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Archive for May 7th, 2008

Interview With Rally Development’s Tim Miller and Ryan Martens

Posted by Bob Warfield on May 7, 2008

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

Give us a little background on  yourselves and on Rally Development

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

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

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

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

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

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

Tell Us How You Go About Selling

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

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

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

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

What are your thoughts on Sales 2.0?

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

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

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

What’s your secret sauce?

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

Walk me through your customer acquisition and download model

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

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

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

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

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

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

How do you guys do customer support?

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

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

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

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

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

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

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

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

Who else does this?

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

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

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

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

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

How do you get good at producing content?

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

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

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

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

What else should we talk about this interview?

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

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

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

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

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

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

Posted in Marketing, saas, strategy | 3 Comments »

Is Microsoft Playing Possum for Yahoo? It Could Be Much Worse!

Posted by Bob Warfield on May 7, 2008

The prevailing wisdom is that Yahoo’s stock hasn’t totally cratered because Microsoft is simply being coy, and will inevitably be back after shareholders have made Yahoo management a little more pliable.

Personally, I’m not in that camp.  I think Yahoo fought so hard that Microsoft now views them as incompatible.  So what’s next in the Microsoft-Yahoo-Google love triangle?

Mike Arrington thinks Microsoft is just playing possum.  He writes recently of Gates’ apparent about face on strategy where he is no saying there’ll be no major acquisitions.  First, I would take that to mean they’re not looking at any at the moment.  But second, it made me think what that means for the Microsoft-Yahoo relationship if its true.  If Microsoft is determined to follow a go-it-alone strategy, how will they grow their search and advertising businesses?  It’s a safe bet they’re not suddenly going to hobble Google.  No, Microsoft has their own version of the scorched earth strategy. 

My bet is that it could be much worse for Yahoo than the investment community’s theory they’re just waiting to acquire them later.  The danger scenario for Yahoo is that Microsoft has decided the best approach is to spend up to the 40-odd billion bid taking all the market share they want away from Yahoo.

Why not?  Clearly Yahoo is in a severely weakened state.  Culturally, this is exactly what Microsoft has always done well.  Focusing all their energy on crushing the life out of a competitor is familiar ground.  And who wouldn’t want to view Yahoo as that competitior rather than try it against Google?

Even worse is that Google might actually decide they need to pursue a similar course.  Rather than let Microsoft have the share, they may feel they need to take it.

Tough position for Yahoo to be in, caught between those two giants.

Related Articles

No sooner did I post this did I read that Microsoft has now approached Facebook to see if they’re interested.  As I say above, Microsoft is done with Yahoo.  They are very black and white about who is an enemy and who is a friend.  Once you’re an enemy, they stop at nothing to crush you.  This is how it starts.

Posted in Marketing, Web 2.0 | 3 Comments »

Another Chat With Concur’s Steve Singh

Posted by Bob Warfield on May 7, 2008

I just got off the phone with Steve Singh, CEO of SaaS Travel and Expense vendor Concur. 

I interviewed Steve last September, and he continues to be a very easy person to talk to, considering he is the CEO of one of the most successful SaaS vendors out there.  Phil Wainewright has taken to calling Concur one of the “four SaaS horsemen” alongside Salesforce, Taleo, and Omniture.  Those four are the largest pure play SaaS vendors out there at this point.  Singh’s style is very down to earth and self-deprecating.  He does not bash his competition, and genuinely values his customers and employees as you’ll see in the interview below.

Concur just turned in another great quarter of results that included tripling their net income year on year to $3.7 million, and increasing sales 74% to $53.6 million versus $30.8 million in the 2007 second quarter.  In light of this performance, customer acquisition was on my mind, so I this was the topic for our discussion.  Here’s how it went:

Steve, if I look at what I get the most questions about, and what would make for an itneresting read for my audience, it would be around the area of customer acquisition.  people really want to understand what works and what doesn’t in the SaaS world.  As I look at Concur versus your peers, you seem to be able to grow more while spending relatively less on sales and marketing.  Help us to understand what Concur does differently?

We deliver a service that really works in this difficult environment.  I’m a big fan of Salesforce, Taleo, and Omniture.  There’s a good group of SaaS companies that’s starting to emerge from the pack and really show what’s possible and what the future will bring.

Our view is that it’s nto a question of valuing enterprise growth over earnings growth.  Both should increase and the question is the mix.  We look at every dollar invested as if it was our own personal money, and it is in some sense, because we’re all shareholders here.  We expect a return on those dollars invested.  We quantify that as every dollar invested going towards at least 25% topline growth and 100 basis points of improvement in the operating margins.

For example, I’m perfectly happy if we can’t grow at 25% (although so far we’ve always beaten that!) to reduce the growth rate and increase bottom line growth.  If we can grow better than 25%, we are still not willing to come off the goal of improving the operating margin for the year.

Can you give us an example of what you’re trading off there?

Well, one of the big differences between Salesforce, a company I have huge respect for, and Concur, is how much we each spend on Sales and Marketing.  They spend about 50% and we spend 26% or so.  We are much more efficient in that way.

This efficiency comes from a couple of different points.  A higher percentage of our quota carrying salesforce get to their quotas.  And, we spend less on brand marketing.  Our view is brand marketing is not the best use of dollars. 

My job is to win the customer by giving them a great value.  We deliver a better service than anayone else can offer at a better value equation.  Beacuse of that, we get a huge amount of business from existing customers referring prospects.

<The angle brackets signify my parenthetical remarks, not voiced to Steve.  The trade off between brand marketing versus focusing on the better value proposition is an interesting one.  Concur is certainly a lot quieter in the market than Salesforce.  Steve is quick to point out that there is no one formula and that he isn’t saying the other guys are wrong, he is just saying what’s worked at Concur.  One wonders how much of the brand marketing is reflective of CEO personality differences, market differences, or other unaccounted for factors.  One thing that is sure is that Concur is very efficient at gaining new business!  The remarks about quota are also interesting.  Most sales managers I’ve talked to have 1/3 of their people wildly beating quota, 1/3 under review to see if they can make it or need to move on, and 1/3 who are too new to be held accountable.  It sounds like Concur has changed those ratios somewhat.>

So what’s your go to market advantage?

Boy, we could look at that in terms of hosting operations, platform as a service, sales and marketing, or research and development. 

Let’s focus on sales and marketing

Okay, for Sales and Marketing we try to drive as much of the prospecting experience to the web as possible.  We give potential customers the ability to see the product.  We make sure they can learn about the service from the web, know what it costs, and understand the value generated.  We do as much of that online as possible. 

When our direct sales force actually speaks to the customer, that prospect is much more developed and educated about Concur than is true at other companies.

From there it is also very important how you price your services and the types of contracts you drive.  We look at contract terms as moving closer and closer to 90 day or 1 year evergreen contracts.  A 3 to 5 year contract with cash up front is only reassuring for the vendor, not the customer.  Customes want you to be measured on quality every day.  Making that possible lowers the barrier for the customer.

Are those contract terms a differentiator?

<Singh chuckles>

We talked about that last time we chatted.  I don’t think of it as a differentiator because I expect that over time everyone will do this.  Why wouldn’t you make the vendor earn your business?  Vendors should make their contractual terms customer oriented.  Don’t collect the money up front.  This is a hinderance for many On-demand companeis.  They need to get to where there is literally no risk for the customer to move forward.

The next piece is that the quality of the service has to be so high that the retention rate is fantastic.  Our retention has been at 98% for 7 years now.  On our expense reports, literally 80% of the report is filled out automatically, so the end user experience is dramatically better.

When you chcuk out of a hotel, you have to break out all those numbers on the bill slipped under the door.  With Concur, we pull all that data from the hotel for you and populate it for you in your online expense report.  We already know every line item of detail–room rate, taxes, incidentals, whether you refueled your Hertz before turning it in or not.  You just use the service, and your experience is dramatically better.  That’s a positive feedback loop.

So when employees move to new companies, they ask for Concur.  One of the most satisfying experiences we have is watching controllers among our customers move to new companies, because they nearly always install Concur as one of the first prioriries on the new job.

<The focus on customer experience is fascinating.  There’ll be more on this theme in a bit, but you get the impression that Singh will spend a lot to improve that experience because it increases his sales.  That’s a very product and customer-centric focus, as opposed to using clever sales and marketing tactics to force more product into the market.>

Give us some examples of things you tried that didn’t work

<Loud chuckle>

Well the old perpetual license approach didn’t work!

We do invest a fair bit in going after different lead generation programs or different marketing and advertising programs that sometimes are wildly successful and sometimes are not.  We give our folks a lot of latitude to test and understand.  In all fairness, we push very aggressively on new functionality in the product.

Our customers give us a lot of requests for refinements.  For example, we’re announcing integration with RightCharge which improves our ground transportation integration.  You can book a taxi, shuttle, or town car and get it paid for and then populated on your expense report automatically.

I don’t want to come of sounding arrogant, but we haven’t had too many failures in all fairness.  Certainly nothing big.

<I wanted to follow up on his comment about testing and see whether Steve was a big believer in conducting tests and then doubling down on tests that worked well.  I didn’t get the impression he thinks that way>

Are you a test-oriented company?

We’re a company that’s very oriented towards giving our folks a lot of latitude.  The value of our business is entirely the people, like most technology companies.  These are incredibly bright people who have a great understanding of our customer’s needs and values.  We drive decisions down in the organization and have found that to be pretty low risk.

This manifests itself as something like Concur Imaging (Fax Imaging).  This feature happened because one individual 6 or 7 years ago hated pasting receipts on a piece of paper and mailing them off.  So, we added an 800 number you could fax your receipts to.  Customers loved it.  It improved the experience.  We kept on following our noses there and wanted to make that one step even better.  So we got a massive improvement from eliminating the paper receipts entirely.

There shouldn’t be any reason 2 years from now that you should fill out anything on your expense report.  It ought to be filled out for you.  We can do most of this today.  Use our booking tool to book travel.  It generates an itinerary, and you take your business trip.  As you take your trip, we get corporate card receipts every single night.  We match them to your itinerary.  As you check out of the hotel, drop off your car, we pull the receipts and match them back to the itinerary.  If they agree, your reprot is done for you.

Compare that to the experience of doing expense reports 7 years ago on Avery forms or Excel templates.

<At this point I began to get an idea of the competitive barriers to entry that were being erected throughout all this.  Concur has built up tons of partnerships to collect this data.  Conversely, if I have a choice to buy from a Concur partner and get my expense automatically handled or to choose someone else and have to rekey the data, guess which one I prefer?  We didn’t talk about this, but it’s a compelling story.

We were about out of time, so I lobbed in a last question about Sales 2.0.  There’s been a lot of discussion around this topic in the startup and VC world.  It means a lot of things to a lot of different people.  Mostly, it has to do with the view that old school sales models are too expensive in today’s world.  Companies pitching to investors need a story about why their sales will be more efficient.  I had the impression Steve hadn’t really heard too much about Sales 2.0, or didn’t put much stock in it, but his answer was interesting.>

What does Sales 2.0 mean for SaaS?

What do you mean by Sales 2.0?

It means a lot of things to a lot of people, but basically, it means making you sales process radically more efficient using the Web.  In the extreme, it may mean the end of feet on the street.

<The latter elicited a real chuckle>

The idea of the end of feet on the street is ridiculous.  It’s just not going to be that way, especially in larger deals with a significiant ongoing commitment.  We manage very sensitive data for our customers.  There is a relationship built on trust.  You can’t do that in a completely automated way.

I do think that you can do a lot more education over the web in a Sales 2.0 model.  That’s what Sales 2.0 has to be focused on.  Help the prospect understand what service you are delivering and the value proposition there.  At least a telephonic contact will be needed to close the deal.

You can drive greater efficiency.  ADP needed a couple thousand sales people to get 500 thousand customers.  You can do even better with Sales 2.0.

Anything else you’d like us to know?

The other piece from last quarter’s call is that not only do we see great demand in a difficult economic environment, but the travel and expense integration business has really taken off.

<Phew!  That was a high bandwidth half hour!  And thanks Steve, always a pleasure! >

My takeaways:

– Relentlessly improve your product or service to deliver the best user experience and ROI.

– Use a deep partner ecosystem to build competitive barriers, improve the experience further, and potentially create sales allies.

– Use the Web to educate prospective customers about the experience and the value.

– Follow up with great sales people to close the business.

My emphasis on “great sales people” is not just lip service (as in all sales people are great).  I’m keying off Steve’s mention that more of their people make quota than normal.  There’s some sort of focus on excellence there.

Posted in saas | 5 Comments »

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