ServiceNow CEO trash talks the legacy players and hits out at profitability concerns

When ServiceNow's CEO Frank Slootman hit the stage for the opening keynote of his Knowledge14 conference in San Francisco this week, he seemed rather relaxed, understated and amicable for a chief exec. This is my first experience with the guy so I had no preconceptions, but my first impression was that he didn't seem as brash as some of the other tech giant CEOs out there. I figured this was maybe because ServiceNow isn't quite rolling with the big boys just yet and doesn't need to shout so loud. But oh how quickly this changed when it got to the press and analyst Q&A session....

But more on that in a minute. To sum up what ServiceNow is about (hugely digesting here), it is pretty much a pure play software-as-a-service company that offers enterprises a service management platform to organise workflows within their organisation. However, ServiceNow is trying to move away from being just an IT Service Management company, which is fairly limited in scope and not particularly exciting, and is looking to become the backbone of all departments and drive the platform out of IT and into all areas of the business.

As Slootman said this morning:

“Our big goal is to really drive IT service management to become enterprise service management. That is strategically what we need to accomplish. It needs to be fully embraced, we don't want to become ITSM plus some apps here and there. We need the CIO to say that the enterprise needs this service management platform for all these applications." 

The idea behind this being that if all of your company's processes are organised within one service platform, there is good opportunity to streamline activities and get clear visibility into what is happening across the organisation. And the idea seems to be gaining traction. Slootman recently outlined the cloud company's customer successes upon announcing ServiceNow's Q1 results. He said:

“Our installed base is now at 2195 accounts with 426 Global 2000 customers. Global 2000 accounts added in the quarter include Bombardier, BP, Société Générale, Thomson Reuters, Visa and Wal-Mart. We continue to see deeper and broader penetration of the large enterprise. Our average annual deal size for both new customers and upsells increased year-over-year for the third consecutive quarter.

“We booked a record nine new transactions with annual contract value in excess of $1 million. The quarter also witnessed the two largest annual transactions in our company’s history, one of which had a total contract value in excess of $10 million. These increases are attributed to customers deploying as an enterprise service management platform, while IT service management usually as the catalyst for transactions. The largest transactions are driven by a much broader enterprise scope.”

However, despite all this and despite a 62% increase in revenues year-on-year, ServiceNow reported a loss of $43.3 million, or 30 cents per share. The lack of profitability for cloud companies that rely on a subscription model isn't uncommon, with Salesforce reporting similar outcomes. However, when a European journalist at the event this week asked Slootman when we could expect ServiceNow to become profitable, we finally saw some flare from the Chief Exec.

Mindless Drivel

I don't know the name of the journalist that asked the question, but bravo to him for sparking the response that it got from Slootman. The CEO immediately said that he isn't out to please a few guys on Wall Street and that people need to learn the different between accounting and economics – where, according to him, accounting is the “bastardisation of economics”. Slootman argues, quite convincingly, that ServiceNow isn't profitable at the moment because he is investing heavily in its growth – however, he said that it is still cash rich.

“The reality is is that this company is inherently extremely profitable, if you look at cash, you look at bookings, you look at

things like that. We are choosing to reinvest that at a very hard rate, rather than stick it in the bank. But I could overnight make this company so profitable that it would blow your mind. I'm choosing not to do this. 

“We are growing at a rate and at a scale that has rarely been seen before in the history of enterprise tech, so saying we are not profitable is just repeating mindless drivel. What good is it doing to stick money in the bank and let it sit there and put on 0.1% interest, when we can invest it in a really great enterprise?

“You want to own a shit stock? Go and buy BMC. You want to own a growth company? This is the one. But we are going to invest every dollar that we know how to invest because we have such a great opportunity. If you don't want to be a part of the journey you can go and buy HP, or IBM, see how exciting that is for you. I'm not going to prematurely force this company into profitability just to please some people on Wall Street.”

Slootman also said that he doesn't see the legacy players as competition – he was particularly vitriol about BMC, which has traditionally dominated this space. BMC, such as is typical for vendors at these big conferences, currently has some reps standing outside the ServiceNow event on the streets of San Francisco, all dressed in blue and carrying out some competitive marketing. This caused Slootman great amusement. He said:

“The legacy companies, BMC and HP, are what we replace half the time. They're not competing for new business, the customers that we have did not view BMC as an alternative. It's what we replaced. They simply don't have the product to compete in the modern era – it's Soviet era software. We have been dismantling their business left, right and centre. 

“In the history of technology industries, the legacy guys aren't the ones to be afraid of. The ones to be afraid of are the people we don't know about. Just like ServiceNow, we came out of nowhere – BMC were worried about HP. But we have taken the whole company down, so you have to be very careful before you start patronising the new entrants.

“BMC is the last of my worries, I see them out their in their blue shirts and its the most pathetic thing I have ever seen. It's the equivalent to handing out cigarettes out at an ex-smoking conference. They are out there handing out blue balls - have a little bit of respect for yourself. Just go away." 

Interestingly, when someone asked Slootman how long it would take for ServiceNow to become a legacy player, which will then have to be wary of new entrants, he said:

“It will never happen on my watch, I mean never.”

Acquisitions ahead? 

Chief Strategy Officer, Dave Wright, also headed up a press and analyst Q&A this morning at the conference, where I asked him what challenges lay ahead for ServiceNow. Alongside saying that managing growth would be difficult (shocker), Wright also said that 'if' ServiceNow were to acquire some companies in the future to fill some gaps in its portfolio, integrating them wouldn't be so easy. This is because ServiceNow takes an approach that any company bought has to be brought onto the ServiceNow platform, thus requiring some dismantling.

He said:

“In order for us to move into every area that we want to, potentially we need to look at acquisitions. But when we look at a company to buy, that company will always have a product stack – it will have a user interface, it will have an app layer, it will have a persistence layer. 

“What we have to do is throw most of that away. We don't want the persistence layer because it needs to sit on our platform to have that unified platform story, we don't want the user interface because we want to have that common feel. So it makes the challenge of being able to value a company based on how much work you are going to have to do to rewrite and integrate.”

But what about those gaps? Where can we expect them to be filled? Wright said that there were a number of areas that ServiceNow needed to improve upon, but wouldn't comment on whether this was via a build approach or via acquisition. But he did note that we could expect to see improvements to its IT operations management offering, its application lifecycle offering (to support the rise in dev/ops), as well as the business management side – where he would like to be able to help companies cost precisely how much it is costing them when a service is down via an easy to use dashboard.

Verdict

• As much as the trash talking is to be expected, Slootman has a point. He's not in a position where he has to be worried about the likes of HP, IBM and BMC, they are the ones that are going to be anxious about this new breed of vendor rising the ranks. That being said, he shouldn't be complacent. However, from his Q&A today it seems that ServiceNow has a clear strategy for the next 12-24 months and if it is successful in its mission of branching out of IT and becoming the service platform for the enterprise, then ServiceNow has a good chance of becoming one of the next cloud giants.
• On that note, I've spoken to a number of large customers today (CERN, Bupa, NIST) and every single one has bought into Slootman's vision of an enterprise-wide service platform. This tells me that the company is on to something good and it is heading in the right direction.