Growth vs. Efficiency in the "Cloud"

http://www.mckinsey.com/industries/high-tech/our-insights/grow-fast-or-die-slow

Executives leading cloud computing companies must deliver sustained growth, while also driving high levels of sales efficiency. Growth is defined primarily in terms of annual software revenue and/or recurring software revenue. Sales efficiency is the ratio of recurring software revenue produced from $1 of sales and marketing expense. The attached McKinsey article demonstrates why investors demand maximum growth, as the fastest growers command the highest premiums and hold the best chances of sustainable success. In their study of 3000 software companies operating between 1980 and 2012, only 28% achieved $100M in annual revenues and 3% reached a scale of $1 Billion+ in annual revenues. Companies growing > 60% at $100M of annual turnover were eight times as likely to achieve $1Billion in annual revenues than those growing less than 20%. So growth is good -- We can't argue with the data. However, the reality is that every company has finite amounts of cash, and when the markets are more cautious (as we have witnessed in recent times), sales efficiency is emphasized as well as growth. Growing at "all costs", for example, is unacceptable especially for private companies where access to capital is more limited than at larger, public companies. As such, VCs are not writing as many huge checks now, as they have several years ago. We have seen these cycles before in the tech space, where bubbles grow, then burst (or decline) only to repeat again. So what have we learned? First, prudent cash management and sales efficiency always matter no matter how hot the markets may be. At some point, someone will care about how well the business is being run -- Really:). Second, we find that companies who have figured out how to generate a lower cost, high volume distribution model for smaller tier customers, while simultaneously scaling an enterprise business for mid to larger sized customers are among an elite minority, and are often those who made it to the billion dollar a year club. Think Symantec, Adobe, Salesforce.com, and Microsoft, for example, among the "older" generation of cloud computing pioneers. I admire the way Symantec, where I used to work, and Microsoft leverage global channels to drive lower cost and highly scalable distribution. These companies also pioneered the "self service" model, where many of their key products can be discovered, tried, and purchased online with no human intervention. These "E-Commerce" users can then grow within an organisation, even a large one, where the central procurement office then asks to consolidate the purchase into a larger, enterprise order. Forging along similar paths as their older predecessors, we see newer players such as Atlassian, Twilio, and other cloud software companies developing highly efficient distribution models that still enable hyper growth. I have this vivid memory from 2006, where I attended a management offsite with the top leaders at Symantec thinking: Norton Anti-Virus can be sold to an individual consumer, a tiny start up, a mid-sized bank, or IBM. We are selling this product through multiple channels, all of which are billions each in revenue and highly profitable: Self-service e-commerce for consumers; high volume inside sales for SMB and corporate segments; field sales for B2B mid and large enterprises; public sector; and virtually any entity with a computing device. Lessons-learned: (1) Each distribution channel needs to be measured against industry benchmarks for growth, sales efficiency, revenue yield, margins, customer satisfaction (churn, NPS); and employee performance (2) Different geographies may be better suited for one distribution model vs. another, e.g. US Federal Government and Japanese Enterprise segments tend to favour indirect selling motions where partners play the role of "prime"; High tech, global finance, and large retailers often want direct relationships with their key vendors to maintain control or drive process differentiation. (3) Self-service is key to promote your top products in the marketplace not only for SMB clients but also for "practitioners" or the professionals working in larger organisations, e.g. the developer, financial analyst, or HR professional in a F500 company. Even before the days of social media, the cloud companies with engaging, easy-to-implement, easy-to-use products were able to win over small user groups and then grow that base exponentially via word of mouth, performance marketing, and traditional sales & marketing methods. In yet another Symantec example, I recall the joy that my team and I had when the CIO announced that we would be switching from Siebel to Salesforce as our enterprise CRM. Siebel was a complex product, feature rich but harder to use. SFDC was intuitive and easy to use. For example, when I joined Demandware as head of sales, I simply logged into SFDC with no training and was immediately able to run forecasts, drill into opportunities, and know what's going on in the business. In summarising these lessons-learned, we should ask: Do we have a clear strategy to grow fast with great efficiency? Do we have a large addressable market that can be engaged with a self-service, "E-Commerce" model? Do we have vertical and geographic segments aligned with the appropriate go-to-market models (e.g. direct vs. indirect channels; inside vs. field sales)? Have we aligned this GTM strategy to a detailed operating plan, that can be measured, monitored, and adjusted, across the exec team and board? If the answer to any of these questions is "no" or "maybe", you are in good company. We cloud computing leaders struggle on a daily basis to balance growth vs. sales efficiency. However, if we can leverage these lessons-learned and get some of these strategies built, along with assembling a capable and inspired team to implement them, we can increase our odds of becoming that rarest of species in cloud computing: the $ Billion+ of annual revenue, sustainable enterprise.

Cheers