Cool infographic regarding small businesses and their use of social media. This demonstrates some tangible business value now being derived from leveraging social media sites.
Cool infographic regarding small businesses and their use of social media. This demonstrates some tangible business value now being derived from leveraging social media sites.
On Saturday, April 22nd, Steve Lohr from the NY Times wrote a column titled, “Amazon’s Trouble Raises Cloud Computing Doubts“. The article asserts that outages with Amazon’s cloud computing services will likely force many companies to rethink their strategy to rely upon outside vendors for their compute and storage services.
The article includes some comments from an IDC analyst who suggests that due to this outage, companies must now have a “conversation” about what they keep inside the four walls and what they place outside ‘in the cloud’ – as though systems managed inside a company are somehow safe or safer. Ridiculous. Companies with internally-managed infrastructure have outages every day. It’s the strategy they’ve put in place to handle these outages that matters.
Just as companies today weigh the cost of investing in disaster recovery for their internal systems, companies that rely upon cloud computing vendors need to perform a similar assessment. I would assert that the “conversation” suggested in the article should really have been targeted at whether or not you need disaster recovery services and how much you are willing to pay your PaaS/IaaS vendor to supply them.
Disaster recovery services are available ‘in the cloud’ – as the article points out that Netflix has availed itself of - but these services aren’t automatically included and cost more. The companies that experienced outages when a portion of Amazon’s cloud infrastructure went down chose not to pay for disaster recovery services and they got exactly what they paid for.
I would suggest that a more accurate headline for the article should have been something like, ”Lack of a Strategy for Your Cloud Computing Services is a Disaster Waiting to Happen”. Unfortunately, this boring title wouldn’t be nearly as sensational and wouldn’t sell papers…or online subscriptions…and it’s probably one of the reasons why I’m not a journalist.
If you have at least some sort of marginal interest in what is going on in 2011 with respect to start ups, you can’t help to have read or heard about the new “bubble” controversy.
Valuations and deal sizes for “hot start ups” are reaching lofty heights.
Just off the press is an article from Dan Primack, a journalist for Fortune magazine. In his article titled, “Venture capital shows sign of bubble” he writes the following:
Venture capitalists invested $5.87 billion in 736 U.S.-based companies during the first quarter of 2011, according to a new MoneyTree Report released by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters. That works out to $7.98 million per deal, which is 18% larger than the average deal size during the prior quarter. It also is 21.6% higher than the average deal size in Q1 2010, and a whopping 47% larger than the average deal size in Q1 2009. Moreover, the average early-stage, expansion-stage and later-stage deal was larger in Q1 2011 than was the comparable deal in 2010. That’s important, because it indicates that this isn’t just reflective of VCs putting more of their eggs into less-risky, later-stage deals.
He goes on to cite the following statistics:
Overall, software companies continued to lead all industry sectors with $1.1 billion raised for 187 companies last quarter. This was followed by industrial/energy with $1.03 billion for 75 companies and biotech with $784 million for 85 companies. The quarter’s largest deal was a $201 million round for BrightSource Energy, an Oakland, Calif.-based thermal power plant developer, that raised $201 million. The rest of the top five was Plastic Logic ($200 million), Fisker Automotive ($111 million), Tabula ($108 million) and SoloPower ($78 million). Per usual, Silicon Valley led the nation with $2.49 billion invested in 212 companies. New England placed second with $639 million for 90 companies, and New York Metro snared $580 million for 69 companies.
So, the question currently being bandied about the proverbial watercooler is are we or are we not in a bubble? If we are in a bubble, are we in 1998 or 2000 (referring to the relative beginning and end of the last formally recognized bubble) and if we are in a bubble will this one end like the last one or will the ending be somehow different this time.
From my own perspective at InterWest, we are seeing more deals than ever in 2011. The weeks are literally jammed with back to back meetings with great entrepreneurs with great ideas. And, the deals that are getting done, for companies in a hot sector (e.g. consumer internet) and/or with a proven team are being fought for and won at valuations that may be hard for the entrepreneurs to live up to — and for the venture firms to generate a great return if anything goes wrong and the company takes longer and more capital to reach its goals.
That said, one observation made by Keval Desai, an early member of Google and VP at Digg, is that:
In addition, the rapid rise of the mobile/cloud computing market is also driving a complete transformation and overhaul of back end systems thereby creating opportunity throughout the technology markets.
Given all this, it could be entirely possible that we see many years of growth in many, many different technology areas without the big bubble pop we saw last time. Companies started today that see early traction and growth - and revenue – have a good shot at not suffering the fate of the Bubble 1.0 companies like “pets.com” but instead could survive to become the new large incumbents that help to reshape the world in which we work and play.
Of course, this doesn’t factor in exogenous issues such as instability in the Middle East, natural disasters, etc. which could act as a countervailing dampener.
So, while hot start up valuations may appear to be “bubbly”, we may look back and feel they were actually fairly valued. The next few years should be pretty interesting…but hopefully “interesting” in a good way.
I received a report from SaaS Capital titled “Leaders and Laggards: SaaS Growth and the Cost of Capital”. The subject of the report is how the public markets value a high growth SaaS company (their definition of high growth is >25% YoY).
The report states, “13 public SaaS companies tracked by Pacific Crest Securities have increased in value 40% since the beginning of 2008. During that same period, the S&P index has yet to return to its pre-recession value.”
It goes on to say, “…not all public SaaS companies have performed equally well. To be a standout in this space, growth needs to be greater than 25% per annum, and the market opportunity needs to be significant (e.g. CRM, ERP, HCM, etc).”
They claim that growth dominates over profitability for a couple of reasons. The first is that the SaaS market is still immature with only a third of the entire software market spend. The second is that these companies have been able to demonstrate significant profitability after sales and marketing spend is cut back.
I’m not sure I necessarily buy into this last statement because I’ve yet to see any high growth SaaS companies that have cut back on their sales and marketing spend in favor of profitability. In fact, I remember a few years ago speaking with Phill Robinson, the then-current CMO of Salesforce. His comment to me was that he had not reached a point of diminishing return from his investments in Google Adwords – and Salesforce has continued to invest heavily in sales and marketing – mostly “brand” marketing v demand marketing surprisingly.
Here is the chart that SaaS Capital showed with the relative performance of each of the 13 public SaaS companies.
So, it’s true for public SaaS companies but does high growth spell high valuations for private SaaS companies?
The answer is a resounding “yes”. In fact, even more so. For fast growing private SaaS companies, valuations have recently been over the top. In the public markets, the high multiple ranges but is about 10x-12x annual revenues.
In the private markets, a high growth SaaS company with “only” a 12x multiple could be a great deal for an investor. One of the companies I looked at last year had less than $5M in revenue but the pre-money valuation of the round when it was completed was in the mid $100M range – all because its YoY growth rate and its pipeline had grown so fast and it was in a very large and addressable market.
In contrast, a low growth SaaS company is in a precarious position. The authors of the SaaS Capital report cite a private SaaS company they have been working with that generated $11M in revenues and is profitable but only growing somewhere north of 10% per annum. The company was unable to find any interested strategic investors and is hoping to get a financial buyer to pay 1.5x revenue this year. If they do, I think they should consider themselves fortunate.
So, if you want a successful outcome for your SaaS business, by defnition it needs to generate high growth. To do that, you need the capital to invest in sales and marketing. And, as I have written about in previous blogs, in a high volume SaaS model, lead generation not sales capacity, fuels growth. This is one reason why I believe we haven’t seen any leading SaaS companies emerge that haven’t been venture backed at some point to fuel growth.
So, by definition, if you’re a SaaS company it’s incumbent upon you to find marketing personnel who are experts at lead generation. I know this is one of the critical hires in each one of my SaaS portfolio companies and it is becoming increasingly more difficult to attract this highly sought after talent.
Given the importance of lead generation for the SaaS model and company valuations, I suspect over the next few years, that marketers with proven lead generation skills in the SaaS market may see base + variable compensation on the same level as sales personnel.
I recently made a post positing the notion that “killer applications” start with “killer UI”. Unfortunately, the vast majority of business applications are sorely lacking many of the ease-of-use UI features that consumer software is known for.
I thought it might be interesting to follow up that post with an interview with Jon Innes. Jon and I were colleagues at Siebel Systems and he has worked on enterprise software for Siebel and SAP as well as consumer software for companies such as Intuit and Symantec. He is currently a consultant who helps companies understand how to improve user experience. Jon is a member of UPA, HFES, and ACM CHI with a graduate degree in human factors psychology from New Mexico State and imminently qualified to discuss the impact and importance of UX/UI. He can be reached at info @ uxinnovation.com.
In this interview, I’ve asked Jon to focus primarily on back office enterprise application software, more commonly known as Enterprise Resource Planning (ERP) software. This is typically complex software that enables companies to “run the business” and covers major functions such as: accounting, billing, invoicing, order management, etc. Due to the complexity of these applications, UI/UX is especially critical but has traditionally taken a distant back seat to functionality.
Q. Jon, ERP applications are typically “mandatory” applications. That is, if you are an AP clerk or call center agent or a member of the Purchasing department you must use an ERP application to perform your function – you spend your entire day sitting at a keyboard staring at a monitor feeding data into an ERP system. As a result, you would think that companies would be extremely focused on ensuring that workers were as productive as possible and that the UI/UX of the ERP software was as easy to use as possible. Why, then, is ERP UI/UX so challenging?
A. Actually Bruce, your question hints at the answer. “Mandatory” applications don’t have the same feedback loops of consumer products. The AP clerk is unlikely to be involved in selecting the system and has little input into the requirements and design process.
This is historically one of the key challenges in enterprise software. There are so many stakeholders involved compared to consumer products and each of them tends to have conflicting agendas. This is the real reason ERP systems are known for having poor UIs. It is not the UX professionals involved, or the lack of resources, but the nature of the problem itself. Think of all the different stakeholders associated with ERP systems and their influence on the design and purchase of ERP software:
The individual users are the accountants, call center representatives, sales personnel, and countless others who record transaction-oriented data into ERP systems. In cases of self-service-oriented purchasing or expense reporting software, it could include anyone who is required to do those tasks in the company, not just the individuals in the purchasing or procurement functions.
Unlike consumer software end users, they don’t have a say in purchase of ERP systems. They also don’t have a way of providing feedback to the vendors about user experience problems.
The functional managers on the team perform specialized functions in the organization. Examples include managers of sales divisions and customer support organizations. It’s important to consider managers’ goals for ERP systems during design, such as providing consistent ways of combining sales forecasts, or tracking support issues. This extends beyond what the individuals do with the UI to how that work is coordinated and measured. Functional managers occasionally have limited input into purchase decisions at companies. Unfortunately, they almost never have a direct line of communication with vendors to discuss product enhancements.
As the “E” in ERP implies, the systems are designed to serve enterprises and their executive management. Examples include aligning sales predictions with manufacturing plans or the related staffing and support budgets. ERP systems are designed to meet the needs of the executives who are the ultimate customers and decision makers regarding ERP purchasing. They have significant influence on ERP vendors, but typically this is channeled through individuals with IT responsibility, such as the CIO or CTO.
Unfortunately, enterprise executives rarely, if ever, actually use ERP systems. So while they hold the purse strings, letting executives select an ERP system is much like having your grandmother select your clothes for you (thanks granny, that’s lovely…)
The other stakeholders include customers, business partners, and analysts that “guide” the customers of ERP systems. Ecosystem members have limited-to-no input in ERP purchase decisions. Analysts can significantly influence the decision makers, but rarely focus on user experience aspects of ERP.
Q. What are the other challenges beyond the feedback loop?
A. Another big factor contributing to poor ERP user experience is sheer complexity. ERP suites, which contain a broad range of functions, might have tens of thousands (if not hundreds of thousands), of pages or screens.
These screens are designed to be used in just a part of a company, such as the call center, accounting, or human resources department. As one would expect, the design reflect the philosophies of modern corporations. As such, ERP systems inherit both the strengths and weaknesses of this way of conducting business. One key weakness in both corporations and ERP suites is that their modularity makes them resistant to change.
ERP is software for corporations, designed by corporations. While this might sound like a good thing, consider that most large corporations suffer from poor cross-functional communications. This presents many barriers to good design. User-centered design depends on regular, rich interaction with users throughout the development process. Better feedback loops result in better designs. Unfortunately, insufficient feedback from the user (note the use of “user” and not “customer”) is the norm in enterprise software today. Frequent interaction with users required for design iterations are rare compared to that in more consumer-oriented companies.
Q. What key techniques to making things easy-to-use apply to ERP UI design?
A. One key factor is just simple iteration in the design process. The iterative design process for a package of soap at Proctor and Gamble is subject to much more user feedback than most ERP modules. However, the problem is also in reaching the end-user. The ERP ecosystem is fertile ground for what former Microsoft COO Robert J. Herbold calls “the fiefdom syndrome.” Many players in the ecosystem are solving for their own short-term interests. Here are some of the classic maladaptive behaviors:
The end result is that ERP systems often look like they were designed by developers using different requirements, instead of a consistent, unified system. Efforts within vendor companies, customers, and the ecosystem as a whole are often uncoordinated. Interacting with other stakeholders requires navigating an ecosystem filled with individuals and organizations that have conflicting priorities.
Q. Ok, so you’ve done a good job explaining how various stakeholders can negatively influence the ultimate UI/UX of ERP. But irrespective of stakeholder influence, why can’t ERP vendors make their applications look a lot more like a consumer application “out of the box” or in the case of a SaaS-based system, “out of the cloud”?
A. Well I think the good news is that SaaS solves part of the feedback loop problem. At least now the vendor of the ERP solution can tell if users are actually using it. In the past lots of money was spent on ERP that really didn’t get fully used. Kind of like that funky sweater or tie grandma bought you for Christmas. Now it’s like grandma lives next door, and she knows you never really wear those presents. That is of course if she’s paying any attention which brings me to my next point.
The other half of the problem is mindset. You’d be surprised at how much the old “through it over the wall” attitude still exists at many SaaS ERP providers. For the most part they still don’t have the kind of user-centered design process or UX metrics that folks at Apple, Yahoo or Google take for granted.
One of my clients who is a midsize SaaS provider in the ERP space has not run a single A/B (user research) test in almost 8 years of business. They have over 150 engineers and no full time UX staff. That would be unheard of in a consumer website company. Now days most early stage startups focused on consumer offerings hire dedicated UX staff and run tests like A/B studies long before they get series A funding or hire more than a dozen engineers.
Q. What are some things that companies can do to overcome the issues you’ve identified with poor UI/UX associated with ERP applications?
A. Test the usability of their products and fix the problems. According to research by Jeff Sauros (a former Intuit UX guy now at Oracle) “usability problems are almost ten-times more common on business applications than on websites. The ratio is around 2 to 1 for business applications and consumer software.” His tests use what we call CIF-style summative metrics in UX.
Ten years ago, the Common Industry Format (CIF) for usability tests was defined after corporations like Boeing and Allstate realized the hidden costs of unusable IT. However, almost ten years after CIF was ”adopted” as a standard, most IT organizations and industry analysts remain largely ignorant about CIF and related UX research methods, which can objectively measure if a product or service is easy to use. Salesforce.com probably does the best with this stuff, but even their level of effort lags behind a company like known for ease of use like Intuit.
This isn’t surprising. According to the Standish Group, only 40 percent of IT organizations measure the success of the systems they deploy in any way! ERP customers should be asking for usability data like CIF metrics, and analysts should be publishing reports discussing usability test data not just opinions. Executives in CTO/CIO roles should be asking vendors about data on the usability of the latest updates to their offerings. Industry analysts should start asking about this kind of data too, rather than acting as extensions of ERP marketing departments to push further investments in IT, ignoring the high failure rate of ERP projects.
Another step in the right direction, some vendors have started focusing more on ethnographic studies of enterprises that specifically focus on workgroup and enterprise level factors in addition to end-user ease of use. These have long been recognized in consumer product companies as key to creating usable products. Studies of this type take time and planning, but they provide especially valuable data for designing useful, usable ERP systems where they highlight designs that don’t support group or companywide collaboration well. I helped introduce these at Oracle as a designer in the ‘90s but upper management didn’t’ understand the value they provided.
Success looks something like this: CIOs start asking vendors why they haven’t seen data on the ease of use of systems at their company. CEOs of ERP vendors start paying more than lip service to ease of use and UX. Finally, VC’s should probably be asking for UX metrics when they start considering writing term sheets for ERP startups. Dave McClure and some of new UX savvy wave of early stage investors already do this when funding ventures like Mint.
Bruce Cleveland is a general partner at InterWest Partners, specializing in Cloud Computing (SaaS, IaaS, and PaaS) plus analytical and mobile applications. More »
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