Posts Tagged ‘Zuora’

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I was hoping to save this idea for either a year-end story or something focusing on the new year but events seem to have a mind of their own.  The story, whenever it would be issued, would go something like this: Enterprises are picking up more cloud computing solutions and as they do there is a willing audience of customers happy to jettison the legacy systems that have increasingly hamstrung them.

In the last few weeks we’ve seen an increasing number of articles and reports, and I have written about them, that indicate building or built up frustration with enterprise software, especially the legacy on-premise variety.  We all know the drill, legacy software is expensive to buy and costly to maintain.  It cramps your style and it requires legions of people to manage.  And try as we might to remember that business today leverages information to make a buck, information management is for most companies an external thing.  It’s not core to doing the business of making widgets.

But all those observations by pundits don’t add up to much.  What we need is proof before decision-makers plunk down scarce cash.  We got a bit of that this morning in an article in the Wall Street Journal about venture capital investments.

According to the piece by Ben Worthen, VC’s are investing heavily in the enterprise cloud application sector and it cites recent investment news from companies like Workday, Zuora and Marketo.  The latest investments in Workday give that company a $2 billion market capitalization according to the article.  Perhaps it’s time to think of an IPO?

But Workday is far from alone.  Zuora just raised $36 million in its series D round placing its valuation at $300 million up 100% from a year ago.  Marketo recently raised $50 million but I don’t know what that does to the company’s valuation though I could guess.

Want more proof?  The article goes on to say “In the third quarter, venture capitalists put a total of about $1.2 billion into start-ups that sell business software online, sometimes known as ‘cloud’ companies, nearly double the $758 million they invested in the year-earlier period and 50% more than in any other recent quarter, according to VentureSource.”

While all this capital is certainly nice for the startups mentioned it also bolsters the trend I alluded to above.  These enterprise cloud companies are the tip of a spear aimed at the heart of legacy enterprise software.  These guys are lean and focused and they have solutions that are better fits and have greater relevancy to today’s world than some of the legacy products that may have been designed during the Reagan administration.

I think that’s the story.  The preponderance of evidence strongly suggests that after many years of dissatisfaction about the state of legacy software, many companies are about to discover, if they have not already, that they have a new array of options.

Interestingly, this sea change in the making is not happening in CRM to the same degree and that’s all thanks to cloud computing.  The front office had its change over the last decade when it changed out legacy CRM for the cloud variety.  Given the flexibility of cloud computing and the more iterative way improvements and updates are distributed it will be interesting to see if the front office will ever have a similar change again.  The front office may be entering the same condition.  So let’s speculate in a later piece about what that might mean to the software industry, OK?

Finally, this kind of activity is a net good for the economy.  As companies reduce their overhead for IT and spend money on new systems they become more competitive and in many cases require less credit for purchases because cloud computing is a pay as you go affair.  Legacy software isn’t going away soon but its advance may have stopped especially if the VC’s intuition is right.

ERP’s Disruptive Moment

Posted: October 26, 2011 in CRM
Tags: , , , ,

At Dreamforce Zuora, like many other emerging companies allied with, decided to hold a user group meeting.  As long as the customers jointly held by Salesforce and Zuora were in town the logic went, why not have them in for a day of education, listening and a pep talk form the boss.

It was a fine idea.  Customers came to San Francisco a day early to hear Zuora CEO Tien Tzuo tell his audience that conventional ERP would be dead in a matter of a few years.  He used the word dead too.  Such an outrageous statement could have easily been taken as so much hyperbole from a leader who had raised tens of millions in venture funding and showed the world a new way to bill and collect for subscription services, which are increasingly coming to dominate the economy.

Tzuo’s statement began to look significantly less flamboyant and even on track on Tuesday as he and Workday c0-CEO Dave Duffield announced an alliance between their companies to drive some nails into ERP’s coffin.  Workday financials and Zuora billing and payments is a solution that will help enterprises take the steps they need in order to compete in what Tzuo calls the “subscription economy.”

Xxx The step requires a big change in business model for many companies as they pivot and begin to sell their output as services rather than products.  Unlike products services can be changed fluctuating according to need.  But until now, there was a limited number of ways that companies could bill and receive payment for their wares and the software — from companies like Oracle and SAP — that supports one time product transactions is not easily turned to billing for subscriptions.

The drive for demand for subscriptions can be traced to two key events — the social revolution boiling around us and the economic funk we’re in.  Social media like Twitter and Facebook has given people a new understanding of the “power of now.”  We expect instant answers from the connected universe, rapid solutions to problems and just in time information and increasingly we’re expecting that kind of response from our vendors.  If we buy something online we expect to adjust the purchase and amend the conditions of use as often as we need to.  We’re also broke.  As individuals and companies we might be able to afford the monthly payment but not the bolus of cash required to buy things.  Together, these two phenomena are driving the need for subscriptions.

What’s a company to do?

The only thing a smart vendor should do is to say, “Sure let’s do business with you the way you want to interact with us.”  Simple right?  That’s where the billing system comes in.  Companies wanting to get into the subscription economy have to deal with balky back office billing, payments and financial systems that don’t make this style of commerce easy.

Realistically, if you can’t bill and collect for your output you can’t realistically engage with your customer as your customer wants.  Many companies are trying to make their obsolescing billing systems play in this new world but it’s like death by a thousand paper cuts.

The subscription business model runs on thin margins and relies on automation for everything from selling to service to billing and payments.  If you need to insert human labor into any of this such as to make all the changes and upgrades that people expect today work in your billing system, then you end up running an unprofitable subscription business, and who wants that?

So that’s the disruptive moment.  Old billing systems and an increasingly restive customer base beginning to move to new and nimble competition all signal a need for a new business model.  The model exists but the software that enterprises now have doesn’t support the new model.

ERP is ripe for disruption and ironically I’ve heard some of them talk this year about the need to deliver their systems in a SaaS model, but that misses the point.  In addition to using SaaS principles for their technology, ERP vendors need to build product to support SaaS and subscription services.  They aren’t doing a very good job of it and that is why the Workday and Zuora announcement is so important.

Uber analyst Dennis Howlett over at ZDNet wrote a piece ruminating on the Gartner Symposium and colleague Larry Dignan’s summary of the meeting, “Enterprise IT: Here comes that deer in the headlights look again” that is well worth reading.  Together the articles wonder aloud how much time there is between now and the paradigm shift that will make so much of enterprise computing obsolete and even risky for enterprises to invest in.  Mixing metaphors, another way to put it — how long before the cloud vendors inherit the earth?

Speaking of Dignan’s effort, Howlett writes:

He opens the analysis with:

While Gartner is urging creative destruction, I can’t help but be skeptical. If everyone could re-imagine IT and blow up old systems to delight customers, there would be no losers in the corporate world. As we know, there are plenty of losers and there will be thousands of companies that flop at people-centric system design.

I can imagine similar thoughts coming from many colleagues. How many times have I crapped on the idea of Enterprise 2.0 aka social enterprise?

But in the real world, IBM can’t find enough bodies. Accenture can’t keep up, Deloitte and Capgemini are both very busy. And that’s just in their SAP practices. SAP is about to confound the market with a great Q3. I’m betting Q4 will be a blowout. Oracle got Fusion out the door this month. Who says the incumbents are in trouble?”

Add to this the Workday-Zuora announcement this week from Workday Rising, a user conference, that the two companies would deliver an integrated and cloud based billing, payments and financials solution that will run circles around Oracle and SAP financials in the subscription business and you don’t need Tom Hanks to tell you, “We have a problem.”  Tien Tzuo, CEO of Zuora, did the honors when he said that conventional ERP was dead.

So why the upbeat financial results from the likes of SAP?  To answer this we need to take a small detour to the clouds.  Let’s look at airplanes, specifically the Lockheed Constellation.

The Constellation was/is a gorgeous aircraft with beautifully sculpted lines.  It’s design dates to the post-war period and its heyday was the 1950s.  The Constellation was something of an apex of aeronautical engineering offering speed, range, and the ability to carry lots of passengers.  It also had the most advanced engines in the business at the time — piston engines and those power plants made it the end of the line.  It was the last iteration of piston-propelled aircraft soon to be over taken by jets — the new paradigm.

It is no surprise that SAP posted good numbers in Q3 and, as Howlett says, it will probably do so again.  But SAP and Oracle are building Constellations and the strain in the implementation system he alludes to in referencing IBM, Accenture, Deloitte and the rest, exposes one of the Achilles heels of on premise computing.  It is as damaging as the workload and expense of keeping a piston aircraft flying.  Add to all this the other major deficit exposed by Workday and Zuora and you realize that the dominant positions SAP and Oracle have held are disintegrating.

The on-premise paradigm is effectively over.  It will stick around for a long time but we will only see it shrink.  The businesses with the smart money are getting out of on premise and trying to figure out the models they need to survive as cloud companies.

The paradigm has been under attack for the last ten years but the incumbents have always been able to fend off the competition, mostly because the attacks were one-dimensional.  Incumbents could deal with arguments that cloud solutions were less costly, easier to maintain or better to customize or integrate, but when all that comes together with the complaint that the on-premise solutions were made for a manufacturing rather than a services and subscription market, all bets are off.

Tien Tzuo was right, the on-premise paradigm is effectively dead.  Yes, it will take time to convert and yes, the technology conversion comes with a business model conversion or at the very least a big modification.  It’s also mandatory.  We’re moving into the jet age.

Is CRM far behind?

There was brisk business in associated user group meetings in San Francisco before Dreamforce.  For some reason I don’t understand Dreamforce starts in the middle of the week this year which is fortunate for two reasons.  Huricane Irene clobbered travel operations up and down the east coast over the weekend and given the number of users coming from the east, it was fortunate.  Many people were able to reachedule flights though some inevitably missed being at Dreamforce this year.

Salesforce is predicting forty thousand people will be in attendance and many Salesforce partners have taken advantage of the fact that their mutual customers are in town.  I’ve been to user meetings with , Cloud9 and Zuora (more in a moment) and Marketo and WorkDay are also hosting events.  Alas there is only so much time and this week it seems like there is much greater demand than can be accommodated.

Cloud9 introduced new functionality for its sales forecasting system and Zuora told its customers about its product roadmap for the next year.  Zuora seems like CEO Tien Tzuo is trying to out pace alma mater Salesforce in his growth rate.  He announced enhancements to ZBilling and ZPayments as well as ZForce their integration platform.  Most importantly, Tzuo told his audience two things. First he’s out to provide a complete end to end functionality for revenue and finance so that customers can manage all their revenue and profits from his product.

Second, and definitely most controversial, Tzuo told his audience that ERP was, if not dead, then dying.  His logic makes a lot of sense.  Zuora is not about simply building another billing system.  It’s a company focused on supporting the Subscription Economy.  By Zuora’s definition, the economy is rapidly moving from a twentieth century manufacturing paradigm to one where we all sell services in one form or another.

Now, ERP is the billing and accounting model for the manufacturing paradigm.  That paradigm requires a billing and revenue recognition automation suite that supports one time sales of products.  That model gets creamed in the subscription world where vendors have to be prepared to change configurations and one time deliverables with every invoice.  Most subscription vendors long ago figured out that old ERP would do the job for them and either built their own systems or bought into Zuora or one of its competitors.  So the prediction that ERP is dead refers to the idea that as we transition from manufacturing to subscriptions ERP will have a decreasing workload.

I am generally in agreement.

ERP might not be the only thing to go away due to the subscription economy.  Much of the ERP argument can be applied with variation to CRM.  It’s not subscriptions per se that are causing CRM to change but what supports subscriptions, the Internet.  More specifically the social revolution that started on the net.

In San Francisco this week Salesforce is pushing hard on its newest idea, the social enterprise which dovetails nicely with the social customer.  Social has changed CRM beyond recognition over what it was like just ten years ago.  Subscription CRM also gave us the first valuable mashups, SaaS, open APIs and a lot more.  All of this innovation is having a cumulative effect on CRM.

CRM first got started as a way for vendors to bring together front office applications for sales and service because they were big and hard to integrate.  That’s all done and the availability of good, fast and cheap ways to bring applications together has given us a plethora of CRM specializations that customers are able to pull together themselves — without IT help.

So, as I think I see it, CRM will not go away but it has already morphed so much that it really is becoming something else.  Social? Yes.  The idea that organizations and customers are adapting and adopting says a lot and we probably need a new moniker, not for the sake of having something new but to better describe what it does.  I am not sure that SocialCRM does it.  Social as a descriptor was important, but I am not sure it is any more.

If you look at what Salesforce is talking about it’s collaboration — not just inside the organization but also to better support the dialog between the vendor and the customer.  Perhaps the last silos to be broken down are the two labeled Customer and Vendor.  Once that’s done I think we need to look for a new moniker.  Just sayn.

As often happens in evolutionary systems, availability precedes demand.  That’s a complicated way to say that we build products then figure out what they’re good for.  It’s not that innovators develop things willy-nilly, but no matter how well thought out an innovation is, the marketplace has the last word on its utility.  When we speak of early adopters and mainstream users it’s this dynamic we’re referencing.

In recent years one of the best examples of this evolution in action has been subscription billing.  Today we speak of the subscription economy and subscription billing as mutually reinforcing but when it was first introduced subscription billing was targeted at a more narrow business problem.  Initial buyers were companies that began offering their products as subscription services rather than as products to be bought once and then serviced.  Their need was for flexibility, speed and accuracy in the billing process, things that conventional billing systems could not adequately handle given the number of customers and transactions that subscription vendors were encountering.

If subscription billing merely stayed in that expanding niche its future would have been assured as increasing numbers of companies were converting to subscription business models.  But then the marketplace changed in two fundamental ways opening up even greater opportunity for the subscription model.

The first change was the rapid adoption of subscriptions as a new way to deliver products to customers.  Subscriptions proved to be so much better than conventional purchases with their large cash outlays, that customers rapidly concluded that subscriptions were better.  Market demand has driven numerous companies to scrap their decades old business models in favor of subscriptions.  Those companies that have not converted see evidence mounting daily that tells them to convert of perish.

The second change, which has not been remarked on nearly enough, is the credit crunch that has hobbled the economy since the housing debacle of 2008.  While business is still obviously being done, the economy is barely growing but a consistent bright spot is subscription companies because their business models enable customers to use their products while effectively amortizing the cost — without involving a lender.  This enables them to sidestep a conventional financing process that is crippled due to still tight credit conditions resulting from weak bank balance sheets.

The subscription economy isn’t a band-aid that companies put on their business models to weather a tough economy.  Driven by customer demand, the subscription economy is increasingly the way that customers prefer to do business and this preference is driving the market.

But the benefits that the subscription economy delivers are hardly one sided in favor of the customer.  Vendors have discovered that their old billing systems had been dictating the kinds and types of products they delivered to the market.  For instance, a good idea that could be built but not billed accurately and timely — which is the case with many subscription services — was simply a non-starter.  But the flexibility of the subscription model enables companies to break their complex products into smaller units that customers can then assemble in ways that make sense for them.  Customers are increasingly able to custom design products that fit their needs much better than the one size fits all products that are relics of the industrial age.  And vendors can flexibly respond to customer needs even if those needs change very frequently.

The marketplace has discovered many uses for the subscription economy and its enabler, subscription billing in the handful of years since the idea was first introduced.  As we can see, some of subscription billing’s uses were not even envisioned a few years ago but alert innovation by users and, especially, Zuora, have made subscriptions a phenomenon.

We’re certainly passed the early adopter stage in this market and mainstream adoption is well under way.  Companies that once would not consider a subscription business model are discovering that with subscription billing they can make their transition and preserve their cash flows and in these tough economic times that says a lot.

Yesterday Zuora, the billing and payment solution company for subscription businesses did a smart thing, at least I think so.  At NetSuite’s user meeting, SuiteWorld, Zuora chief Tien Tzuo announced that his trademark product is now pre-integrated with NetSuite’s financials.  But that wasn’t what’s smart, only the thing that enabled the thing that is smart.

You see, Zuora comprehends a business problem that is bigger than the solution it can provide on its own.  Subscription billing is a different animal from conventional billing for products.  It’s as different as a horse and a zebra.  They might look the same through a picket fence but you wouldn’t want to saddle a zebra.

Subscription billing is like that.  Each type of vendor has to attend to all of the details of the customer relationship that impact billing.  But where a conventional vendor might sell a product and bill in full, the subscription vendor sells a potentially different product every time the customer decides to change the configuration.  One of the powerful aspects of selling subscription services is that by reconfiguring them you can deliver a potentially different branded product — if your billing system can keep up.

There are subscription costs that we’re all familiar with like the number of seats deployed but that can change at any time.  There are also any number of one time fees and costs that may not fall in the same billing cadence as the subscription.  It goes on and on and it gets funky.

There is also the little issue of renewal.  The product vendor thinks in terms of cross sell and up sell but the subscription vendor thinks in terms of all that plus keeping the customer — every day.  I have seen data that says that customers base their loyalty decisions in part on how easy their vendor is to deal with and billing is one of the key points of contact post sale in the subscription world.  There are different metrics that need to be tracked too — monthly recurring revenue, total customer value and the just alluded to churn.

Vendors of all stripes have discovered how hard this nut is and early subscription vendors wrote their own billing systems because there was no other game in town.  But as much as Zuora is a good fit for subscriptions, it still needs support from CRM for effective sales and marketing and back end financials for managing the customer payables and then some.

So, Zuora’s bit of brilliance on display at SuiteWorld has been its admission that it needs other solutions to deliver to the customer an end-to-end solution and then delivering its part.

This is very interesting to me.  Several years ago I thought the same kind of convergence needed to happen in sales (still do).  SFA was and is the workhorse solution for sales but it is increasingly ill suited to the demands of this marketplace.  Solutions from a great variety of sales enablement vendors offer help to consolidate an end-to-end process.  But people on both sides of the divide seemed cold to the thought of declaring a process and one’s alliance to it.

Now, to be fair, just about every sales enablement vendor has integrated with Salesforce and at least some of the other SFA products and in those parts of the world something like an integrated end-to-end solution exists.  But the end-to-end sales process is still elusive in many cases, I think.

A few weeks ago I gave a short talk as part of a webinar for Sage.  The subject was CRM and why small companies need it, as they surely do.  In it I said that we treat our money very well in business by way of ERP systems.  We know what’s been sold, to whom, for what, when it was delivered and when the money is due.  In contrast many companies still track future money — a.k.a. the sales process — on random scraps of paper and in idiosyncratic documents.

The Zuora-NetSuite announcement is important because it goes after that discrepancy.  Zuora, with its new connector as well as its Z-Force connector to Salesforce offers the promise of uniting front office processes in a choice of Salesforce or NetSuite CRM and NetSuite financials on the back end thus delivering the end-to-end process that I crave.  I suspect I am not alone.

So good on them — all of them — as my Aussie friends might put it.

NetSuite has been putting on a rather good show at its user, press and analyst meeting and I will have more on that in a separate post.