Joining me on the panel were Byron Deeter, a GP at Bessemer Ventures and Joel York, CMO at Xignite. I really enjoyed the panel members and the audience interaction and was reminded again just how bright the people are throughout Silicon Valley and how fortunate I have been to work in an industry where the US still continues to lead the rest of the world.

Some of the topics the panel bandied about regarding the SaaS business model reminded me of lessons I have personally learned that I thought were worth repeating here.

The first big question thrown at the panel is whether a company can successfully negotiate a hybrid model that embraces both SaaS and traditional software delivery.

My point of view – based upon personal experience and observing other companies attempting to do it –  is “no”. While a number have tried (e.g. Microsoft, SAP, Oracle), I still haven’t seen any existing company do it very well, at least not yet.

The problem is at least two-fold:

1. The SaaS model demands that a company not only be a software development organization but it must also take on the responsibility for running the sofware 24/7.  It requires a different way of thinking about how you develop, market and deploy your products v traditional software.
2. The differences between the business models drives completely different comp plans, completely different behavior throughout the company and different expectations by Wall Street/investors. For example, a traditional software model is sales capacity driven, a SaaS model is typically marketing/demand driven. It’s hard enough for large ISVs to address this schism let alone a small company with extremely finite resources – while I haven’t seen any company do it successfully to date, I’m willing to keep an open mind here and if you have great examples of companies doing this well, please tell me about them and how they are doing it.

In addition to these basic structural issues, I think back to when I took over Siebel’s CRMOnDemand division after returning from a long sabbatical. I found myself having to learn a different vernacular and to develop an instinct for managing a different set of operating terms (e.g. CMRR, ACV, Churn, CAC Ratios, etc.).

In addition, we had to create a different organizational structure to manage the business model. For example, I created a Customer Success function in order to ensure someone woke up every morning worried about customer usage and adoption to manage Churn. In a traditional model, this responsibility was largely an issue/expense that the customer bore.

Where I had no cost of labor associated with managing software in a traditional model, the SaaS model demanded that with every new customer Ihad to ensure that performance did not diminish. This meant putting in more CPU, more storage, and doing a lot of SQL optimization work – especially for our analytics/reporting modules – whatever it took to ensure our customers were happy.

Of course, this is all “old hat” for execs at pure SaaS companies but for those ISVs who are just now contemplating deploying a SaaS solution, this will be new ground to cover.

The point I – and many others – have made is that embracing SaaS is just not as simple as doing a technical overhaul to make a product “multi-tenant” or to virtualize it – virtualization is the Larry Ellison method of delivering SaaS which Gartner now “endorses” as another viable form. Remember when it was sacreligious to say you were a SaaS company if your underlying architecture wasn’t multi-tenant?  It must be those high fees Oracle pays Gartner.

Actually, to Larry’s credit, he is right about the fact that companies don’t like commingling their data with others. Some market reports I have seen show there is demand for companies to deliver a “private” SaaS offering where each company’s data is guaranteed to be kept separate. Those reports also show that companies are willing to pay more for this offering.

Another big question asked of the panel was if/when the Back Office/Mission Critical applications (e.g. ERP, etc.) would open up to a SaaS delivery model. The key constraints that most of the attendees identified as impediments to the sales cycle for these types of solutions today revolve around objections regarding performance, reliability, scalability and security.

These objections reminded me of a lesson I learned at Oracle back in 1987.

At the time, I worked for a recently anointed Oracle VP – Tom Siebel – in the newly formed Product Line Division. Under Tom were DEC VMS (Oracle’s biggest product line at the time), IBM MVS/VM, DG AOS, Unix and PC organizations. I was given the responsibility to run the Unix division – a nascent product line.

One of the great value propositions that Oracle provided was that you could take an application built to run on top of Oracle (e.g IAP/IAG and its sucessor SQL*Forms), and run it on top of an Oracle RDBMS irrespective of the operating system/hardware platform.

In 1987, Unix was a fledgling commercial operating system and was primarily used in academic and/or scientific environments. It had few mainstream commercial applications. Then, Unix lacked a lot of what enterprises felt were basic requirements – clustering, disaster recovery, fault tolerance, scalability, etc.

A number of Unix systems start ups emerged to take advantage of the fact that Unix was relatively “cheap” to license and they could instead focus their engineering dollars on delivering fast, relatively inexpensive hardware systems. Companies such as Pyramid, Sequent, AT&T Information Systems, began to take on the mini/mainframe computer markets with these low cost systems – low cost when compared against a DEC VAX, IBM Mainframe, etc. vis a vis price/performance.

However, these new systems lacked commercial applications.

My strategy – er, Larry’s strategy – was to go after the Unix systems manufacturers and to get them to license Oracle so that they could then take applications written on top of Oracle for DEC and/or IBM and have them immediately run on their machines for substantially less.

It turned out that the “magic” ratio was 10:1. Once the Unix vendors could offer an Oracle solution for 10x less than a comparable DEC Vax Oracle solution, many of the issues of security, reliability, etc. that previously plagued the Unix vendors selling into a commercial environment began to evaporate.

Instead, companies found areas where they could use an Oracle/Unix combination that wasn’t as dependent upon security, reliability, etc. and Unix vendors used the profits from these sales to fund R&D to plug the commercial gaps. A classic Innovator’s Dilemma cycle occurred.

We all now know how it ended up – Unix is now the standard operating environment for many/most commercial applications. Many Unix vendors were acquired and many incumbents disappeared – the computer systems landscape was irrevocably transformed.

I think it is easy to use this history lesson to predict where “cloud computing” is going to end up. Today, many large enterprise IT departments decry cloud computing as not reliable, not secure, not scalable, etc. However, with recent price/performance ratios tipping 10:1, we are beginning to see cloud computing enter the periphery of the enterprise and we will see a lot more in the next couple years.

It started first with front office applications. Now, it’s penetrating the back office at several different levels that include applications (e.g. Workday) and infrastructure (e.g. AWS, Rackspace, etc.).

If history repeats itself – and I do not believe there is any reason for it not to do so in this case – I predict that within 5 years, private clouds and public clouds will achieve massive penetration inside the Global 2000 and completely disrupt the way computing is deployed and managed. It will also change the vendor landscape, irrevocably.

However, as much chaos as this will introduce now, in 10 years, I doubt that cloud computing will be a big topic of discussion because it will be de rigueur; just as Unix is today.

Crowdsourced Logo and Graphic Design by crowdSPRING

Hitchhiker: You heard of this thing, the 8-Minute Abs?
Ted: Yeah, sure, 8-Minute Abs. Yeah, the excercise video.
Hitchhiker: Yeah, this is going to blow that right out of the water. Listen to this: 7… Minute… Abs.
Ted: Right. Yes. OK, all right. I see where you’re going.
Hitchhiker: Think about it. You walk into a video store, you see 8-Minute Abs sittin’ there, there’s 7-Minute Abs right beside it. Which one are you gonna pick, man?
Ted: I would go for the 7.
Hitchhiker: Bingo, man, bingo. 7-Minute Abs. And we guarantee just as good a workout as the 8-minute folk.
Ted: You guarantee it? That’s – how do you do that?
Hitchhiker: If you’re not happy with the first 7 minutes, we’re gonna send you the extra minute free. You see? That’s it. That’s our motto. That’s where we’re comin’ from. That’s from “A” to “B”.
Ted: That’s right. That’s – that’s good. That’s good. Unless, of course, somebody comes up with 6-Minute Abs. Then you’re in trouble, huh?
[Hitchhiker convulses]
Hitchhiker: No! No, no, not 6! I said 7. Nobody’s comin’ up with 6. Who works out in 6 minutes? You won’t even get your heart goin, not even a mouse on a wheel.
Ted: That – good point.
Hitchhiker: 7′s the key number here. Think about it. 7-Elevens. 7 dwarves. 7, man, that’s the number. 7 chipmunks twirlin’ on a branch, eatin’ lots of sunflowers on my uncle’s ranch. You know that old children’s tale from the sea. It’s like you’re dreamin’ about Gorgonzola cheese when it’s clearly Brie time, baby. Step into my office.
Ted: Why?
Hitchhiker: ‘Cause you’re f&*%n’ fired!

The scene is hysterically funny – at least to me! But it might be one of those things you have to see/hear live to appreciate.

Anyway, lately I feel like I’ve been hearing the equivalent of “7 Minute Abs” business ideas. That is, the business premise is to take a successful idea with an existing brand and an existing installed base- make a relatively small refinement –  and expect to build a complete company around it – unseating the incumbents, etc.

So, what am I talking about? Someone comes in with an idea for a new CRM application but it has a mobile twist. Someone else comes in with an idea for a real estate website – but with a lot more social capabilities. Another comes in with an idea to connect homeowners with handymen (handypeople?) but it’s a mobile app v a web app.

In fairness, these aren’t bad ideas and unlike “6 minute abs” they are almost always an improvement over the original. However, in my opinion, most of the incumbents could easily replicate the new idea - with little chance of IP infringement – if it takes off.

I think it’s important that if you are going to go after an existing market with an installed base, make sure that your business model/product idea has demonstrable and radical differentiation — something where the value proposition is easy to describe and simple to convey.

In other words, make sure you’re not “dreamin’ about Gorgonzola cheese when it’s clearly Brie time”.

Just sayin’……

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.

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:

•  There are 7B people on the planet.
• 2/3rds of them don’t have Internet yet
• 95% without smartphones
• Facebook only has 10% share
• There is an entire new generation that is using mobile tablets, as infants, that will learn, socialize and play completely differently than anyone born prior to them.

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.

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.

According to the article, from $33M in 2009, GroupOn’s revenue virtually exploded in 2010 to $750M. From an employee base of 120 in 30 cities in 2009, the company now has 4,000 employees across 565 cities. Holy cow!

As I read the article, it reminded me of the significant challenges companies must deal with when faced   with explosive growth.  We were faced with a similar challenge at Siebel Systems in 1998 as we  had doubled from 1997 and we were preparing to double revenue the following year (from $418M to $800M). As it turned out, we doubled in 1998 ($813M) and we doubled again in 1999 to $1.7B.

While this is a high quality problem to have, the fact is this type of growth places enormous stress on executives, managers and employees. And, it is a problem that few executives/managers have personally had any experience with.

One of the issues we faced at Siebel was not only with external hiring, but also ensuring that our executives/managers could scale with the business. For example, people who may have been great first line managers were becoming second and/or third line managers in the course of a single year. Not everyone had that experience nor was everyone capable of making that type of transition.

To his credit, Tom Siebel realized that in order to “keep the wheels from coming off” (his words), we needed to put in place a hiring program that would ensure that employee 5,000 was as capable as employee 100. Additionally, we needed to ensure that managers who whose organizations were exploding internally, weren’t collapsing under the weight of new/different responsibilities.

We knew it was an impossible challenge to make perfect external hires and transition every manager from one level to the next. Therefore, we needed to put in place a process that ensured when we made a mistake and hired the wrong person or we identified that a manager was failing that we had a mechanism to quickly identify and rectify the situation.

We needed  a plan to hire several thousand people in a single year. This meant that people who we had hired within the past year would likely be responsible for hiring additional people within the year. These would be people who themselves had limited experience with our “Core Values” and/or our operating principles.

The opportunity to do this wrong and hire a lot of people who would be detrimental to our business was extremely high. This would cost us a lot up front and even more downstream with our customers, partners and shareholders.

To address the the critical challenge of talent acquisition, we put in place a recruiting and training function across the company. Working with HR, each senior executive was assigned a dedicated recruiter who helped to draft the job roles/specifications that aligned with employees who were currently viewed as successsful in their role within their groups.

We held “Super Saturdays”, where we would bring in dozens of candidates and have them interview with current employees and managers in an intense day long process. By the end of the day, we accumulated all the comments on each candidate from each interviewer and assessed whether or not we wanted to make an offer. For those candidates who made it through the process, HR generated an offer letter and the hiring manager met with the candidate at the end of the day and personally made the offer. It was  a long and exhausting day but we were able to make many great hires within a single day without impacting the business during normal business hours.

Then, in each group certain managers who had tenure with the companyand the organization, were tasked with creating a training curriculum that helped to train new employees. For example, in the Alliance organization, we took the dozens of recent MBAs we had recruited earlier in the year and put them through an indepth program where they were trained on how Siebel created and managed its alliances.

We operated a “boot camp” where newly-minted alliance managers learned the general policies of  Siebel Systems (e.g. Core Values) along with organization-specific issues such as the structure of the Siebel Alliance Program, how to write an alliance business plan, and how to work with other functions within Siebel Systems. At the end of the month long training each manager was tested and certified.

Similar training was performed in Product Management, Sales, Engineering, etc.

Consequently, new employees were able to quickly assimilate into the company and understand our Core Values, our policies, learn who were the key people in different functions across the company, how to work across the organization and how to work within their own organization.

In addition, we knew that not every employee – new or otherwise – was going to work out and as important as it was to bring on great people, it was equally important to be able to identify and remove people who were unable to contribute as we needed. To address this very real issue, we created an objective process.

Every employee at Siebel had a set of quantifiable and written objectives which were captured in an internal system we developed. Today, there are products like Rypple that will help companies capture and track their objectives/commitments. As a result of this process, every six months we stacked ranked every employee across the organization and we eliminated the bottom 5-10% performers.

I don’t claim this was a perfect process by any stretch – I don’t believe everyone liked/agreed with this approach or that mistakes weren’t made from time to time where we terminated or kept the wrong employee – but overall this program helped to quickly identify and resolve employee situations that weren’t working out.

Between these two programs, we were able to “keep the wheels on” even in our hyper growth days.

I think these ideas can even apply to companies that only need to make a few hires. Many times interviews take a back seat to the business and are stretched out far longer than necessary. From what I have seen, most start up companies are poorly prepared to execute quickly in this area. Interviews can be disjointed with candidates left wondering who they need to interview with next or where they stand. Offer letters take days/weeks.  

For high tech companies, people are our most precious asset. So, just as it is critical to have a world class development process, having an outstanding hiring process is critical to success.

For those key hires that could make/break a company and who are likely to be highly desirable by your competitors, putting in place a world class hiring process so they join your team vs. someone else’s could be the difference between your company becoming the market leader or an also ran.

So…ask yourself “how good is our hiring process?” Even if you aren’t in hyper growth, are the wheels coming off?

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:

Individual Users

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.

Functional Managers

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.

Enterprise Executives

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…)

Other Stakeholders

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:

• Most of us recognize that the end users of ERP systems would be the best source for many UI requirements, at least for streamlining existing work. Unfortunately, these users face the conflict that they are under pressure to get their primary job done. This makes them hard to engage in the design process, even if you can navigate the organizational barriers necessary to reach them at all.

• Managers of functional areas in large corporations often have limited recent hands-on experience with day-to-day transactional work. They are rarely the best source of information on how to design systems for their staff, but often they don’t realize this. These managers also don’t want day to day productivity of their teams impacted by IT initiatives like providing feedback on the design of ERP systems. Nor do they have the time or motivation to get involved in IT projects like ERP deployments; they simply aren’t rewarded for doing so.

• IT departments in companies typically want to own the requirements for their ERP systems. Unless they have training and experience conducting user-centric research methods, they may not have the skills to do this work, at least at the level of sophistication found in consumer product companies. Making it worse, they are often discouraged by managers of functional areas when they do attempt to conduct any requirements analyses with end users. All too often, IT staff gets rewarded for introducing new technology, but not evaluated based on the impact this technology has on worker productivity. The net result is that corporate IT departments can become more of a barrier than a facilitator in any efforts to gather user feedback to refine ERP systems.

• IT consulting and professional services firms want to position themselves as experts to their customers. Often this means they fail to fully analyze the needs of each customer in detail, relying instead on their expertise. Rarely do they admit the need to conduct any type of user-centered requirements analysis. Doing so would require billing the customer for learning requirements for the ERP system, something they want to claim expertise in. Even if they do propose a detailed requirements analysis effort incorporating usability feedback, and have a staff skilled in doing so, this adds to the cost of the “scoping phase” of the engagement, which means it rarely gets approved. When requirements applicable across customers are discovered, this is often seen as an opportunity to create “custom solutions” for which each new customer is billed, rather than suggesting these enhancements to vendors.

• Sales people at ERP vendors are rarely motivated to assist in engaging the customer in any deep level of requirements discussions. They are primarily motivated to close each deal quickly. Any ongoing discussions with customers are typically viewed as conflicting with sales goals. Sales people may also want to avoid any possibility that customers perceive the current product as deficient, because it may impact short term sales efforts.

• Professional Services teams that are part of ERP vendor organizations are typically motivated on a project-by-project basis to gather requirements. Unfortunately, they may also be motivated to keep this information to themselves since this knowledge makes them more valuable. They may also develop “custom solutions” which they reuse unknown to the customer or the product teams.

• Support organizations often have plenty of insight into what is not working with deployed products. Rarely are they consulted before a customer actually deploys the product. Typically, they are rewarded for “closing” an issue as quickly as possible. This often results in them not having time to participate in requirements gathering efforts. When they do identify product improvements, they often struggle to get improvements implemented, as these are typically seen by product management as less strategic than new functionality driven by marketing considerations.

• Product management often has limited customer interaction due to the influence of the previously mentioned organizations. Even if they have significant domain knowledge, it often becomes outdated and or is limited to experience at a single company, which may or may not represent the market as a whole. All too often, product management is incented to focus on feature enhancements rather than usability and simplification. Another problem that occasionally arises is that product management may want to “own” requirement decisions so much that they fail to facilitate an ongoing dialog between user experience specialists or product teams and the customers and end users. Even when motivated to do the right things, they may struggle to overcome the organizational barriers within both their own company and those of any customers they do try to engage with directly.

• Development teams may not work closely with any of the above organizations. They are typically incented to deliver new functionality as quickly as possible and have little say in extending deadlines to address quality or user experience issues. In some cases they may not even work closely with product management, due to pressure to focus on completing development tasks on current projects. Rarely do they track objective metrics on UX related quality so tradeoffs go unnoticed at most companies.

• Another contributing factor is the lack of shared vision on user experience or other best practices within vendor organizations. Due to the size of ERP projects, many vendors have specialized product teams focused on each functional module, working with limited oversight. This means modules created by teams often fail to integrate well, creating usability issues that impair efficient collaboration among a customer’s functional divisions and even design problems at the enterprise level. It also results in a new twist on the “it’s not my department” problem when it comes to the UI design.

• When a product team member in a vendor organization, a user experience advocate in the partner or customer ecosystem, or an industry analyst tries to work with others to resolve user experience issues, the functional separation makes this difficult.

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.

When I originally started this blog, I did it as an experiment; I didn’t give a lot of thought about the long-term breadth of topics I wanted to cover beyond “Software as a Service” nor the blog’s overall positioning. I thought that if it garnered a few followers I would circle back and consider its “look and feel” and branding.

Well, after 2 years since starting there are now nearly 2,000 people who read this blog each month, so I consider it to be a successful experiment – especially given the fact I’m not some Hollywood celebrity such as Ashton Kucher who apparently has a ton of interesting and intelligent things to say/tweet. Consequently, I felt it was time to finally “circle back” and put some serious thought into branding/positioning/etc.

The first thing about my blog I wanted to change was the title, “SaaS and All Things Software”. I wanted to do this for several reasons. Over the past few years, SaaS has evolved into something a lot bigger – “Cloud Computing”. Cloud Computing includes DaaS, PaaS and IaaS as well as SaaS and I am involved in companies and technologies in all these areas and others. Second, I have many other comments I’d like to make that go beyond “SaaS and All Things Software” and I’d like the blog’s title/message to be broad enough to encompass those observations.

I chose the title, “Rolling Thunder” for two reasons. The first is that it ties into “Cloud Computing”; Thunder. Clouds. Duh. The second reason is that Rolling Thunder is a PR term meaning “continuous communications”. I thought that it fit nicely with the intent of the blog. So, that’s the rationale behind the name.

Based upon the recommendation from one of my partners at InterWest,  I decided to try and use crowdsourcing to come up with a new design. So, I signed up with Crowdspring. Crowdspring is one among a number of websites that features 10′s of thousands of designers (called “creatives”) who look for interesting projects (e.g. websites, blogs, stationery, logos, wedding themes, etc.) that are posted by ”non-creatives” (my term) like me.

After signing up, I created a project, described what I was looking for in a new blog design, and pointed the “creatives” to my existing blog for ideas. In the initial set up, I had to come up with an award amount for my design – it has to be at least $200. In this case, I chose $500 to make sure my project received enough attention.

In total, I recieved about 40 different designs to consider. I ended up selecting one design style from all the other entries. However, that was simply a design. I still had to have it converted into an actual WordPress Theme. This wasn’t within the designers skill sets so I took the design to the web programming firm we use (HyperArts) and had go through a few more design iterations as well as having them convert the design into an active WordPress theme.

Although the Crowdspring approach didn’t give me a “blog ready” result, had I gone the traditional route, I would have spent several thousand dollars in design fees and would have been restricted to just a single firm’s imagination and skills. With crowdsourcing, I had access to many designers and felt I received a lot of creative ideas that influenced the final design outcome.

I relied upon Crowdspring to handle all the financial details, etc. It made it relatively simple and straightforward. None of this would have been possible a few short years ago. Pretty amazing stuff. My only negative comment is that most of the designs submittted are simply repurposed stock art so you aren’t really getting anything “custom” — at least not for the $500 award I offered. But, you do get some creative uses/adaptations of stock art and for my purposes this worked fine.

With that, welcome to my “new and improved” blog. I look forward to interacting with all of you in 2011 and beyond on topics that include SaaS but will branch out to general observations on a variety of things I find interesting…and, hopefully, so will you.

For anyone who has run, is running, or plans to run a SaaS company, you quickly learn that the SaaS model is highly dependent upon two major apertures in its revenue generation funnel; the first is revenue in the top and the second is churn out the bottom.

It’s doesn’t take a degree in rocket science to understand why successful SaaS companies must keep the top aperture of the model as wide open as possible through lead generation and the to keep the aperture at the bottom as closed as possible. That’s why Churn Rate is such a critical performance indicator for SaaS companies and why I contend that just as there must be a group that wakes up every morning worried about that top aperture – revenue generation - there must be a corresponding group responsible for the bottom aperture – customer success.

I thought it might be beneficial to follow up that initial article with an interview of someone whose job it is to keep that bottom aperture closed. I decided to ask one of the best people in this role I know – Tracey Kaufman,  Senior Director, Customer Experience at Cloud9 Analytics -  her thoughts on what it takes to manage a customer success function for a SaaS company. Cloud9 is one of my portfolio companies focused on delivering Sales Forecasting applications, initially targeted at the Salesforce.com ecosystem. 

Tracey held a similar position in my OnDemand division at Siebel Systems and did a fantastic job there.  At Cloud9, she has kept churn rates in the low single digits on an annual basis so she knows what it takes to develop a customer success program that delivers positive results.

Q. Tracey, what would you describe is the role of Customer Success at a SaaS company?

A. The Customer Success or Customer Experience role – which is what we call it at Cloud9 Analytics – has multiple dimensions:

Customer success

• We are involved in the full customer lifecycle starting post-contract and continuing throughout their subscription period.
• We develop customer programs, processes and best practices including a deployment blueprint and tips for using the product.

Voice of the customer

• We are responsible for identifying and codifying the key components of customer success and communicating them cross-functionally to inform the product roadmap, sales and marketing messaging and services processes. 
• We collect customer feedback via interviews, focus groups and surveys.

Community development

• We must work cross-functionally to build a Community Portal that serves as a central repository for product information, promotes customer engagement and provides value-added resources.
• Work with Marketing to conduct customer events and Products to build a Customer Advisory Board

Executive visibility

• We provide the executive team with a Customer Experience dashboard summarizing the overall health of the customer base.  We develop key indicators to identify at-risk customers and have established a critical account management process.

Q. What are the key objectives of your position?

A. I’m responsible for driving customer loyalty and ensuring that our customers are satisfied and are realizing measurable value from our products and services.

Q. How are you measured?

A. We are measured as a percentage of referenceable customers, subscription renewals vs churn, customer satisfaction, product adoption and usage.

Q. What are the key issues you deal with on a daily basis?

 A. The biggest issue is trying to change the behavior of the sales organization. Despite industry data showing that implementing a dynamic pipeline management process informed by analytics results in higher close rates, increased sales velocity and improved forecast accuracy, sales reps don’t like entering data into CRM systems and sales managers are more comfortable using spreadsheets as opposed to an interactive analytics application.

Q. How do you work with your counterparts in your company?

 A. I’m fortunate to work at a customer-centric company with people who truly value customer input. In general, my colleagues look to me provide them with an assessment of the health of our customer base, identify customer reference candidates for sales and marketing efforts and serve as the voice of the customer to inform the product roadmap and customer-facing business processes.

Q. How do you work with your customers? Who do you work with?

 A. I engage with our customers at many levels of their organization.  My primary contact is our key stakeholder(s), who can be in Sales Management, Sales Ops, the Executive level and occasionally IT.  I work with the business champion to:

• Establish deployment objectives and success criteria and help them develop a plan to achieve those objectives.
• Conduct periodic health-check calls to review the status of their deployment. Based on the customer’s disposition, this may lead to moving them along a reference track or developing a set of remediation steps to address issues. 

 I handle product training as well and that provides me the opportunity to connect with all of the end users.  For a start-up company, this kind of hands-on interaction with the end user is a great source of product input and has been critical in developing a set of best practices.

Q. What are the warning signs that concern you with respect to customer churn?

A. The first warning sign is product usage.  We receive weekly usage reports that provide information on customer logins.  When I notice low usage, I contact the customer to review the status of their deployment in order to understand the obstacles to adoption.

Q. What do you do to anticipate and avoid customer churn?

 A. Engaging early in a customer’s deployment is critical. I’ve identified the key ingredients for customer success and work with our champions to ensure that they have the necessary people and processes in place.  For example, they need to be able to articulate a clear business problem to their end-users that deploying our product will solve. Additionally, since adopting a new software solution is typically a challenge for sales people, I work with our champion to integrate the use of our product into their existing sales management cadence and focus on the carrots instead of the sticks – namely, the ways that our product can deliver results for the things that matter to them – closing more deals, faster and improving their forecast accuracy.

Q. What is the most challenging part of your job?

 A. Our product is easy to deploy and both the purchase and rollout is typically managed by the business instead of IT.   While that is a key benefit, it also means that customers often don’t have a formal approach to the deployment as they would with a large scale enterprise software application.  For example, customers purchase the product because they realize that they have a relevant business problem, but haven’t established measurable success criteria or a set of baseline metrics that they can track. Additionally, success with any software product requires broad user adoption.  Too many people take the Field of Dreams, “if you build it they will come” approach, which doesn’t often work – especially with sales users.  Rather, the business champions need to proactively communicate a set of best practices including the what, when, how and most importantly why to encourage usage.

 Q. What is the best background for someone who is chartered with Customer Success?

A. Personality is more important than work background. To be successful in customer success, you need a customer-centric perspective, the courage of your convictions, the belief that “facts are our friends”, good listening and problem solving skills and enough gumption intermingled with interpersonal effectiveness skills to tell the Executive team things they don’t often want to hear. Thus said, the majority of customer success candidates I’ve interviewed for jobs at software companies come from a Customer Service, System Integration and Post-Sales Account Management background. From a work experience perspective, it’s important that the person has a deep understanding of what customer success means – both quantitatively and qualitatively for their business, has experience working cross-functionally and can effectively serve as the voice of the customer.