Not in My Kitchen, You Don’t: Leaders as Norm Setters

There are two types of restaurants:  those where it’s acceptable for a cook to pickup dropped food and serve it, and those where it’s not.

food on floor 2

Sure, when asked, everyone would say it’s unacceptable to serve dropped food in their kitchen.  But is that how their kitchen actually runs?  One of my favorite definitions of culture is, to paraphrase Henry Ford’s thoughts on quality, “what happens when no one is watching.”

And if managers really run such clean kitchens, then why are there so many:

  • Websites with typos?
  • Webinars with logistics problems at the start?
  • Demonstrations where something breaks?
  • Presentations where the numbers don’t foot?
  • Customer meetings that start late?

The fact is most managers say they run kitchens where it’s unacceptable to serve food that was dropped on the floor, but all too often they don’t.  Dropped food gets served all the time by corporate America.  Why?  Because too few leaders remember that a key part of their job is to set norms — in our company, in our culture, what’s acceptable and what’s not.

Defining these norms is more important than defining quarterly OKRs or MBOs — both because they persist over time and because they help define culture — yet few managers treat them as such.  Sure, some managers like to emphasize values, and will frequently story-tell about a focus on Trust or Customer Success.  And that’s great.  But that’s all positive reinforcement.  Part of norm setting — particularly the part that says what’s not acceptable is our culture — needs to be negative reinforcement:  you can’t do that here.

gordon

That’s why I love Gordon Ramsey and his shows like Hell’s Kitchen.  “YOU CAN’T SERVE THAT, IT’S BLOODY RAW!”

He is a clear, if overzealous, communicator who sets very clear norms.  The power of norms is that, once set, the culture reinforces them.  Everyone quickly understands that in our kitchen you don’t serve dropped food and people will call each other out if someone attempts to do so.

I remember over a decade ago, mixed in a deluge of corrections I’d made on a press release, I wrote something like this:

“No, No, No, No, No, Goddammit, No — Never [break this rule and do that].”

The guy who wrote the press release was new.  He complained to HR that my feedback created a hostile work environment.  The complaint made me pause.  Then I thought:  you know what, for someone who writes like that guy does, I want it to be a hostile environment.  Cook like that in someone else’s kitchen.  But not in mine.  (Yes, he quit shortly thereafter.)

Over time I’ve learned that you don’t need to scream like Ramsey (or my younger self) to establish clear norms.  You just need one, simple, almost magical word:  unacceptable.  Just as it’s unacceptable in this kitchen to serve food that’s been dropped on the floor:

  • It’s unacceptable in this marketing team to publish work with typos.  (Work on your writing skills and have a better process.)
  • It’s unacceptable in this events team to have logistical problems at the start of an event.  (Test them all, three times if necessary, before running the webinar.)
  • It’s unacceptable in this SC team to have demos crash during sales calls.  (Test every click before you start, and don’t go off-road for the fun of it.)
  • It’s unacceptable in this finance team to create slides where the numbers don’t foot.  (Cross-check your own work and then have someone else cross-check it again.  Or, better yet, use a system to publish the numbers off one database.)
  • It’s unacceptable in this sales organization to start customer meetings late.  (Our standard practice is to book the meeting room 30 mins before the meeting start, arrive 30 mins early, and test all logistics.)

When it comes to norms, you get what you expect.  And when you don’t get it, you need to be clear:  what happened is unacceptable [1].

Since this is all pretty simple, then why do so few managers spend time defining and enforcing such operational norms?

First, it will make you unpopular.  It’s far easier to be “surprised” that the webinar didn’t work for anyone on Chrome or “understanding” that sometimes demos do crash or “realistic” that we’ll never eliminate every typo on the website.  But remember, even here you are norm-setting; you’re just setting the wrong norms.  You’re saying that all these thing are, in fact, acceptable.

Second, it’s hard because you need to be black-and-white.  A typo is black-and-white.  Numbers that don’t foot are black-and-white.  But amateurish PowerPoint clip art, poorly written paragraphs, or an under-prepared sales presentation are grey.  You’ll need to impose a black-and-white line in defining norms and let people know when they’re below it.  Think:  “this is not good enough and I don’t want to debate it.”

Third, your employees will complain that you’re a micro-manager.  No one ever calls Gordon Ramsey a micro-manager for intercepting the service of under-cooked scallops, but your employees will be quick to label you one for catching typos, numbers that don’t foot, and other mistakes.  They’ll complain to their peers.  They’ll cherry-pick your feedback, telling colleagues that all you had were a bunch of edits and you weren’t providing any real macro-value on the project [2].  You can get positioned as a hyper-critical, bad guy or gal, or someone might even assert that it’s personal — that you don’t like them [3].  A clever employee might even try to turn you into their personal proof-reader, knowing you’ll backstop their mistakes [4].

But, know this — your best employees will understand exactly what you’re doing and why you’re doing it.   And they will respond in kind:  first, they’ll change their processes to avoid breaking any of the established norms and second, they’ll reinforce those norms with their teams and peers.

# # #

Notes

[1] And people who do unacceptable things don’t last long in this organization.

[2] No one would ever say “the ambiance was great, the service prompt, and the customer should have been happy despite the raw scallops,” but somehow many business people will say “the vision was great, the idea creative, and that the CEO should have been happy despite all the typos and math errors.”

[3] Ergo be careful in your approach.  Feedback should always be about the work — criticize the performance, not the performer.  And you must be consistent about enforcing norms equally across all people.  (Norms aren’t just for the ones you don’t like.)  Proof-read only the first page or two of a document and then say, “continued review, but stopped proof-reading here.”  Or, borrowing from The Best Work Parable, you might just stop everything at page two, send the document back, and offer to read only a properly written version of it.

[4] This begs fundamental questions about approvals.  Say you approve a press release about last quarter’s results and it contains both several typos and several incorrect numbers.  Does your approval let people off the hook for those errors?  How will they see it?  What does your approval actually mean?  Are you approving every number and every comma?  Or are you, in effect, approving the release of the headline on a given date and assuming others are accountable for quality of the body?

Kellblog Predictions for 2019

Because I’ve been quite busy of late with the sale of my company, I’m doing a somewhat quicker and lighter (if not later) version of my annual predictions post.  Here goes, starting with a review of last year’s predictions.

2018 Kellblog Predictions Review

1. We will again continue to see a level of divisiveness and social discord not seen since the 1960s. HIT.  Hard to argue I need to justify this one.  Want to argue about it?

2. The war on facts and expertise will continue to escalate. HIT. Unfortunately, the President is leading the charge on this front, with the Washington Post fact checker tallying 7,645 false claims since taking office.

factchecker

3. Leading technology and social media companies finally step up to face ethical challenges. MAJOR MISS.  Well, I nailed that the issue would be critical, but boy did I overestimate the maturity of the management of these companies.

4. AI will move from hype to action, meaning bigger budgets, more projects, and some high visibility failures. HIT, I think.  See this McKinsey report for some interesting survey data on AI adoption and barriers to it.

5. AI will continue to generate lots of controversy about job displacement. HIT. While the optimists say AI will create more jobs than it will displace, many still worry conversely.  Since the prediction was about the controversy continuing, we’ll call it a hit.

6. The bitcoin bubble bursts. MAJOR HIT.  This one partially redeems me for over-estimating Facebook’s management.

btc

7. The Internet of Things (IoT) will continue to build momentum.  HIT. See this Forbes article about data from Dresner Advisory’s 2018 IoT Intelligence Market Study.

8. The freelance / gig economy continues to gain momentum with freelance workers poised to pass traditional employees by 2027. HIT.  Per this Forbes article, 57M people now participate in the gig economy in some way.

9. M&A heats up due to repatriation of overseas cash.  HIT. Per Berkery Noyes, software M&A deal value was up nearly $100B over 2017.  To the extent this was due to overseas cash repatriation I don’t know, but it certainly was a factor.

m-and-a

10. 2018 will be a good year for cloud EPM vendors. MAJOR HIT.  Anaplan went public, Adaptive Insights was acquired by Workday, and Host Analytics was acquired by Vector Capital. 

With 9 hits, two of them major – and with only one offsetting major miss — I should probably just drop the mike and get out of the predictions business.  But no guts, no glory.

Kellblog’s 2019 Predictions

Reminder to see the disclaimers in my FAQ and remember that these predictions are not financial or business advice – they are made in the spirit of fun.  To the extent they’re concrete, that’s to make the game more interesting so we can better assess them next year.  Here we go.

1. Fred Wilson is right, Trump will not be president at the end of 2019. I think Fred’s also right on virtually all of the other predictions made in his epic post, which I won’t attempt to summarize here. Read Fred’s post – and just make sure you read to the end, because it’s not all doom and gloom.  So, as a Kellblog first, prediction #1 is a pointer.

2. The Democratic Party will continue to bungle the playing of its relatively simple hand. Party leaders will continue to fail to realize that the way to beat Trump is not through a hard-left platform with 70% tax rates that caters to the most liberal Democrats – but a centrist, pragmatic, people- and business-friendly platform that certainly won’t be enough for the far left, but will be far better than the Republican alternative for all Democrats, and most importantly, give centrist Republicans a realistic alternative to what their party is offering them.  The Democratic Party will continue to be more concerned with making statements than winning elections.  This may cost it, and the Nation, dearly.

Remember the famous Will Rodgers quote: “I am not a member of any organized political party.  I am a Democrat.”

 3. 2019 will be a rough year for the financial markets. Political problems in the USA, Europe, and increasingly Latin American.  Trade wars.  Record deficits as we re-discover that trickle-down, tax-cut economics don’t work.  Threat of rising interest rates.   Brexit.   Many folks see a bear market coming.

Years ago, I accepted the fact that – like many – I am a hypocrite when it comes to the stock market.  Yes, I absolutely believe that it’s theoretically impossible to time the market.   But yes, I’m entering 2019 with a high allocation to cash and intend to keep it that way.  Hum.  Try to reconcile that.

For fun, let’s makes this concrete and predict that the BVP Emerging Cloud Index will end 2019 at 750.  I do this mostly to provide some PR for Bessemer’s Index, officially launched via the NASDAQ in October, 2018, but which was built on the back of five years of Bessemer maintaining it themselves.

4. VC tightens. Venture capital funding has been booming the past several years and – for the above reasons and others (e.g., the fact that most VCs don’t product enough returns to justify the risk and illiquidity) – I believe there will be tightening of VC in 2019.  If you agree, that means you should raise money now, while the sun’s still shining, and try to raise two years of capital required in your business plan (with some cushion).

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If things follow the recent trends, this will be hardest on average and/or struggling companies as VCs increasingly try to pick winners and make bets conservative in the sense that they are on known winners, even if they have to overpay to do so.  In this scenario, capital on reasonable terms could all but dry up for companies who have gone off-rails on their business plans.   So, if you’re still on rails, you might raise some extra capital now.  Getting greedy by trying to put up two more good quarters to take less dilution on your next round could backfire – you might miss one of those quarters in this increasingly volatile environment, but even if you don’t, VC market tightening could offset any potential valuation increase.

5. Social media companies get regulated. Having failed for years to self-regulate in areas of data privacy and usage, these companies will likely to face regulations in 2019 in the face of strong consumer backlash.  The first real clue I personally had in this area was during the 2016 election when Facebook didn’t just feed me, but actually promoted, a fake Denver Guardian story about a supposedly dead FBI agent linked to “her emails.”  I then read the now-famous “bullshit is highly engaging” quote from this story which helped reveal the depth of the problem:

Or, as former Facebook designer Bobby Goodlatte wrote on his own Facebook wall on November 8, “Sadly, News Feed optimizes for engagement. As we’ve learned in this election, bullshit is highly engaging. A bias towards truth isn’t an impossible goal. Wikipedia, for instance, still bends towards the truth despite a massive audience. But it’s now clear that democracy suffers if our news environment incentivizes bullshit.”

I won’t dive into detail here.  I do think Sheryl Sandberg may end up leaving Facebook; she was supposed to be the adult supervision, after all.  While I think he’s often a bit too much, I nevertheless recommend reading Chaos Monkeys for an interesting and, at times, hilarious insider look at Facebook and/or following its author Antonio Garcia Martinez.

6. Ethics make a comeback, for two reasons.  The first will be as a backlash to the blatant corruption of the current administration.  To wit:  the House recently passed a measure requiring annual ethics training for its members.  The second will have to do with AI and automation.  The Trolley Problem, once a theoretical exercise in ethics, is now all too real with self-driving cars.  Consider this data, based on MIT research in this article which shows preferences for sparing various characters in the event of a crash.

crash

Someone will probably end up programming such preferences into a self-driving car.  Or, worse yet, as per the Trolley Problem, maybe they won’t.  While we may want to avoid these issues because they are uncomfortable, in 2019 I think they will be thrust onto center stage.

7. Blockchain, as an enterprise technology, fades away. Blockchain is a technology in search of a killer application.  Well, it actually has one killer application, cryptocurrency, which is why it was built.  And while I am a fan of cybercurrencies, blockchain is arguably inefficient at what it was built to do.  While Bitcoin will not take down the world electric grid as some have feared, it is still tremendously energy consumptive –in coming years, Bitcoin is tracking to consume 7.7 GW per year, comparable to the entire country of Austria at 8.2 GW.

While I’m not an expert in this field, I see three things that given me huge pause when it comes to blockchain in the enterprise:  (1) it’s hard to understand, (2) it consumes a huge amount of energy, and (3) people have been saying for too long that the second blockchain killer app (and first enterprise blockchain killer app) is just around the corner.  Think:  technology in search of a business problem.  What’s more, even for its core use-case, cryptocurrency, blockchain is vulnerable to being cracked by quantum computing by 2027.

8. Oracle enters decline phase and is increasingly seen as a legacy vendor. For decades I have personally seen Oracle as a leader.  First, in building the RDBMS market.  Second, in consolidating a big piece of the enterprise applications market.  Third, more generally, in consolidating enterprise software.  But, in my mind, Oracle is no longer a leader.  Perhaps you felt this way long ago.  I’d given them a lot of credit for their efforts (if not their progress) in the cloud – certainly better than SAP’s or IBM’s.  But SAP and IBM are not the competitors to beat in the future:  Amazon, Google, and a rejuvenated Microsoft are.  The reality is that Oracle misses quarters, cloud-washes sales, and is basically stagnant in revenue growth.  They have no vision.  They have become a legacy vendor.

The final piece of this snapped into place when Thomas Kurian departed to Google in a dispute with Larry Ellison about the cloud.  DEC’s Ken Olsen once said that Unix was “snake oil” and that was the beginning of the end for DEC.  Ellison once said roughly the same thing (“complete gibberish”) about the cloud.  And now the cloud is laughing back.

9. ServiceNow and/or Splunk get acquired. A friend of mine planted this seed in my mind and it’s more about corporate evolution than these two companies in specific.  The pattern is that highly successful companies go through phase I ($1-$100M hypergrowth) and then phase II ($100M to $1B build-out) and then, once past a billion in revenues either (1) stay growth- and vision-focused like Salesforce or (2) drift towards a stewardship mentality where the people and perks are such that everyone makes a lot of money if they just keep on keeping on.  I’m not an expert in ServiceNow or Splunk, but I have tracked them from a distance for a long time, and I think they are drifting towards stewardship mode.  If I’m right, that will make them possible M&A targets in 2019.  They’re both great businesses that mega-vendors would love to own – especially if “on sale” due to a bear market discount.

10. Workday succeeds with its Adaptive Insights agenda, meaning that Adaptive’s mid-market and SMB presence will be greatly lessened.   Most people I know think Workday’s acquisition of Adaptive was a head-scratcher.  Yes, Workday struggles in financial apps.  Yes, EPM is an easier entry point than core financials (which, as Zach Nelson used to say, were like a heart transplant).  But why in the world would a high-end vendor (with average revenue/customer of $1M+) acquire a low-end EPM vendor (with average revenue/customer of $27K)?  That’s hard to figure out.

But just because the acquisition was, to be kind, non-obvious, it doesn’t mean Workday won’t be successful with it.  Workday’s goals are clear: (1) to unite Adaptive with Workday in The Power of One – including re-platforming the backend and re-writing the user-interface, (2) to provide EPM to Workday’s high-end customer base, and (3) to provide an alternate financial entry point for sales when prospects say they’re not up for a heart transplant for at least 5 years.  I’m not saying Workday can’t be successful with their objectives.  I am saying Adaptive won’t be Adaptive when they’re done — you can’t be the high-end, low-end, cheap, expensive, simple, complex, agnostic, integrated EPM system.   Or, as SNL put it, you can’t be Shimmer — a dessert topping and a floor wax.  The net result:   like Platfora before them or Outlooksoft within SAP, Adaptive disappears within Workday and its presence in the mid-market and SMB is greatly reduced.

# # #

Disclaimer:  these predictions are offered in the spirit of fun.  See my FAQ for more and other terms of use.

The Next Chapter

This morning we announced that Vector Capital has closed the acquisition of Host Analytics.  As part of that transaction I have stepped down from my position of CEO at Host Analytics.  To borrow a line from The Lone Ranger, “my work is done here.”  I’ll consult a bit to help with the transition and will remain a friend of and investor in the company.

A Word of Thanks
Before talking about what’s next, let me again thank the folks who made it possible for us to quintuple Host during my tenure all while cutting customer acquisition costs in half, driving a significant increase in dollar retention rates, and making a dramatic increase in net promoter score (NPS).  Thanks to:

  • Our employees, who drove major productivity improvements in virtually all areas and were always committed to our core values of customer success, trust, and teamwork.
  • Our customers, who placed their faith in us, who entrusted us with their overall success and the secure handling of their enormously important data and who, in many cases, helped us develop the business through references and testimonials.
  • Our partners, who worked alongside us to develop the market and make customers successful – and often the most challenging ones at that.
  • Our board of directors, who consistently worked positively and constructively with the team, regardless of whether we were sailing in fair or foul weather.

We Laid the Groundwork for a Bright Future
When Vector’s very talented PR guy did his edits on the closing press release, he decided to conclude it with the following quote:

Mr. Kellogg added, “Host Analytics is a terrific company and it has been an honor lead this dynamic organization.  I firmly believe the company’s best days are ahead.”

When I first read it I thought, “what an odd thing for a departing CEO to say!”  But before jumping to change it, I thought for a bit.  In reality, I do believe it’s true.  Why do Host’s best days lie ahead?  Two reasons.

First, we did an enormous amount of groundwork during my tenure at Host.  The biggest slug of that was on product and specifically on non-functional requirements.  As a fan of Greek mythology, the technical debt I inherited felt like the fifth labor of Hercules, cleaning the Augean stables.  But, like Hercules, we got it done, and in so doing shored up the internals of a functionally excellent product and transformed our Hyderabad operation into a world-class product development center.  The rest of the groundwork was in areas like focusing the organization on the right metrics, building an amazing demand generation machine, creating our Customers for Life organization, running a world-class analyst relations program, creating a culture based on learning and development, and building a team of strong players, all curious about and focused on solving problems for customers.

Second, the market has moved in Host’s direction.  Since I have an affinity for numbers, I’ll explain the market with one single number:  three.  Anaplan’s average sales price is three times Host’s.  Host’s is three times Adaptive’s.  Despite considerable vendor marketing, posturing, positioning, haze, and confusion to the contrary, there are three clear segments in today’s EPM market.

  • Anaplan is expensive, up-market, and focused primarily on operational planning.
  • Adaptive is cheap, down-market, and focused primarily on financial planning.
  • Host is reasonably priced, mid-market, focused primarily on financial planning, with some operational modeling capabilities.

Host serves the vast middle where people don’t want (1) to pay $250K/year in subscription and build a $500K/year center of excellence to support the system or (2) to pay $25K/year only to be nickeled and dimed on downstream services and end up with a tool they outgrow in a few years.

Now, some people don’t like mid-layer strategies and would argue that Host risks getting caught in a squeeze between the other two competitors.  That never bothered me – I can name a dozen other successful SaaS vendors who grew off a mid-market base, including within the finance department where NetSuite created a hugely successful business that eventually sold for $9.3B.

But all that’s about the past.  What’s making things even better going forward?  Two things.

  • Host has significantly improved access to capital under Vector, including the ability to better fund both organic and inorganic growth. Funding?  Check.
  • If Workday is to succeed with its goals in acquiring Adaptive, all rhetoric notwithstanding, Adaptive will have to become a vendor able to deliver high-end, financial-focused EPM for Workday customers.  I believe Workday will succeed at that.  But you can’t be all things to all people; or, to paraphrase SNL, you can’t be a dessert topping and a floor wax.  Similarly, Adaptive can’t be what it will become and what it once was at the same time – the gap is too wide.  As Adaptive undergoes its Workday transformation, the market will switch from three to two layers, leaving both a fertile opening for Host in mid-market and a dramatically reduced risk of any squeeze play.  Relatively uncontested market space?  Check.

Don’t underestimate these developments.  Both these changes are huge.  I have a lot of respect for Vector in seeing them.  They say that Michelangelo could see the statue within the block of marble and unleash it.  I think Vector has clearly seen the potential within Host and will unleash it in the years to come.

What’s Next?
I don’t have any specific plans at this time.  I’m happily working on two fantastic boards already – data catalog pioneer Alation and next-generation content services platform Nuxeo.   I’ll finally have time to write literally scores of blog posts currently stalled on my to-do list.  Over the next few quarters I expect to meet a lot of interesting people, do some consulting, do some angel investing, and perhaps join another board or two.  I’ll surely do another CEO gig at some point.  But I’m not in a rush.

So, if you want to have a coffee at Coupa, a beer at the Old Pro, or – dare I date myself – breakfast at Buck’s, let me know.

A Simple Trick To Get Your CEO Closer to Your Team

Startup VPs sometimes lament that their CEOs don’t really know the people on their teams, don’t realize how smart and talented they are, or fully appreciate the value of their teams’ work.  How, they wonder, can they build a better bridge between their boss and their teams?

The answer is simple:  invite the CEO to something.  To what?

  • Your staff meeting
  • A departmental town hall Q&A session
  • Your team’s planning offsite
  • A quarterly business review (QBR) or equivalent

Social gatherings (e.g., team buildings, after-work drinks) are fine a complement, but they don’t actually solve the problem I’m addressing — how to build a bridge between your team and your boss. This is not about knowing their spouses’ names and how many children they have.  This is about seeing them at work, in the workplace.

That the answer is so simple and that so few VP actually do it reveals something [1]:

  • Some VPs like to complain about the problem.  These folks likely harbor insecurity about their teams because they are, in the end, afraid to put the CEO in a room alone with them.  They are afraid their teams may look stupid, or worse yet receive direct feedback that they worry their teams can’t handle.  These VPs would never invite the CEO unprompted, and even when prompted, reply with, “yes, we should do that one day” but somehow that day never seems to come.  These VPs are weak and will likely get stuck in their careers unless they have have more confidence in their teams (or hire better teams, as indicated) and more confidence in their boss.

 

  • Some VPs like to fix it.  These people typically don’t need to be told to build a strong relationship between their team (particularly their direct reports) and their boss.  It’s good for everyone, and the company overall, when such relationships are in place.  These people aren’t afraid their team will embarrass themselves because they know they’ve hired smart, quality people.   These people aren’t afraid that their team will wilt under a bit of direct, executive feedback either — probably because they’re not afraid to deliver such feedback themselves.  If they don’t think of the idea themselves, when prompted, they jump on the idea — and not just once for show — but by building such invites into their standard operating cadence.

My strong advice is that you want to be the second type of VP.  If you’re not trying to build a better relationship between your team overall, your directs, and your boss, then you are failing everyone — including yourself.

# # #

Notes

[1]  Now you could argue I’m projecting here because I’m not a highly invite-able CEO, but I can say across 12 years of CEO experience at two different companies, it was a relatively rare experience to be spontaneously invited by my direct reports to such events.  (And when it did happen, it was always the same VPs doing the inviting.)  What’s more, I can also say across more than a decade of CMO experience at two different companies, I didn’t see a lot of my peers do it, either.

Top Kellblog Posts of 2018

Here’s a quick retrospective on the top Kellblog posts (as measured by views) of 2018.

  • Career Development:  What It Really Means to be a Manager, Director, or VP.  The number two post of 2018 was actually written in 2015!  That says a lot about this very special post which appears to have simply nailed it in capturing the hard-to-describe but incredibly important differences between operating at the manager, director, or VP level.  I must admit I love this post, too, because it was literally twenty years in the making.  I’d been asked so many times “what does it really mean to operate at the director level” that it was cathartic when I finally found the words to express the answer.
  • The SaaS Rule of 40.  No surprise here.  Love it or not, understanding the rule of 40 is critical when running a SaaS business.  Plenty of companies don’t obey the rule of 40 — it’s a very high bar.  And it’s not appropriate in all circumstances.  But something like 80% of public company SaaS market capitalization is captured by the companies that adhere to it.  It’s the PEG ratio of modern SaaS.
  • The Role of Professional Services in a SaaS Company.  I was surprised and happy to see that this post made the top five.  In short, the mission of services in a SaaS company is “to maximize ARR while not losing money.”  SaaS companies don’t need the 25-35% services margins of their on-premises counterparts.   They need happy, renewing customers.  Far better to forgo modest profits on services in favor of subsidizing ARR both in new customer acquisition and in existing customer success to drive renewals.  Services are critical in a SaaS company, but you shouldn’t measure them by services margins.
  • The Customer Acquisition Cost Ratio:  Another Subtle SaaS Metric.  The number five post of 2018 actually dates back to 2013!  The post covers all the basics of measuring your cost to acquire a customer or a $1 of ARR.  In 2019 I intend to update my fundamentals posts on CAC and churn, but until then, this post stands strong in providing a comprehensive view of the CAC ratio and how to calculate it.  Most SaaS companies lose money on customer acquisition (i.e., “sell dollars for 80 cents”) which in turn begs two critical questions:  how much do they lose and how quickly do they get it back?  I’m happy to see a “fun with fundamentals” type post still running in the top five.

Notes

[1]  See disclaimer that I’m not a financial analyst and I don’t make buy/sell recommendations.

[2] Broadly defined.  I know they’re in Utah.

Seven Books Not To Give the Boss for Christmas*

Well, when you run a company focused on corporate finance, you don’t get a lot of Holiday Party scandals.  At Host’s very nice 2018 Holiday Party the closest thing we had was an employee conversing with me about books (Bad Blood) and then wholeheartedly suggesting that I just had to read another book, Drive — which, as it turns out, is about motivating employees.  Hum.

The blowback potential hadn’t occurred to me in real time, but after got home I noticed an email from the person who’d suggested the book, contritely offering that the suggestion wasn’t intended to send a message or anything.  I laughed.

My reply was simple:  I once actually not just recommended but actually bought and gave Death by Meeting to my boss, so I’m not one to be throwing stones.

But, for those with a dark sense of humor, the exchange did get me thinking about the perfect Christmas anti-shopping list for the boss.  Here we go.

Seven Books You Probably Shouldn’t Buy the Boss for Christmas*

  1. (When East Coast people move to California.)  Stop People Pleasing: Be Assertive, Stop Caring What Others Think, Beat Your Guilt, & Stop Being a Pushover.  

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2.  (“Can somebody please make a decision around here?”)  The Perfection Trap: Cultivate Self-Acceptance, Fire Your Inner Critic, Overcome Procrastination, and Get Things Done.

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3. (“I love those all-hands emails.”) Writing to Be Understood: What Works and Why

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4. (“Don’t worry, you can lead without it.”)  The Charisma Myth: How Anyone Can Master the Art and Science of Personal Magnetism

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5. (“If you’ve not checked Glassdoor recently, uh.”) How to Make People Like You in 90 Seconds or Less

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6.  (“I love the team you’ve put together around here.”)  Needy People: Working Successfully with Control Freaks and Approval-holics

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7. (“Executing our new strategy looks like a piece of cake.”)  Endurance, Shackleton’s Incredible Voyage.

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Notes 

* or equivalent.

Host Analytics + Vector Capital = Growth

I’m delighted to say that Host Analytics has signed a definitive agreement to be acquired by Vector Capital, a San Francisco private equity (PE) firm with over $4B in capital under management.  Before diving into some brief analysis of the deal, I want to thank Host Analytics customers, employees, partners, investors, and board of directors for everything they’ve done to help make this happen.

Going forward, I expect the company’s top three priorities to be growth, growth, and growth.  Why?  Given a large market opportunity and a company that’s executing well, it’s the right time to add fuel to the tanks.

Large Market Opportunity
To wit:

  • The total available market (TAM) for Host’s enterprise performance management (EPM) products is $12B.
  • The market, somewhat amazingly, remains less than 10% penetrated by cloud solutions, which means there is an enormous on-premises replacement opportunity.
  • The market, equally amazingly, still over-relies on Microsoft Excel for planning, budgeting, reporting – even sometimes stunningly consolidation – which represents an enormous greenfield opportunity.
  • Recent consolidation in the market (e.g., Workday’s acquisition and, in my opinion, up-market hijacking of Adaptive Insights) creates new space in various market segments

Executing Well
Host is wrapping up an excellent 2018 with strong sales growth (e.g., new subscriptions up 50%+ this quarter), record ending annual recurring revenue (ARR), historically high customer satisfaction (i.e., net promoter score), above-benchmark employee satisfaction — and we’ve been doing all that while transitioning to positive cashflow.  On the product front, we’ve been pumping out innovations (e.g., Host MyPlan, Host Dashboards) and have an exciting product roadmap.

Simply put, the company is executing on eight cylinders.  Strong execution plus large opportunity usually calls for one thing:  more fuel.

Shareholder Rotation
Host was well ahead of the market with its vision of cloud-based EPM and raised its first venture capital in 2008.  As some of our early investors are thinking about how to wrap up those funds, it’s the right time for a shareholder rotation where our last-phase investors are able to get liquidity and the company can get new investors who are focused on the next phase, i.e., the next five years of growth and scale.

That’s why I think “shareholder rotation” is the right way to think about this transaction — the old shareholders rotate out and Vector rotates in.  And I should note that our largest shareholder, StarVest Partners, is not rotating entirely out — they will remain a significant shareholder in the company going forward.

In many respects, things won’t change.  Host will remain focused on:

  • Delivering a complete EPM suite
  • Providing solutions for the Office of Finance
  • World-class professional services and support, and our desire to create Customers for Life
  • Partnership, working with other leaders to provide our customers with complete solutions
  • Product innovation, finding novel ways to help finance better partner with the business
  • Core values: trust, customer success, and teamwork

Other things will change.  We’ll see some new faces as we evolve and grow the company.  We’ll get the benefit of Vector’s internal management consultancy (i.e., the value creation team) to help drive best practices.  You should expect to see us accelerate growth through both organic means (e.g., scaling up sales, launching in new geographies) and inorganic means (e.g., follow-on acquisitions).

Thanks to our founder, serial entrepreneur Jim Eberlin, for creating the company.  Thanks to everyone who helped us get here.  Thanks to our board for its foresight and support.  Thanks to Vector for taking us forward.  And thanks to StarVest for coming along for the ride.  Onward, full speed ahead!

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