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| Home - CEO Spotlight - Sep 04 Issue |
CEO Spotlight: Joe Davis, Coremetrics
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It didn’t hurt that Coremetrics was a hot company, growing rapidly as an ASP. As a CEO, a hosted software business has some big advantages. The beauty of this model is that it can sell the same product to both large and small companies. I am not forced to choose who I build my product for. We sell to big and small companies and they pay based on how much traffic they get at their web site. The implementation fees are low when compared to enterprise software and the deals are easier to close because you’re not asking companies to write a $2 million check upfront. They know that if they don’t like the service they can turn it off and go to another vendor which keeps the pressure on us to maintain customer satisfaction. My favorite part of managing an ASP is the predictability of revenue. Almost all of our revenue comes from recurring monthly services fees, so our revenues do not make big up or down swings each quarter because of what deals did or didn’t close. Fortunately my sales team has easily exceeded their goals for every quarter that I have been here, but as an ASP this has little impact on an individual quarter’s P&L. Even if we sign some very large deal we don’t recognize any revenue until the implementation is complete and even then we do it a month at a time, so the impact of each deal is truly felt over the lifetime of the contract not the quarter it was closed. We balance our costs the same way. The sales reps are only paid as the customer pays his monthly bills. All of this adds up to a business that has much smoother revenue and expense lines than I am used to. My visibility to how any quarter is going to turn out is pretty good even at the beginning of the quarter. Compare this to Enterprise software where I sometimes didn’t have a good idea of how the quarter was going to turn out even if there was less than a week left in the quarter. One or two deals always had the ability to make you or break you. Not anymore.
Angel Mehta: What were some of the lessons you learned about how to manage at Nortel?
Joe Davis: Nortel was certainly a learning experience, most of it around the challenges of doing acquisitions. They purchased Clarify for several billion dollars and yet I couldn’t find anybody at a senior level inside Nortel that could tell me why. This was a hardware manufacturer selling networking hardware and optical gear who buys a CRM software company. These are just such different businesses and the challenges of trying to make it work at times seemed insurmountable.
For example, we had issues with compensation models. They comp’ed their sales people on revenue. Pretty standard stuff. The problem was trying to get sales rep to include Clarify in a hardware deal under this compensation scheme. The large optical deals might be a large as a few billion dollars. Adding Clarify for maybe $2 million dollars was not worth their time. It was less than the sales tax. The sales guys didn’t want to spend time selling our software because it could complicate the deal, and there was next to no money for them in it because it’s practically invisible on the price sheet. To make this work we eventually had to change their comp models to pay for the software part of a deal on margin instead of revenue. This made sense because the margin on that multi-billion dollar optical deal is pretty thin, but the margin on a million dollar software deal is really good. We changed the model and all of a sudden we had the sales people interested and saying, hey, we’re driving a billion dollars optical, but let’s talk about adding in two million dollars on Clarify because we could make a lot more money on this deal. This was just one example of how hard it was to make Clarify work inside of Nortel.
To this day I still don’t understand why this acquisition happened. To me it seemed that Nortel was a company that lost its bearing, not because it was faltering, but because of how well the business was doing. They were making a ton of money, their stock was shooting up like a rocket and they wanted to keep the growth up while taking advantage of an inflated stock. So they started buying companies at wild valuations without always understanding what they were getting, and in the case of Clarify, without a real plan for how they were going to drive the business forward. The lesson I learned from this time was how hard it is to make an acquisition work. Before you move forward you better have a clear understanding of why you are doing it, how you are going to make it work, and whether it is worth the all the time you will have to spend on it that you will not be spending running the rest of your business.
Angel Mehta: Running PeopleSoft CRM must have given you tremendous visibility into the CRM segment as a whole. Is there any growth left in that category?
Joe Davis: Yes. There are still a huge number of customers that either have not purchased significant CRM product or have early generation stuff and are looking to move forward. Clarify had a tremendous installed base of clients on client server and so there’s an opportunity whenever those customers are looking at architectural change. This is the challenge for Siebel as well, as they compete with PeopleSoft with its pure web based solution. Siebel 6 is client-server and 7 is web based, and any client looking to move from Siebel 6 to 7 or 8 realizes they have to re-implement the software completely, which is going to cost them almost as much as the original implementation cost… for a lot of these big implementations, the cost of rolling out the product was higher than the software price itself. So if it costs millions of dollars to upgrade from Siebel 6 to Siebel 7, for example, companies are going to look at whether there are other vendors who might have better offerings. That’s when someone like Salesforce.com can step in and say, “we have an alternative that will cost you a lot less.”
Marketing automation, I think, is still a huge untapped market. We’ve talked about it for years but very few companies do a very good job in terms of doing marketing campaigns. Part of it is the technology has been constantly evolving. As analytics get better, as you start to collect more data, as you find better ways to communicate with clients and you build dialogue as opposed to just emails. That market’s still has a lot of growth there. The challenge is making sure people figure out how to make some money off of it for the customers. It isn’t going to be the boom time like it was six years ago, but you’re still going to see 20-25% growth in CRM for another couple of years at least. We see this as a huge opportunity for Coremetrics. We sell a series of marketing and merchandising applications that are built on top of the data we have collected. These applications are one of the things driving our revenue growth, and we have several more of them in development. The difference between what we are doing and the Marketing Automation vendors is that we are not trying to develop a broad based marketing solution that can be customized to meet specific needs. We are delivering a series of point solutions for specific challenges faced by marketers and merchandisers. Need to target email campaigns based on buyer behavior? Our LIVEmail application directly links our customer profiles directly into the database of your outsourced email vendor. Our goal is to have 15-20 of these applications available over the next couple of years. Some clients will use 3 or 4, so will use ten. We are already successful at selling these and it demonstrates that there is plenty of opportunity delivering marketing solutions, and the opportunity will only get bigger as online marketing spend continues to grow.
Angel Mehta: So what advice would you have for early stage CEO’s about competing with PeopleSoft, or other large application vendors?
Joe Davis: You’ve got to be niche focused. You can’t compete against the big ERP vendors with broad solution, so you’ve to find a way to narrow it. So it’s got to be on a very specific piece of functionality, preferably unique to a vertical. Sometimes, you can survive in a market because the market isn’t attractive enough for a market leader like PeopleSoft or Siebel or Oracle or SAP to go after. The challenge in that case is growth. You can have a very unique vertical focus, but can you grow the business big enough to have a liquidity event by selling the company or getting to an IPO?
Angel Mehta: Is it even worth it to do an IPO now for smaller companies given the cost and hassles associated with Sarbanes-Oxley?
Joe Davis: I think a lot of people who haven’t been through an IPO look at it as a Holy Grail – as the best kind of liquidity event. In truth, it’s only a liquidity event for the major investors. From the employees’ perspective, everything is locked up and there’s not a lot you can do. So you’ve to make sure the company continues to grow and keep the stock price up, while taking care of the regulatory hassles. It’s very easy to lose focus on the business trying to keep up with the challenges of being publicly traded. So for a lot of companies it doesn’t make sense. A lot of companies would be better off selling if they can get the right kind of price point. Unfortunately, there’s not as many buyers as there used to be because there is not as much capital to throw out there. You’re starting to see more consolidation going on. Now what you see is a few different private companies being pushed together into a larger revenue number so that they can get closer to a liquidity event.
I’ll also tell you, a few months ago, I saw companies with pretty questionable numbers filing for IPO. If we somehow go back to a world of people filing to go public showing losses, burning cash, but showing two or three quarters of very fast growth, that’s going to be terrible because investors are going to get burned all over again. One of my competitors just filed to go public a few months ago and they were barely breaking even. There were not able to demonstrate multiple quarters of growth. Does that make any sense? It may from the perspective of a company investor who just wants to cash out quickly, but do you really think they’re going to get the right price, get out there, and be able to sustain that and not sour public investors on IPOs. That kind of stuff scares me. It makes no sense whatsoever.
Angel Mehta: So as a closing question, let me ask you about leadership. Tell me, is there such a thing as CEO DNA and how do you define it? If you were hiring a CEO do you have a preference in terms of somebody coming from a sales, marketing, and finance or tech background?
Joe Davis: That is the million-dollar question. I don’t think background matters, but it helps if you have work in multiple functions. It allows you to look at things through a set of lenses instead of the one you have always used. I think the most important thing a CEO has to have is a willingness to make decisions. This sounds pretty simple but it’s amazing how few people, even at senior levels in major corporations, don’t like to do that. They push it off, they hesitate, they do constant analysis. Making a decision is sticking your neck out. There are always easy decisions, but anybody can make those. It’s very rare that important decisions are obvious. Most of the time it’s 50-50 as to what’s the right answer, and as a leader, as a CEO in particular, you need to be willing to say we’re going with option A and we’ll just find a way to make it work, or deal with the consequences. Very few people have the guts to do that.
Joe Davis is President and CEO of Coremetrics. Joe is responsible for leading the company’s overall business strategy and guiding day-to-day operations. Prior to joining Coremetrics, Joe served as the group vice president and general manager of the CRM division at PeopleSoft. Joe turned the CRM division into the fastest growing product line within the company and led two exceptionally successful product launches. For article feedback, you can contact Joe at: jdavis@coremetrics.com.
Angel Mehta is Managing Director at Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net
 
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