change isn’t only recognizable in sales though selling is a big beneficiary with solutions that include SFA, CPQ, admin functions, AI, ML, compensation management and gobs of graphically rich reporting. Marketing is a rich area with its newfound abilities to identify, target, hand off, score, and journey map. And service has its own rich tool set most significantly analytics married to multi-channel abilities to take customers from beginning to end of a support journey without necessarily bringing in a human.
In all of this businesses are freeing up employee time for higher-level tasks that add value to customer experiences well beyond getting a deal or a right answer. This is where the customer facing jobs of the future will come from. They will demand more and different people skills as well as technical mastery.
That’s why this show season has been a turning point. I think it will be looked back on as the time we began a more disciplined approach to customers and employees as people who interact with technology, not just as various flavors of technologists.