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

Archive for October 1st, 2007

Interview: Concur’s CEO Steve Singh Speaks Out On SaaS/On-Demand, Part 3

Posted by Bob Warfield on October 1, 2007

In this final installment of my interview with Steve Singh, CEO of Concur, he discusses his views on sales and marketing for SaaS companies including some thoughts on how the business is changing.  If you missed part 1 or part 2, be sure to give them a read as well!

As before, my parenthetical remarks (meaning my reaction but not something Steve and I talked about) are in parenthesis. Any mistakes are mine, and any great insights are Steve’s!

One of the things that stands out about Concur is the wide range in customer sizes you have. Lots of SaaS companies are primarily SMB. What makes Concur different?

Steve: Our product works for companies ranging in size from the LA Philharmonic to BofA with 180,000 uses.

The differences we see in the two ends of the spectrum:

• Integration is harder for larger customers. They have to integrate to financial and other systems. They have multiple ERP, HR, corporate credit card, personal accts, and many other systems.

• We have established API’s built by Concur to facilitate these integrations, but it’s important to remember that On-demand can’t require massive customization or massive consulting.

Bob: (Avoiding the need for massive customization and expensive professional services engagements that go along with it has been one of the big obstacles for many customers considering SaaS. If you can’t work out a mechanism to deal with customization that is relatively self-service, you won’t be able to enjoy the full benefits of the SaaS business model. This is one of the reasons why I wonder at the Force platform, which is aimed at least partially at customizing Salesforce, but which is so similar to conventional ERP customization that it seems very heavy weight for SaaS.)

Tell us about your use of the Web as a marketing medium. How are you using the Web?

Steve: All On-demand companies have a long ways to go to use the web as a marketing platform. We deliver our services that way, but we need more marketing and selling. Marc’s company does a tremendous job selling and shareing customer experience. It is a more cost effective way to reach middle market accounts. It makes it easier for customers to learn on their own schedule, which lets them move through your funnel without feeling the pressure of a formal sales process.

It’s a priority for Concur and you’ll see us make some leaps.

Bob: (The Web 2.0 remains a challenging medium for many to figure out how to harness. It will be interesting to see what new paths Concur will blaze.)

How does SaaS affect the sales process?

Steve: SaaS accelerates sales. You can’t argue with the numbers. Cycles are shorter in every segment. The reason is lower up-front capital commitment. The Customer is more comfortable. No long term commitment. No point to try before you buy, it’s more expensive to try before you buy, so they just dive in.

Advice for Technologist/CEO’s on Sales & Marketing?

Steve: Go spend half your time with customers and prospects. Not just for learning, but to understand where your customers are going. It tells you where to invest. You have to understand their objections and problems.

Customers are also a tremendous source of energy. Even if they aren’t 100% happy, a frank and honest conversation can make the difference. “I love what you provide, I only want you to improve it.” How can that be a bad conversation?

Bob: (Go to any successful ISV’s user conference and you can feel that energy that Steve Singh talks about!)

What is the role of Partners for SaaS?

Steve: It doesn’t work to hang out with SI’s. SaaS ISV’s are built to deliver ROI immediately. VARs and SI’s are driven to bill hours.

There’s a role for partners to help you distribute or who can add value to your solution. But, your missions must be aligned. We have a great relationship with ADP. We have great relationships with Corporate Travel partners.

You have to find each other. The best relationships are when you both need each other. You can’t sell them on the idea.

Bob: (Partnering in the SaaS world is hard, so hard that I’ve referred to SaaS as Partner Toxic and even IDC has said it’s difficult. Steve points out some excellent examples of relationships that can work well with SaaS.)

What trends and changes do you see going forward with SaaS?

Bob: (Steve followed up the interview with a great note about some interesting changes he sees coming to SaaS.) 

Steve:  Some thoughts on pricing, contract lengths and cash flow from operations.

1.  Pricing is always a philosophical discussion that intersects with market realities. While market leaders can often demand pricing premiums and while investors will always ask to increase prices on a periodic basis, we think the right approach in the SaaS market is to price aggressively in favor of the customer. Given that the leverage point in this business model is the technology stack that you are utilizing, there is plenty of opportunity to drive. very impressive operating margin. Increasing operating margin is purely a function of building scale [more customers signing up for the service]

2. Contract lengths – Investors often ask, how long customer contract lengths are. They and many SaaS providers take comfort in the wrong thing. The right question here is – what is your retention rate. I think it is a false sense of security to look to 3 – 5 year contractual commitments. If customers are dissatisfied with your service, they will stop using it and stop paying the bills. Revenue recognition becomes simple. Zero. How many companies do you know of that have sued their customers. If you were to plot a chart that shows contract lengths on the x axis and number of SaaS companies on the y axis – you would find that the average contract length is 3.5 to 4 years. If you then add two more “SaaS” companies to that chart – ADP & Paychex – the bell curve on that chart would move to less than 1 year. ADP currently signs 90 day contracts that automatically renew. It is my view that SaaS contracts will move to that type of term over the next few years. The only metric that will matter is customer retention as that will be the measure of contract length.

3. Cash Flow From Operations – there is a wide disparity in how cash is collected across SaaS providers. Some companies collect 1 year of cash up front, some 2 years, some 90 days, etc. We have taken the view that since the customer can terminate the contract effectively at will, the more conservative posture is to collect monthly [although we do have a small handful of customers that pay quarterly as it is easier for them]. The difference between monthly billing and collections versus 1 year up front is very significant – for more than the obvious reason. SaaS companies are growing at a rapid rate – today. Once that rate of growth slows down, the cash flow from operations for those companies that collect 1 year of cash up front will drop precipitously. Or for that matter if customers decide that paying 1 year up front is not market the same result will come about. In contrast, if you bill and collect monthly, you can literally stop selling new customers and not see any change in cash flow from operations. This is important because investors often value SaaS companies on cash generation. ADP & Paychex? Monthly.

Bob:  (These are all fascinating business strategy points that Singh is making.  Balancing on the razor’s edge of a more competitive offering that drives growth faster versus trying to be profitable sooner and use less investment capital.  Steve sees the market moving in favor of customers.  And why not?  That is the natural direction the compass of progress points as markets mature.)

 

Posted in business, saas, strategy | 6 Comments »

The Internet First Breeds Diversity Then Conformity: Punctuated Equilibrium

Posted by Bob Warfield on October 1, 2007

I read with interest that TechMeme will soon offer a “leader board” (password protected so far) that shows the top 100 blogs. I went through the whole list and obligingly added a few to my reader list.  In the end of the day, I don’t think this list is very interesting because it largely is a force for conformity on the web.  Those 100 blogs will have an unnatural advantage over blogs 101-200, even though if you read through the list, there is tremendous overlap in the content of the blogs.  Aren’t there really more like 20 blogs at most there that you’d have to follow to know 90% of what’s going on of interest in that list of 100 blogs?  Doesn’t TechMeme itself already distill the interesting stuff from those blogs?  Some others wonder about things like TechMeme being very US-centric.

What’s really interesting is the list of blogs that are just off the edge of the radar screen.  These would be the best 100 blogs after the first 100.  Note that if we choose to list the best 200, we will once again have to expand our search to find unique and interesting content until we’re just outside the radar screen.  The problem is too much conformity.  Unless you can escape the conformity zone, you can’t tap into the wellspring of genuinely new ideas that are out there until they’ve been rendered conformist.  By then, it’s almost too late to be interesting.  The party is over.

The web breeds diversity, and then it distills that diversity down to conformity.  It’s a classic damped oscillation, with big interesting swings in thinking that gradually settle down until everyone is saying the same thing.  The interesting part about the web, the part that’s truly different, is the big oscillation end.  The conformity piece has been around since cavemen banded together into cliques that all thought the same way. 

This path from diversity to conformity is what evolutionary biologists call puntuated equilibrium.  The web is an evolutionary system in which memes can evolve from initial diversity and growth into a mature form where the meme has become well accepted and digested throughout the web.  Given the very low friction that exists in the web, ideas can evolve in this way extremely rapidly, faster than at any other time in history.  This is fantastic for mining new ideas and for introducing new ideas, but I maintain the interesting part is the diversity part.

Ironically, this Technorati-killer feature of TechMeme mimics the part of Technorati I like the least, which is that Technorati poops out after showing the top 100 or so of everything.  Is the Top Searches and Top Tags list even that interesting?  Not so far as I can see.  The ideas that appear there have been so pasteurized and homogenized that I may as well be looking at Yahoo News or People Magazine.  There is no way to scroll further on these lists.  So it is with a Google Search.  How often do you really get lucky?  Well, if you’re looking for a definition, or just something quick, it works well.  But what if you really want to dig in and understand something?

How do we ride the punctuated equilibrium?  I use Google Blog Search, and I really try to dig in on new ideas.  I sift through a lot of pages of search results even when it seems like an idea has hit equilibrium in the results.  I try to arrange my blog reader list with original thinkers, and not just endless newsy blogs that all say the same thing.  When one of the original thinkers I like starts musing about something, I try to think beyond the edges of their radar.  With few exceptions, these great thinkers are off the edge of the 100 lists.  I prefer search searches that let me drill down to any level.  Services that offer structure will often make it easier to sail away from the known conformist ideas and towards things you hadn’t thought of before.  Use bookmarking services of various kinds to see what new lands others may have discovered that you missed out on.  Search del.icio.us, stumble around on StumbleUpon, or try Reddit every so often to see what’s happening.

If someone really wants to innovate on search, they’d find a way to identify the off-the-radar results that matter.  They’d help people to sail off the edge of the known world.  It’s the only way to find new worlds.  If we don’t find the new worlds, we succumb to the forces of conformity and the web ceases to be unique.

Related Articles:

Recommendation Systems Reduce Diversity

Web 2.0 is Dead and Spammy, Long Live Web 3.0?

Choose the Aston Martin When Everyone Else Is Driving BMW’s

The biggest thing the web brings is choice.  What does choice make scarce?

Posted in Marketing, strategy, user interface, Web 2.0 | 14 Comments »

Platform Vendors Have to Be Switzerland

Posted by Bob Warfield on October 1, 2007

Platforms are big news these days.  Everyone wants to be a platform:  becoming a platform is even part of Yahoo’s plans to turn the company around. 

What do you look for in a platform vendor?  Yes, the features and functionality provided by the platform are important.  And yes, the community that is already there is also important.  But what about how a platform conducts itself?  Think of a platform like the popular notion of a Swiss Bank:  an extremely safe place to put your faith and assets.  A place that has no interest whatsoever in anything but safeguarding those assets.  Most platforms are not like Swiss Banks.  They are bent on World Domination.  They get confused about their loyalties when greed sets in.  They start to compete with those who placed their trust in them.  Those are the platforms you want to think twice about betting on.  Consider what it will be like to try to make a living on that platform, or to commit your data and energy to using the platform. 

Platforms often come about because a great application started a frenzy that others wanted to be part of.  Facebook is in that category.  We’ve yet to see whether Facebook will be a friendly platform owner, or predatory, but it’s something folks wonder about for obvious reasons.  Zuckerberg is saying some of the right things, at least, when he suggests that widgets should have a life both on and off Facebook.  That implies he doesn’t insist on total domination.  On the other hand, some are afraid that at least other Social Networks like LinkedIn have reason to fear.  Yet, the other Social Networks are direct competitors, not consumers of Facebook’s platform, so isn’t it kosher to fire a shot or two in their direction.  It’s still too early to tell if Herr Zuckerberg will be a taciturn Swiss Banker, or whether he’s bent on World Domination.  I am cautiously optimistic about the early signs.

The Apple iPhone is another great-application-begets-platform story, and one that seems to have gone bad.  Clearly, Apple is not acting as Switzerland here.  They are bent on world domination.  In fact, their weapon of choice, “bricking” of iPhones, has sparked a startling backlash where once there was nothing but raves.  Steve Jobs does not want to nurture you on his platform, he wants to control your every thought and action.  I’m sure he feels it’s for your own good, but is this what we want from our platform vendor?  I should say not, and its been a long time since a killer app came to roost on Apple’s platform as its first and only hunting grounds.

Still other companies are in the odd role that their admirers beg them to be platforms, but they have no intention of sharing any part of their pie.  eBay has always had the view that they owned every penny of opportunity surrounding their platform.  Many have tried to join on, but eBay itself makes that all but impossible.  It isn’t surprising, their Disney executives grew up on the idea that Mickey was a franchise, not a platform, and nobody was entitled to a piece of Mickey’s pie.  Apple is very similar, particularly in view of the latest iPhone shenanigans.  In Apple’s case, they’re control freaks for the sake of their conceptual integrity, whereas with eBay, it’s just business.

Microsoft gives us an abject lesson on platform owners who are not Switzerland.  It started innocently enough with things like BASIC and DOS, but soon, Microsoft wanted to compete with everyone, taking full advantage of their platform in every way they could to do so.  For a while in Silicon Valley every VC pitch had to include a discussion of why Microsoft wouldn’t just take your business away when they wanted it.  Arguably the strategy worked well for a time, but they seem to have reached the limits of it.  I see the last gasp as their abandonment of all things Java in a tiff with Sun over who could own the platform.  Microsoft will say they had little choice, but they’ve pursued it as a bit of a scorched earth policy by working overtime to ensure that the Java web and the .NET web are as incompatible as can be and still call it the web.  Consequently, they lost the hearts and minds of many who would embrace platforms.  Arguably, very little of the current cloud computing renaissance involves Microsoft as a result.

In the land of Marc Andreesen’s 3 kinds of platforms post, he mentions several of the third kind including Ning, Salesforce, and Second Life.  FWIW, I find Andreesen and Ning fit the Swiss Banker profile pretty well.  As we look back over Andreesen’s history, he seems to have done a good job nurturing platforms along the way.  Ning has no particular Social Network of their own, except to help other Social Networkers to use Ning more effectively. 

Salesforce is an interesting case.  Clearly, the other Marc (Benioff), is bent on world domination.  The question is to what degree he would compromise his platform aspirations to do so.  Perhaps he can turn into the Swiss Banker over time, but it seems an unlikely role at the moment.  He came up through the ranks of Oracle, which is not typically a breeding ground for the Swiss Banker mentality.  Still, we should watch closely and reserve judgement for a bit.  There are signs of life around Force, but it remains to be seen whether they’re higher forms of life, or just people looking to siphon off the halo effect of Salesforce’s community and greatness. 

Adobe has been a platform owner for some time with pdf and Flash.  But they’re also an application company as we were reminded by the announcements surrounding their acquisition of Web 2.0 word processor BuzzWord.  As Scoble says, they’re going for Microsoft’s throat.  But does this mean they might one day go for their platform user’s throats too?  I suspect not.  Adobe has always been very deliberate in their actions and they’ve done a good job nurturing their platforms.  BuzzWord is happening at a time when Microsoft essentially owns the document world.  Choosing to go after one of the giant platform monopolists doesn’t seem to me like bad behaviour for a platform vendor.

The ultimate Swiss Banker is of course Open Source.  How can you go wrong here?  The platform you’re depending on has been placed in the Open Source community and so how bad can things get in terms of the owner/creator being the Anti-Swiss?  Hence we see why so many prefer Open Source.  Perhaps Open Source is a way for Marc Benioff to gain full trust, though I have a terrible time seeing Force ever being an Open Source platform.  It just doesn’t seem like their style.

The next time you’re shopping for a platform, remember that platforms involve a big investment.  Try thinking of it in terms of Swiss Bankers.  Which one fits the profile?

Posted in Open Source, Partnering, platforms, saas, strategy, venture, Web 2.0 | 12 Comments »