Thought Leader Interview
Bruce Cleveland has a knack for being in the right company at the right time. He was an original member of the Siebel executive team and prior to that had executive positions at Oracle and Apple. Not content to sit on his laurels, since 2006 Cleveland has been part of InterWest Partners. As a venture capitalist he is investing in software companies that share his vision of the future which includes SaaS and an emerging idea called revenue performance management of RPM which applies or embeds analytics into many aspects of front office automation. Embedding is the tricky part and it's not simply for show. Embedded analytics drive better decision making and lead to better operational outcomes. In this interview Cleveland discusses life after Siebel, RPM and his investments.
Denis Pombriant: Bruce, we’ve known each other since Siebel days when you were a senior vice president and I was a research VP at Aberdeen. What are some of the more significant changes in front office computing that you’ve seen in all that time?
Bruce Cleveland: Well, there are several, not the least of which is the rapid adoption of Software as a Service (SaaS) as the premier business model and form factor for front office computing. Clearly, we’ve seen an overhaul of the entire industry as it has converted to the SaaS business model over the past decade. And it’s pretty clear that this isn’t because SaaS is a better business model for vendors. In fact, the traditional software model where customers paid large amounts of cash up front and vendors weren’t necessarily responsible for the success of the application internally was a much better model for software vendors. SaaS, however, is a far better business model for the consumers of those applications. That’s because SaaS is far better suited to support the cadence of change in the business than traditional software delivery models. In the back office, changes happen much more slowly than the front office. For example, in the back office once I establish a purchase requisition policy, I can then publish that policy internally along with software and workflow that follows that policy and it stays relatively constant. In the front office, prices, deals, territories, competitors are changing all the time and at a comparatively rapid rate.
Front office applications that are delivered through a traditional model are tied to the cadence of IT and nearly always lag the needs business. The SaaS business model enables the front office to make modifications much more quickly so it can operate much more closely to the speed of business. I know Marc Benioff and Salesforce closely branded SaaS with “No Software;” if you go to a Dreamforce event, you still see this. However, I always felt that what really made Marc and Salesforce so successful with the SaaS model isn’t “No Software” — in fact, Salesforce has a lot of software and even promotes internal software development with Force.com, Database.com and now Ruby with their acquisition of Heroku. Instead, I believe that what really propelled Salesforce into the mainstream is that they were to first to free the sales organization from the “tyranny” of IT. Of course, it probably wouldn’t have been politically correct to have your brand associated with “No IT.” So that’s one of the big changes in this space over the last decade.
DP: When you were at Siebel, the company pioneered a lot of new ideas. I am thinking about the way you embedded analytics, the way you bought UpShot and got into SaaS. You also did a lot to integrate with SAP and other accounting systems. When you look at the industry today do you ever take stock of how many of your ideas have been adopted?
BC: I think Tom Siebel and Pat House — the founding team of Siebel — did a great job in defining what has now become the CRM market. And, many of their original ideas — captured in their books such as “Virtual Selling” and “CyberRules” — that may have seemed outlandish at the time are now de rigueur. For example, in 1997, I remember Tom delivering a keynote address at a large conference that featured the idea of a young couple searching for and buying a car over the Internet. Tom played a video showing a young couple (actors we hired) doing a web-wide search (Google didn’t exist at that point in time), finding a dealer and car, looking at a variety of options, colors, and subsequently submitting their order to buy it. I distinctly remember laughter pealing throughout the audience and hearing people say how ridiculous the video was — who would ever spend thousands of dollars for a product they had not physically touched? I also remember a couple people from the automotive industry coming up to me afterward asking me if they could have a copy of the video to take back to their management.
I am proud of the fact that Siebel was able to create the CRM market and I was a part of that. I’m also equally proud that others were able to build from there to create valuable applications that are enabling companies to compete far better than they did ten or fifteen years ago. These new companies, Siebel included, have enabled companies to compete globally and operate with much better insight than they ever could prior to the development of those applications.
DP: You are now a venture capitalist with some strong ideas about the next big thing. At least one of your ideas is about a new category you’ve labeled “Revenue Performance Management”. What is it in a nutshell and what drew you to this and what do you see ahead for revenue?
BC: Well, great question. Very simply, I believe Revenue Performance Management, or RPM, could be the next multi-billion dollar enterprise application software category. Revenue Performance Management (RPM) applications are targeted at the front office — primarily employees in customer facing positions such as sales, marketing, service and support. RPM applications are designed to enable these employees to make much better business decisions so they can optimize revenue.
To help make this more concrete, suppose you are a sales representative and you are asked to submit your opportunity forecast. Today, this is primarily done by you applying your best guess forecast, which relies upon your selective judgment and personal experience. This same subjective process is performed throughout the entire organization. As a result, the overall forecast is the weighted average of everyone’s best guess.
With RPM applications, the idea is to apply analytics and transactional/market data to help front office personnel make decisions that are more objectively based. Inside of companies, there are hundreds of subjective questions asked and answered every day: “Will your deal close?” “Should my marketing campaign target a particular market segment?” “What price should I charge this customer?” All of these questions, and more are answered for the most part through a very subjective decision-making process that relies almost exclusively upon the talent, skill and experience of the individual and/or their management chain. While you can never entirely eliminate subjective analysis from the process, RPM applications are emerging to help people and companies to address common front office issues more objectively and accurately, and helping them to optimize revenue.
DP: As a byproduct of that I’d bet there are more executives in every organization who can join the revenue conversation because that data exists.
BC: Absolutely. Without RPM, it’s like playing the telephone game; you know, where the question or answer becomes increasingly muted and transposed as it is related further down the line. RPM applications should help everyone up and down the management chain to feel much more confident that the answers they are seeking are rooted in objective data and analysis.
RPM applications should be able to help companies and employees optimize the revenue supply chain. The revenue supply chain consists of any function and/or person who is responsible for generating revenue. By definition, sales, marketing, service and support positions — the front office — are all participants in the revenue supply chain. Today, most companies manage their revenue supply chain primarily through best guess efforts, rather than empirical data, to drive their decision making process. I contend this is why companies typically miss targets and deliver suboptimal results.
DP: Sounds like you’ve been thinking about this for a while.
BC: You know, the original idea was part of my keynote at the Siebel’s final worldwide user event in October of 2005. At the time, we didn’t have a great name for it and I didn’t have it as well thought through as I do now, but I did describe some of the elements of RPM in my presentation and we actually did a demo of a mock RPM application.
At the time, the label we used was the “customer adaptive environment” — a terrible name — and it was going to be the next generation of applications we planned to develop. However, with the sale of Siebel to Oracle it became clear to me that Oracle had a different strategy to monetize its latest asset. So, I elected to move over to the investing side and pursue the opportunity of RPM as an investor. I believed this emerging market was a very big white space and could become a large new segment of the enterprise application software market. While it would be extremely difficult to replace Siebel or Salesforce or other large incumbent software providers, it would be fairly simple to walk into a company with this new kind of application, delivered as a service, that could coexist with those solutions.
So, that’s the direction I’ve taken as an investor; to find and invest in great new companies that fit into the RPM category. Take a company like Marketo for instance. They’ve got a great founding team in Phil Fernandez, Jon Miller, and Dave Morandi. They walked into our offices in 2006 and we had this instantaneous mind meld about next generation marketing automation. We talked about the idea of embedding analytics into applications and transforming the role of a Chief Marketing Officer from managing cost and brand centers to being in charge of a revenue center and held accountable for predicting out of period or future quarter revenue. That discussion led to one of the first companies positioning themselves within the revenue performance management market.
I think the success of Marketo demonstrates the value companies are deriving from RPM applications. Companies are willing to pay Marketo a lot more than $50 or $100/user/month per seat — the typical price/user/month for a CRM seat.
I did a market analysis to quantify the number of sales and marketing jobs there are. In the U.S. alone there are 26+ million positions with a sales or marketing title. If you only assume a $25/user/month, you get a market opportunity of 7+ billion dollars. And, we have already seen that companies are willing to spend much more than $25/user/month. That’s why I think this could be a large market.
DP: How many companies are you working with right now and what niches are they in? Are they all tightly clustered around the idea of revenue?
BC: Not every one of them is in the RPM space but currently, the investments I have in this space include: Marketo for marketing automation, Cloud 9 Analytics for sales forecasting, Signal Demand for price/margin optimization, and just recently I invested in Aria Systems, which is in the subscription billing space.
Some people might not think that billing is related to revenue performance but billing is definitely in the revenue supply chain. If you cannot create SKUs or special product bundles and get into market quickly or respond to competitive packaging and pricing, you’re at a significant disadvantage. If you can’t bill for your product, you’re not going to make much revenue. So I think of Aria as the link in the revenue supply chain between the front and back office..
Beyond RPM, another area I think is very interesting is enterprise collaboration. You’ve obviously heard Marc (Benioff) promote Chatter and there are other enterprise collaboration companies like Yammer and Jive. I think the ability to enable people in the enterprise to be more effective at communicating is a big idea so I invested in a company called CubeTree in October 2009 and SuccessFactors acquired the company in May 2010.
While revenue generation does take collaboration, I wouldn’t put CubeTree in the RPM category. It’s not an analytically-based application. It’s not primarily targeting front office employees (it touches everyone). It doesn’t specifically help companies to optimize revenue. So, it’s not an RPM application.
DP: I suppose if you had a very general view of RPM you could say that anything that impedes the production of revenue is in the prevue of RPM.
BC: You could define the category broadly enough where everything might fit in the category but in order for it to be an RPM application, it has to have some very specific capabilities. For instance, it has to be an analytically-based product, it can’t be a pure transactional system; it has to be SaaS based because to operate at the pace of business and not the pace of IT, it has to be focused on revenue attainment, not cost containment. The revenue supply chain is all about improving or maximizing revenue not about reducing internal costs for a company. Lastly, RPM applications are applications, not tools. BI tools for example, can give you insight and information. But they aren’t an application — they don’t let you perform a process like running a marketing campaign or managing the sales forecasting process. And, BI is typically retrospective; it tells you what happened not what’s likely to happen.
DP: If revenue is on the agenda again what does it say about the economy at large. Are things getting better?
BC: I think the economy has been getting better for a while now but the improvement is only now beginning to generate jobs. We have seen corporate profits up and a lot of cash on company balance sheets. That’s going to force companies to innovate through acquisition and R & D. Public companies will be compelled by shareholders to put up not just better margins but better top line growth or revenue.
So, I think we will start seeing jobs added to the economy but these jobs may not be the same as those that were lost. Companies are going to make sure they’re getting much higher productivity rates. If the last ten years have taught us anything it’s that we need to extract the maximum value from every dollar invested.
With respect to my RPM companies, we didn’t see any real slowdown because even in a recession, companies need products that can help generate revenue — especially if they can help you do it with less staff. And, each of my companies have very good value propositions and are SaaS-based so they don’t require large, upfront capital investments. With the recession behind us, what we’re seeing now is strong growth. All of my portfolio companies had good fourth quarters. We’re not seeing any hesitation from new customers signing larger deals; the average sale price has grown in every company and the length of contracts has been longer. My portfolio companies are all hiring and they wouldn’t be hiring if they didn’t think there was demand and/or they weren’t growing. So transactions are larger, pipelines are bigger. I actually think it would be better if we don’t see hyper-growth in the overall economy but I’m pretty confident we will see good to very good growth for the next couple of years at least.
DP: When you look at the front office marketplace we have solutions in many different niches under the traditional headings of sales, marketing, service and support. There’s still a lot of growth ahead but where do you think the CRM space is in its evolution? Are new niches opening up at the same rate they were five or ten years ago or has the environment slowed down and if so why?
BC: Well, the last study that I was intimately involved in that dealt with this subject was in 2005 at Siebel. That study said that despite all of our growth (Siebel) and the fast pace of growth at companies like Salesforce that the vast majority of CRM was still custom applications. When we looked at the market, the packaged CRM application market was only ten to fifteen percent penetrated.
So even with the great growth of Salesforce, Oracle/Siebel, SugarCRM — take your pick of the CRM companies — I think there’s still a lot of potential dollars still to be generated from the transactional side. I don’t think there’s room for a lot of new entrants though. I don’t think we’ll see many new CRM companies being formed but I do think we’ll see companies build on the CRM platforms that exist today. We’ll see more verticalization and specialization occur and we’ll see some RPM-oriented solutions. That said, I think transactional CRM is rapidly becoming commoditized. Transactional CRM applications are not generating as much revenue per seat as analytically-based RPM applications. That’s why my money is on the emerging RPM market..
DP: What else is on the horizon that we should know about?
BC: Like everyone else, I think mobile computing is going to spawn new applications and infrastructure opportunities. While there are many process-oriented jobs where we are paid to sit behind a computer and use an application to perform our job, the vast majority of us have jobs that require us to be mobile. During the course of these jobs, we don’t do a lot of process work; instead we perform random acts of conversation and other forms of human interaction. It’s hard to build applications that support this type of activity! But, I think that is both the challenge and the opportunity. Something like 180 million tablets are predicted to be sold this year and that will double or triple in 2012. That’s a very exciting area to go after. Much as you might think that all the challenges in IT have been solved, the mobile platform will require us to rethink and re-architect our entire computational infrastructure. I think we’ve just started in this area; we are just in the experimental phase with location sensing, social, etc. Mobile will demand a new set of consumer and enterprise applications that we haven’t even thought of. This will create new companies that will have an impact and valuations similar to or greater than Google, Facebook and other companies that emerged over the past decade. So that’s what gets me up in the morning.
DP: Sounds like you’re having a ton of fun.
BC: I am.
DP: Thanks for your time.
BC: My pleasure.
