The Best Work Parable

I can’t remember when I first heard this great parable, and despite Googling around couldn’t find it online [see footnote], so I thought I’d take a moment to re-tell this pointed story here.

One day an employee is asked to write a proposal for a new business idea and submits it to his manager.

Employee:  “Did you get a chance to read my proposal yet? What did you think of it?”

Manager:  “You know, I need to ask you one question about that proposal — was it really your best work?”

Employee (reluctantly):  “No … , in fact, it was not.  I can think of several things I could have done better.”

Manager:  “Great, so please do those things and resubmit it to me.”

The employee then does additional work on the proposal and resubmits it to the manager.

Employee:  “Hi, did you review my revised proposal?  What did you think?”

Manager:  “Well, I need to ask you one question about that proposal”

Employee:  “Sure”

Manager:  “Does the revised proposal represent your best work?”

Employee (reluctantly):  “Well, no, while I think it’s much better than the first version, I still have several ideas for how to improve it.”

Manager:  “OK, so I’d like to ask you to implement those ideas and then resubmit the proposal to me.”

The employee then revises the proposal again and submits it for the third time to the manager.

Employee:  “Did you get a chance to review my proposal?  What did you think?”

Manager:  “Does this third proposal represent your best work?”

Employee:  “Yes.”

Manager:  “Great, so now I’ll read it.”

If you’re playing the role of employee, do you submit your best work on the first go?  If not, why not?  Why do you want your management reviewing low-quality work?

If you’re playing the manager, are your employees getting you to do their jobs for them by having you correct/revise their work into the desired form?  How can you set the bar so you get their best work on the first go?

[Footnote: while I couldn’t find this story via Googling several readers were kind enough to inform me that it appears to have been originally told about Henry Kissinger.  See here.]

What Marketing Costs Should be Included in CAC Calculations?

Dear Kellblog:

I’m working on my CAC calculations and I’m trying to determine if I should include all marketing costs or just my direct demand generation costs?  I’ve talked to many of my CMO peers and can’t get a consistent answer to the question?

Thanks / Bewildered CMO

Dear Bewildered CMO:

My gut reaction is that you should include all marketing costs.  Don’t try to argue that PR and product marketing don’t work on customer acquisition.  Don’t try to argue that people aren’t programs and try to exclude the cost of your demandgen team.

Why?  Three reasons:

  • Demandgen people and programs dollars should be fungible.  PR and product marketing better be doing things that help acquire customers., even if indirectly.
  • Playing counting games can hurt your credibility.  VCs aren’t just trying to compare metrics, they’re trying to get to know you by seeing how you think about and/or calculate them.  I’d think you were a weasel if I found you excluding these costs without really good reason.
  • To the extent that people try to compare these things between private and public companies, remember that there is no way to split marketing apart (or split customer success from sales) with public companies which should suggest that by default you include things.

Best / Kellblog

For fun, let’s go quickly look at some sources for CAC definitions and see what we find regarding this issue:

Kellblog defines the CAC as:


S&M, by default, needs to include all S&M costs, so you can’t cut anything out.

(Side note:  to the extent you amortize commissions, I would prefer to say cash sales expense as opposed to GAAP sales expense, because the latter will hide some costs — but that has nothing to do with marketing.)

The 2015 Pacific Crest Private SaaS Company Survey defines the CAC as:

How much do you spend on a fully-loaded sales & marketing cost basis to acquire $1 of new ACV from a new customer.

This seems to close one door (i.e., you better include IT and facilities allocations to your sales costs — as GAAP would require anyway), but open another because it defines the CAC not in terms of total new ACV, but new ACV from new customers.  So if, for example, you had installed base upsell marketing programs, then I would not count those costs in the CAC calculation because they are not marketing costs spent to win new ARR from new customers.  Is PR?  Is product marketing?  It’s a slippery slope.  I’m not in love with this definition for that reason.  You could never do it for public companies.

David Skok defines the CAC as:

Note that while Skok is calculating a cost to acquire a new customer as opposed to $1 of new ARR, his definition is clear when it comes to splitting marketing costs:  include all S&M costs.

Bessemer prefers talking about a CAC payback period and defines it as:

bess cac

Again, this definition is clear — include all S&M costs.

Memo to Startups: How are you Feeling About Taking that Public Money?

The first time I encountered the issue of inadvertent disclosure of venture capital / private company information was back in 2004, when this ground-breaking Wall Street Journal story hit, Venture Capitalists Scramble to Keep Their Numbers Secret.

The issue was pretty simple.  If public money were being invested in venture funds, then a conflict emerged between non-disclosure agreements required by the venture funds and the FOIA requirements of those funds to disclose their holdings.  In this case the issue wasn’t the valuations of individual holdings, but the performance of the funds themselves.  In the end FOIA appears to have won and it looks like CALPERS, for example, no longer invests with either Kleiner Perkins or Sequoia, though a quick search here shows that GGV and Khosla were seemingly willing to put up with the disclosure requirements.

I had two takeaways from the situation:

  • I was surprised that people didn’t think of it in advance.  The issue seemed to sneak up on the VCs.
  • When there is a disclosure conflict, the rules governing the investing party will tend to win.

I guess not everybody got that memo because recently we’ve had  a similar issue with publicly-traded mutual funds that have invested in privately-held, venture-backed companies.

A series of stories by Dan Primack in Fortune discussed the markdowns of companies including SnapChat (25%), Zenefits/YourPeople (48%), DataMinr (35%), or e-cigarette maker NJoy (90%+).  The second story showed that MongoDB has been cut in half since Fidelity’s original investment, while Domo has doubled.  The third story discussed the consequences of all this including

  • It will presumably be harder for Fidelity and other funds to get into these private deals
  • There will be pressure on the VCs to mark the holdings to similar levels in their portfolios
  • It presumably hurts the startups themselves via reputation damage and could hurt their ability to recruit new talent (though lower valuations can actually help here for sophisticated people)

But the more interesting question is did this take any of the companies by surprise?  Was it an overlooked detail in a pile of closing documents?  Did the Fidelity’s of the world have a right but not an obligation to disclose (e.g., materiality)?

I don’t know, but I would say the whole episode seems to have sneaked up on everyone the way FOIA did in 2004.  This story in The Information seems to confirm my belief:

It’s like we went public without even knowing it.

So it seems to me that in the hurry to these mega-round, unicorn-round deals that nobody paid attention to the lawyers — or maybe the lawyers didn’t speak loud enough — about the disclosure risks when taking money from publicly-traded mutual funds.

I’m guessing the answer to my question is “not so good” and startups are going to think twice, maybe three times, before taking money from this class of investor, even if it’s “dumb money” at a high valuation.

The Perils of Measuring a SaaS Business on Total Contract Value (TCV)

It’s a frothy time and during such times people can develop a tendency to get sloppy about their numbers.  The first sign of froth is when people routinely discuss company size using market capitalization instead of revenue.  This happened constantly during Bubble 1.0 and started again several years ago – e.g., all the talk of unicorns, private companies with $1B+ valuations.

Oneupsmanship becomes the name of the game in frothy times.  If your competitor’s site had 1M pageviews to your own site’s 750K, marketing quickly came up with a new metric on which you could win:  “we had 1.5M eyeballs.”  This kind of gaming, pardon the pun, is seen through rather easily.

The more disturbing distortions are those intended to impress industry influencers to validate strategy.  Analysts – whose job is supposedly to analyze – have a troubling tendency to not judge strategies on their logical merits but on their results.  So if vendor has a silly, unfocused, or simply bad strategy, the vendor doesn’t need to argue that it actually makes sense, they just need find a way to show that it is producing results – and the ensuing Halo Effects will serve as validation.

Public companies try to demonstrate results through revenue allocation games, robbing from non-strategic SKUs to pump up strategic ones (e.g., “cloudwashing” as the megavendors are now often accused).   Private companies have free reign and can either point to unverifiable lofty financing valuations as supposed proof that their strategy is working, or to unverifiable sales growth figures where sales is typically defined as the metric that looked best last quarter.

Most people would quickly agree that at a SaaS business, the best metric for measuring sales is growth in new annual recurring revenue (ARR).  They’d also agree that the best metric for valuing the business is ending ARR and its growth.  (LTV/CAC would come in right behind.)  Using my leaky bucket analogy, the best way to measure sales is by how fast they pour water in the bucket.  The best way to measure the value of the business is the water level of the bucket and how fast it is going up.

But it’s a frothy time, and sometimes the numbers produced using the correct SaaS measures don’t produces numbers that, well, sufficiently impress.  So what’s a poor CEO to do?  Embellish.  The Wall Street Journal recently ran a piece that compared company claims about size/growth made while the company was still private to those later revealed in the S-1.  The results were disappointing, if not perhaps surprising.

Put differently, what’s the SaaS equivalent of “eyeballs”?

The answer is simple:  bookings or, more precisely, total contract value (TCV) bookings.  To show this, we’ll need to define some terms.

  • ARR = annual recurring revenue, the annual subscription fee
  • NSB = new subscription bookings, the prepaid (and – no gaming — quickly collectible) portion of the contract. Since enterprise SaaS contracts are often multi-year and can be fully, partially, or only first-year prepaid, we need a metric to understand the cash implications of the deal.
  • TCV = total contract value, including both prepaid and non-prepaid subscription as well as services. TCV is the largest metric because it includes everything.  Some people exclude services but, to me, total means total.

Now, let’s look at several ways to transform a simple $100K ARR deal in the following spreadsheet:


Note that in each case, the ARR is $100K.  But by varying deal terms the TCV can vary from $150K to $750K.  Now in the real world if someone was going to pay you $100K for one-year deal, they are unlikely to pay $300K for a three-year prepay or contractual commitment.  They will want something in return; typically a discount.

Let’s combine these ideas in one more example.  Say you run a SaaS company and want to impress everyone that you’re doing really well.  The trouble is you’re not.  You sold $10M in new ARR in 2014 (all one-year, prepaid) and think you can sell $10M again in 2015 on those same terms.   If you measure yourself on new ARR growth, that’s 0% and no one is going to think you are cool or write you up on the tech blogs.  But if you switch to TCV and increase your contract duration, you get a lot more flexibility:


If you switch to TCV, the good news is you can grow literally as fast as you want just by playing with contract terms.  Want to grow at 60%?  Switch to 2-year prepaids and give a 20% discount.  That’s not fast enough and you want to grow at 101%?  Move to 3-year prepaids by effectively doing a year-long “buy 2 get 1 free” promotion.   That’s not good enough?  Move to 5-year non-prepaids and you can grow at a dazzling 235% and get nice TechCrunch articles about your strategic vision, your hypergrowth, and your unique culture (that is, most probably, just like everyone else’s unique culture).

This is great.  Why doesn’t everybody do it?  Because you’re mortgaging the future:

  • The discounts you’re giving to get multi-year deals are crushing ARR; new ARR growth is shrinking in all cases.
  • You are therefore crushing both revenue and cash collections over the time period(s)
  • The prepaid deals create a drug addiction problem because you’re not collecting cash in the out years. So you build a dependency either on lots of capital or lots more prepaid deals.
  • Worse yet, on the non-prepaid deals you may not ever collect the money at all.

Wait, what did he say?

In my opinion, non-prepaid multi-year deals are often not worth the paper they are written on.  Why?  Just look at it from the customer’s perspective.  Say you sign a $100K five-year deal with only the first year paid up-front.  And say the software’s not delivering.  It took more work to implement than you thought.  You’ve fallen short on the requirements.  It’s not performing very well.  You’ve called for help but the company can’t fix it because they’re too busy doing other 5-year non-prepaid deals with other customers.

What do you do?  Simple:  you don’t pay the invoice when it comes.  Technically,  yes, you are very much breaking the contract that you signed — but if the software really isn’t delivering, when the vendor calls you say:  “sue me.”

Since software companies generally don’t like suing customers, the vendor – especially if they know the implementation failed – will generally walk away and write it your receivable as bad debt.   If they are particularly devious (and incorrect) they might not even take it as churn until the end of the five-year period when the contract is supposed to renew.   I wouldn’t be shocked if you could find a company that did it this way.

Most sophisticated SaaS people know that SaaS companies shouldn’t be run on TCV or bookings and are well aware of the problems doing so creates with ARR, revenue, and cash.

However, I have never heard anyone make the simple additional point I’m making here:  in a frothy environment dubious companies can create a fictitious bubble around themselves using TCV.  However, because non-prepaid multi-year deals only work when the customers are happy, if the company is out over its skis on promises and implementations, then many of the customers will not end up happy, and the company will never collect much of that TCV.  Meaning, that it was never really “value” in the first place.

Beware Greeks bearing gifts and SaaS vendors talking TCV.

SAP Cloud for Analytics: Tilting at Windmills

Back in the early 2000s when I was running marketing at Business Objects, Gartner’s then-lead BI analyst, Howard Dresner (known as the father of BI and the person who named the category) started pushing a notion called enterprise performance management (EPM).  Back then, EPM meant the unification of BI and planning/budgeting.

The argument in favor of EPM made sense and was actually kind of cool:  with BI you could ask any question, but BI never knew the correct answer.  What did that mean?

It meant that BI tools were primarily tied to operational systems and could tell you the value of sales/salesrep for any quarter in any region.  The problem was that BI didn’t know what the answer was supposed to be.  BI knew the cost of everything and the value of nothing.

The solution was tie to BI to financial systems, which were full of targets and thus could allow us not just to know the value of any given metric, but what the value of that metric should be.

It sounded great and I bought in.  More importantly, so did the category:

Then what happened?  In my opinion, pretty much nothing.  Sure Hyperion reps could increase deal sizes by trying to drop Brio licenses across the whole financial department, as opposed to just FP&A.  Cognos could cross-sell Adaytum, with the help of an overlay sales force.

But did integration happen?  No.  BI and financial planning/budgeting  consolidated, but they never converged.  This is interesting because it’s rare.  For example, by contrast, CRM really happened.  SFA vendors didn’t just acquire customer service vendors and marketing vendors — the three applications came together to create one category.

That didn’t happen with EPM.  You could always ask someone who worked at Hyperion my favorite question, “which side did you work on?” and you always heard either, “oh, the BI side,” or “oh, the finance side.”  You never, ever got asked to clarify the question.

Over time, EPM came to mean financial planning, budgeting, and consolidation (along with associated reporting/analytics) — and not the unification of BI and financial planning.

What did this prove?   You can put the two categories under one roof via consolidation, but the actual markets are oil-and-water and don’t mix together well.  Why?  Two reasons:

  • BI is a platform sale, EPM is an applications sale
  • BI is sold to IT, EPM is sold to the finance department

So other than selling to a completely different buyer with a completely different value proposition, they make excellent candidates for integration!  Put concretely, if you can’t talk about inter-company eliminations, AVB reports, AOPs, topside journal entries, long-range models, FX rate handling, and legal entities, then you can’t even start to sell EPM.  I marketed BI for 9 years and we talked a totally different language:  aggregate awareness, multi-pass SQL, slow-changing dimensions, and star schemas.  The two languages are not totally unrelated.  They are nevertheless different.

Despite this history, many vendors still seem hell bent on mixing EPM water with BI oil.  One cloud EPM vendor positioned themselves for years as a leader in “BI and CPM” somehow thinking the rock-bottom acquisition of a cheap scorecarding tool made them a player in the $15B BI market.

To be clear, I view EPM and BI as cousins.  Yes, in EPM we make scorecards, dashboards, and reports.  Yes, in EPM we do multi-dimensional modeling and analysis.  No doubt.  But we do it for finance departments, we tie our planning/budgeting systems to the general ledger and we are focused on both financial outcomes and financial reports.  Yes, we also care about integrating models across the organization — sales, marketing, services, and operations.  But we are not trying to sell generic infrastructure for making reports and visualizations across the enterprise.

Put simply, in EPM we use BI technologies to build financial applications that tie together the enterprise on behalf of the finance department.

Surprisingly, SAP didn’t get the consolidation-not-convergence memo.  This is somewhat amazing given that SAP is a strong player in both BI and EPM, but somehow hasn’t seemed to notice not only that the two markets never converged but also that there is a very good reason for that.  They are still tilting at windmills fighting to integrate two categories not destined for integration with a vintage-2002 message.

Here’s the press release:

SAP Redefines Analytics in the Cloud

WALLDORF — SAP SE (NYSE: SAP) today unveils the SAP Cloud for Analytics solution, a planned software as a service (SaaS) offering that aims to bring all analytics capabilities into one solution for an unparalleled user experience (UX).

Built natively on SAP HANA Cloud Platform, this high-performing, real-time solution plans to be embedded with existing SAP solutions and intends to connect to cloud and on-premise data to deliver planning, predictive and business intelligence (BI) capabilities in one analytics experience. The intent is for organizations to use this one solution to enable their employees to track performance, analyze trends, predict and collaborate to make informed decisions and improve business outcomes.

Note, that in addition to my strategic concerns, I have a few tactical ones as well:

  • This is a futures announcement without a date.  The service “planned.”  The “planned benefits” are stated.  The only thing I can’t find in the plan is an availability date.
  • Pricing hasn’t been announced either.  So other than knowing what it costs and when it will be available, it was an informative announcement.
  • While SAP is claiming that it’s previously announced SAP Cloud for Planning is included in the new offering, I have heard rumors on the street that SAP Cloud for Planning is actually being discontinued and customers will be moved to the new offering.  At this point, I’m not sure which is the case.

In the end, I’m not trying to beat on SAP in general.  I don’t love the Hana branding strategy, that’s true, but Hana itself (i.e., columnar, in-memory database) is a good idea.  I have no problems with SAP BI’s products — heck, my fingerprints still remain lightly on a few of them.  In EPM, we compete with SAP, so my agenda there is obvious.

But the thing I object to, the tilting at windmills, is that they are still banging the unify EPM and BI drum.  SAP’s new analytics may eventually end up a reasonable or good BI solution.  But if they’re betting serious chips on unifying BI and EPM it’s misguided.

Six Words That Can Make or Break Your Credibility: “I’ll Get It To You Tomorrow”

I can’t tell you the number of times people I’ve worked with over the years have said, “I’ll get it to you tomorrow,” and then don’t.  Sometimes they take a few extra days.  Sometimes, amazingly, they don’t get it to me at all.

Maybe I’m the problem.  Maybe I’m one of a rare breed who thinks that tomorrow is a date and not a euphemism for “later” — which itself is all too often a euphemism for “never.”

But I do notice and I think other people do, too.  In fact, probably the first and simplest sign that someone is in over their head is failing to hit tomorrow promises.  Heck, if you can’t accurately say at 2 PM that you’ll get something done before the end of the day, how I can expect any accuracy on your estimates of a major project?

I’m not so anal that I track every interaction with people.  But once I feel like a may have a “tomorrow” problem, I do start tracking.  I’ll randomly file promises for tomorrow under my tomorrow tasks and for next week under my next week tasks.

When I see problems, I usually start our snarky:  “somebody tell Garth that tomorrow never came.”  Or, “hey Scarlet, are you going to get to that again tomorrow, which is another day.”  Or, “yo, Annie, did the Sun come out yet because it is indeed tomorrow?”  There is just too much great tomorrow-themed material to resist. “Say hi to George Clooney there in Tomorrowland.”

But unfortunately when you’re in this situation, it’s usually not funny.  We can apply the same logic to broken promises as Malcolm Gladwell applies to broken windows:  one the first one breaks, a bunch quickly follow.

So the moral of the story is simple.  If you want to work in a culture of professionalism and proper expectations management, at a company that properly under-promises and over-delivers to its customers, then it all begins with you and the simple tomorrow promise.  Don’t make it if you can’t deliver, and once you make it, deliver. If you find that you can’t, then reset expectations accordingly — but never, ever promise “tomorrow” and then go silent.

Just as you’d be shocked at how many don’t answer questions in business meetings, you’d be shocked at the number of times people say tomorrow and mean “later” — once you start paying attention.

CEO is Not a Part-Time Job

While I’m not that close to the whole Twitter situation and although I’m a moderately heavy user (@Kellblog), I don’t study their financials or other statistics.  That said, as a user, I feel a certain malaise around the service and I think it’s definitely in need of some new energy.

What I don’t get it is apparently soon-to-be-made permanent appointment of Jack Dorsey to CEO while simultaneously serving as CEO of Square.  Dorsey is undoubtedly an amazing guy, that’s not the question.

The question is simple:  is CEO a part-time job?  And the answer is equally simple:  no.

I can say this having worked for many CEOs over my 30 year career (e.g., at Business Objects for nearly a decade) and having been a CEO for about a decade as well between MarkLogic and Host Analytics.  No way, no how, no matter how amazing the person, CEO is not a part-time job.

Now the great part about Silicon Valley is that there are, indeed, a lot of amazing people out there.  There is no logical reason why Twitter cannot find someone amazing — who doesn’t already have a full-time job — to run the company.  So please add me to the “I don’t get it” list.

What I’m making is a general statement.  My logic is only compounded by the situation:

  • Square is working toward an IPO in the fairly short-term.  This is an extremely demanding phase for a company and its CEO.
  • Twitter has become a turnaround.  This is an even more demanding phase for company, and they don’t always end well.

So if I’m going to argue that if it’s impossible in general, then it’s kind of impossible-squared when one company is IPO mode and the other is in turnaround mode.

Is it totally unprecedented? No, per this story, but I nevertheless think it’s a bad idea, as two folks who’ve done it seem to agree.

Though rare, it’s not unheard of for a person to run two large companies. That’s what Steve Jobs did with Apple and Pixar, though he described it as “the worst time in [his] life.” Elon Musk, CEO of Tesla and SpaceX, put it more mildly: “It is quite difficult to be CEO at two companies.”