Posts Tagged ‘Taleo’

I Hope I am Wrong

January 3, 2012

First entry of the New Year. Typically, these things are bouncy and optimistic. This time of year, everyone has that “clean desk” mentality. Anything is possible. Unfortunately, I am just not feeling it as the technology sector enters into 2012 In fact, I have a foreboding feeling inside.

The Potential of 2011

Way back in 2009 and 2010, when many sectors were reeling from the global downturn, the tech industry was navigating the stormy seas rather well. Yes, product revenues were down. But service revenues were holding and profits were actually increasing. By the beginning of 2011, product revenues were once again growing and it appeared the tech industry was poised for a wonderful year. But it never came to be.

  he Realities of 2011

By the time we took the Q3 2011 snapshot of the TSIA Service 50, it was clear the tech industry was not enjoying the best of years.  Every quarter, we compare service margins, product margins, and operating incomes from the same quarter the previous year. The graph below from the Q3 snapshot documents a very humdrum 2011 for the tech companies in the index.

More specifically, some of the market leaders demonstrated chinks in their financial armor:


Cisco limped through 2011. Their own analysis in their most recent 10-Q is not very encouraging:

Gross Margin

In the first quarter of fiscal 2012, our gross margin percentage decreased by approximately 1.6 percentage points, as compared with the first quarter of fiscal 2011. Within this total gross margin change, product gross margin declined by 2.5 percentage points, while service gross margin increased by 1.5 percentage points. The decrease in our product gross margin percentage was a result of higher sales discounts and unfavorable product pricing, and product mix shifts. Partially offsetting these decreases in product gross margin were lower overall manufacturing costs, higher shipment volume, and lower amortization expense from purchased intangible assets. The increase in our service gross margin was due to increased volume, partially offset primarily by increased costs and to a lesser degree, unfavorable mix impacts.

In other words, Cisco is confirming a very troubling trend:

Product shipments are trending higher, manufacturing costs are trending lower, BUT product margins are trending lower due to increased discounting.


Oracle ended 2011 with a financial groan, as documented in this Wall Street Journal article:

 Piper Jaffray wrote that Oracle’s Q2 results illustrate a “clearly more sluggish spending environment.” They predicted “continued unexciting growth” over the next two quarters.

The Realities of 2012

The above data is all old news. Right? It’s the New Year! Yes, it is a new year, but I do not see tech shaking this funk anytime soon. In fact, I feel it will get tougher in 2012 for the legacy providers. Even if the global economy does not falter, the financial models for tech companies will struggle in 2012. Why? Because the three most important plays in the tech company playbook don’t score easy points anymore.

Old Play #1: Next Generation Product Release

When margins start to lag, tech companies look for that next hot product release that will reinvigorate pricing points and margins. The margins on new tech products are commoditizing at alarming speeds. Look at everything from the price of an Ethernet port to the price of a tablet computer for validation of this reality.

Old Play #2: Acquire Revenue and Margin 

Legacy tech companies with lots of cash on hand love to run this play. Oracle, obviously, has been very proficient at this play as pointed out in the Wall Street article:

 But Piper Jaffray saw a silver lining in Oracle’s ability to “acquire companies with 10%-20% operating margins, strip out costs, and rapidly realize 40% operating margins for the acquisition targets”

On Oct. 24 Oracle said it would purchase cloud customer service company RightNow Technologies for $1.5 billion.

“As such, we remain optimistic about Oracle’s aggressive acquisition strategy, which we describe as an ‘earnings arbitrage’.”

Here is the rub: the up and coming stars in tech are not printing cash. Let’s say SAP decided to purchase Taleo to counter the Oracle purchase of Right Now. In their most recent 10-Q, Taleo posted a loss. What if Oracle decided to gobble up  Salesforce, which has been around for over decade, continues to lose money. I am not convinced that Oracle could purchase salesforce, strip out costs, and have a new 40% margin engine. The SaaS model is simply not yet performing at that financial level.

Old Play #3: Cut Costs

Tech companies learned from the largess of the dot com era. Over the past decade, they have become masters of cost control. Which is why there is very little upside left in this play. Unless, of course, tech companies start requiring their employees to travel “cargo class” on business trips.


Adversity Creates Opportunity

Now that I have thoroughly depressed all of my tech industry peeps, let me offer a word of encouragement. Even though I believe 2012 will be a tough year for many tech companies, I also believe 2012 will be a year of business model innovations. I promise to carry this optimism forward in my next post by commenting on some of the wonderful bright spots I see in the industry.


Last But Not Least

October 26, 2011

The last day of TSW! And still, we are cramming in great presentations.

Yesterday we saw a killer presentation by Guy Gauvin of Taleo. Guy showed how Taleo is already living and succeeding by the new rules of tech.

Today, Maria Martinez, the executive in charge of the “Customer’s for Life” organization within will be sharing the mission and tactics of her organization. Clearly, salesforce is already living and dying by the rules of Consumption Economics.

After the keynote, we have multiple breakouts scheduled. I will be hosting one that overviews our brand new PS ODP offering. TSIA members now have the ability to engage TSIA to audit and diagnose the maturity of over 200 processes related to executing a PS business. We launched the pilot for this program at the beginning of this year. The PS organizations from five TSIA members have participated, including , HP Software Services, Schlumberger, Ericsson, Microsoft, and EMC.

In my breakout today, I will overview how the PS ODP works and discuss some of the processes we evaluate during audits. For any PS organization looking for a mechanism to improve performance or align global processes, I recommend you stop in for the overview.

Thanks to the TSIA team and the TSIA members for another outstanding industry conference.

And have fun launching those trojan horses…

The SaaS Business Model

September 18, 2011

In the recent Cloud 20 webcast I hosted, we discussed the topic of the financial business model that SaaS providers will mature into. Right now, we know that SaaS providers that are public do not have business models that are as attractive as the business models of successful license based software companies. In the TSIA Service 50 index, we track the public data of many of the leading established license based software companies. In the graph below, we compare the business models of SaaS companies in the Cloud 20 to the average of business models of software companies in The Service 50:

I have made the above observation in multiple forums over the past two years. There is nothing quite as special as the profitability of a mature license based software company. And to date, SaaS companies have not proven they can be anywhere near that special. But let’s move the conversation one step forward.

The Target SaaS Business Model

Right now, everyone I speak to regarding the SaaS business model believes it is still maturing. “Hey, most of these SaaS providers are in high growth mode as they grab market share. The mature business model will emerge after the land grabs.” OK, I can buy into that assertion. So as SaaS becomes a more and more popular mode for consuming software, how will these SaaS business models mature? We know that a “healthy” enterprise software company generates gross margins north of 80%, spends less than 40% on Sales, Marketing, and G&A, 15% on R&D, and generates a profit north of 20%. What will a “healthy” SaaS business mode look like? The image below shows the actual business models of some of the SaaS companies we track in the Cloud 20 and places them next to a hypothetical target business model for successful, mature SaaS companies.

As the image shows, even large SaaS provides like salesforce have a long way to go before they approach a business model that looks even remotely interesting from a profitability perspective.

The Levers of the SaaS Business Model

In our recent webcast on The Cloud 20, I asked the attendees where the greatest opportunity lies for SaaS providers to improve the performance of their business models. Will they be able to reduce the
percentage they spend on R&D? Will sales and marketing expenses trend smaller as brands become larger? Or perhaps G&A will reduce as a percentage of revenues as these companies grow. The audience was very clear in their response. They believe the greatest opportunity for SaaS providers to improve the SaaS business model is to improve the margin on subscriptions. That makes good sense. Except, a majority of the audience also believed that average subscription prices for SaaS offerings will trend lower, not higher, over time. This means the entire SaaS business model hinges on the volume of incremental subscribers outpacing both the price pressures on subscriptions and the cost to serve more and more diverse customer needs. This may indeed be the scenario that plays out for SaaS. However, that is not how it has played out in other IT markets. Think PCs. As the capability and complexity of each unit went higher, the cost per unit went lower and lower. The result has been a very low margin low profit business model for the PC manufactures, regardless of the market share they command.

What is the target business model for SaaS providers? Based on the rapid adoption of cloud based software models, we will find out shortly enough. I’m just not sure those of us in the IT industry are going to like the answer.

The Cloud 20

September 28, 2010

The impact of cloud computing on technology services is a area TSIA continues to study with great interest.

I’ve just completed a review of the financial performance of companies in The TSIA Cloud 20. This is an index of twenty of the largest cloud computing players. In March, when we took the last snapshot of The Cloud 20, I made three observations:

  • •Cloud computing revenues are less than 5% of total technology solution revenues.
  • •Currently, SaaS models are at least 50% less profitable than the traditional enterprise software business model.
  • •YET: “Cloud 20” revenues grew 3% last year while “Service 50” revenues shrank 8%.

After reviewing the current data, there are three new ratios I have observed:

  • •49%
  • •80/20
  • •2X

To find out more about these three ratios, join me for the Cloud 20 webcast this Thursday: