January 27, 2017
Ep. #29, What’s The Future of Continuous Delivery?
In this episode Edith and Paul are joined by Marianna Tessel, VP of Engineering at Docker to discuss the evolution of software delivery from...
In episode 32 of EnterpriseReady, Grant speaks with Mike Gregoire of Brighton Park Capital. They discuss strategies for growing through a recession, the changing role of modern enterprise salespeople, and the internal metrics Mike uses when evaluating acquisitions.
About the Guests
Mike Gregoire is a Partner at Brighton Park Capital and is a member of the Investment Committee. Previously, Mike was the Chairman and CEO of CA Technologies and Chairman and CEO of Taleo Corporation.
Grant Miller: All right, Mike, thanks so much for joining.
Mike Gregoire: Grant, it's great to be here with you.
Grant: Great, so let's just jump right in. Tell us a little bit about how you got into enterprise software.
Mike: Well, a long story, because I've been around for an awful long time, but I did my undergrad degree in physics, and both my parents were teachers, and I kind of thought that was my lot in life.
And I realized when I was at university, I worked for the university as a teaching assistant, and I realized, my goodness, this is not the life for me.
I just didn't really enjoy it.
And just so happened that this was at the time when GM just bought EDS, and the head recruiter for GM was an alum of the university I went to.
And I ended up applying for a job working for General Motors as an engineer.
And I came right out of school and worked in General Motors, and I ended up on the EDS side as that transaction was happening.
And furthermore, sometimes be in the right place at the right time, this is just as the mini computer market was starting to move into the enterprise.
And so prior to that, everything was on a mainframe, whether it be a big VAX or a big Honeywell machine or a big SPIRIT machine or a big Burroughs machine.
Obviously, IBM had a big share of the market.
And at that moment in time, I'd never worked on a computer bigger than myself.
When you're in university, especially in physics, a lot of the experiments that you do, you have to write software for.
And we did all of our software programming on mini computers.
And at that time, PC started evolving into the academia world.
So I was the guy, and I started working on IBM Series/1, which was the first real-time operating system.
That was the first operating system they put in the space shuttle, and the DEC PDP-11.
I don't know if your folks would remember that one, another great mini computer.
And then the whole line of HP 9000s. And then all of the Unix machines came out.
And so I spent the first several years writing a lot of systems programming for these various Unix variants and some of the proprietary operating systems.
And the whole purpose was getting information from a big IBM mainframe and distributing it down to a plant floor over a variety of different protocols.
So we were writing TC/PIP drivers before there was things like message queues.
And so my interest in the enterprise was at a very fundamental level in the very early days of just getting two computers to talk.
And while the internet was available, it wasn't available in commercial applications.
You had proprietary networks in offices and definitely in plants.
So I did that, I wrote a lot of code for a lot of years, and I got pretty good at it writing the code because I really understood the various operating systems and how to make those operating systems work.
Like, how do you go from an IBM mainframe over the SNA protocol to a VAX cluster with the DEC protocol to an HP UX, that at that time was running a Berkeley kernel.
You had to work at such a low level to make these things communicate with each other.
I had a very in depth understanding of all these different networks and all these operating systems.
And it kind of ended up in that mode where I really was able to take on bigger and bigger projects and lead those projects.
And eventually I became the chief technology officer of BDS Canada, and I got married. I had this great job, and my wife at the time said, "How's this going to play out? Do you know what are we going to do next?"
And EDS had just opened up an office in New York City, and they were starting a whole new business unit that was focusing on banking and brokerage.
At that time, if you had a banking license, you could only do banking. If you had a brokerage license, you could do brokerage.
And that was called Glass-Steagall.
And the powers that be at EDS believed that the breakdown of that law, where it allowed banks and brokerage firms to merge was going to cause an incredible amount of systems integration work, and almost all of the Wall Street trading systems were all Unix based.
And so I got the opportunity to go be the chief technology officer at that group and move to New York City.
So I moved to New York City and five years later, I ended up running that division.
So I moved to the dark side and went onto the business side. And it was really both New York and the financial industry.
New York and the financial industry just cares about what you can do.
They really don't care if you're an engineer, if you're a business major, if you studied art history.
It is, what can you get done? And we went from literally 5 million to 600 million in five years, so incredible growth.
I ended up learning an incredible amount about business. One of the things of working for a big company like EDS, they put you through an incredible amount of training.
So I really understood how to manage a PnL.
I really learned how to understand sales. I really understood how to understand marketing, none of those skills I ever learned in university.
I mean, I ended up going back and doing an MBA, but it was really the proprietary training that EDS put in place that gave me most of my business skills, and it was the way that EDS conducted business.
And then in 1999, Craig Conway became the CEO of PeopleSoft, and Craig was rebuilding his management team. PeopleSoft was, I think, the seventh ranked ERP system.
And as he was rebuilding his management team, I was helping Craig understand in the recruiting process, how do people like EDS and IBM and Accenture and the Scient, Viant, Razorfishes, et cetera of the day, the ENYs, the PWCs, the Deloittes, all of us consulting groups, how do we really help customers understand what systems should be put in place.
And it's not as objective as obviously some people might think, and my advice to Craig was he had to have a rock solid internal professional service firm that could fix price contracts because my view was the gating factor to buying off the shelf software is the runaway costs you had on the implementation, and you'd sell more software if you could give customers certainty on what it was going to cost to implement it.
And the only way to do that is to control the process vertically. And that was not how that industry worked.
You counted on all these third party companies to be able to sell your software.
And software margins are a lot higher than services margin.
So it was a delicate balance, but Craig jumped on that concept and I ended up going to work at PeopleSoft and had a really good run of PeopleSoft, ended up running 2.3 to 2.7 billion at PeopleSoft.
So I had all the professional services, the hosting business, the education business, and the maintenance business.
And we got that interrupted by a hostile takeover, the first hostile takeover in the history of software, where Oracle decided to buy PeopleSoft.
Lived through that, took some time off. And then I decided I wanted to be a CO.
I looked at a number of different opportunities, and I went to a startup called Taleo, 40 million in revenue, losing $20 million a year and started building that out.
That was a SaaS company in the HR space, primarily in recruiting.
I felt I had a lot to offer because I had the hosting business at PeopleSoft, which was not multi-tenant.
Wouldn't be what you would call a SaaS today, but it was the early view into it.
And we always struggled with that because the software was never meant to run that way.
And the first thing I learned there is that you need to be, if you're going to run something in SaaS, the technology has to fit the business model.
It's very, very difficult to scale a company. It's almost impossible to margin a company if the technology doesn't fit the business model.
And so I looked at Taleo, and I said, this is an opportunity to have true SaaS enterprise class system and became the CEO of Taleo, built a phenomenal management team there, had a tremendous board, took it public in '05.
And then in 2011, sold it in a very amicable transaction to Oracle for 2 billion.
And once again, took some time off, and through a strange set of circumstances, I ended up getting into the competition for the job at CA Technologies, which was the sixth biggest software company, and I was probably the most unlikely candidate.
I was definitely under 50, I was a valley, growth-oriented, product-first, engineer-led CEO. And this was a behemoth of a company, 18,000 people, 26 countries, over 150 SKUs.
And when it came down to it, the reason the board selected me is they said they brought it down to three candidates.
All of us had to come in and present our strategy to the full board. We had an hour and a half to do it.
And I was the only one that presented the board with a growth strategy.
I truly believed and the board believed as well that this is a company that should be growing.
And this was not a company that should be hacked apart to private equity and ended up getting the job at CA.
And had a great run with CA. Once again, rebuilt a great management team, had a phenomenal board, a very trusting board, because when you're going through these big transformations, they are never linear.
You're going to have some severe peaks and valleys, and you really need your board with you 100% when you get into the valley.
The board's always with you in the peaks, and everybody else is with you in the peaks. It's in the valley where people really have to believe in the strategy. And then it's going to take a little bit of time to get it to go.
But we ended up, when I got there, it was just under $10 billion in market cap. We sold it five and a half years later for $19 billion in market cap and paid two and a half billion dollars in dividends over that five years.
So it was an absolute home run for shareholders. We built a lot.
We put 20 products in the magic quadrant.
We sold off a lot of the software that was no longer growing and it wasn't strategic.
And we did a number of acquisitions that would help us position the company to be truly the dominant player in security infrastructure management, and also mainframe operations.
So really taking the whole gamut of a data centers, set of technologies that were required to be successful.
And after that transaction closed, I really had to do some deep thinking of what I wanted to do next.
And an opportunity came with my partner, Mark Dzialga, to start a private equity company.
Mark is a legendary investor. He was the chief investment officer at GA for 11 years.
I think he was partner number three at GA, over 22 years of experience there.
And he was also a head of tech banking at Goldman. So really understood technology, a very experienced deal person.
And his thesis of Brighton Park, as we started talking about it was matching capital with really good advice, operational advice, things that a CO would need, is going to differentiate the returns that we get.
And it's also going to differentiate why we would win deals.
And so I really thought deeply of what I like to do and what I want to do.
And I do love working with young entrepreneurs that really have a great idea, and they're really using technology, this product-first leadership.
I really felt that that was something that I could help with. It's something that I really enjoyed doing.
It was an opportunity for me to manage my own portfolio with a little bit more of a hands-on approach.
And we've been at it for 18 months now. We've got four companies in the portfolio.
Each and every one of them is a technology-led company that has an opportunity to be best in class in the areas that they participate in.
And that's kind of where I'm at.
Grant: That's quite a background, so thank you so much for sharing it.
And there's so many areas I want to dive into, and I will tell you, so we've done, I think almost 30 of these episodes, and I've had a pretty hard and fast rule that I'm not going to have investors on, but I'm going to focus on operators.
And so you are the first active investor that I've invited on the show.
So, obviously, I think your experience as an operator is why you got into investing, but it's also, it's why I'm so excited to chat.
And it sounds like that's why a lot of these companies are excited to work with you as well, is just that experience of, across so many different companies.
And you also didn't mention you're on several boards as well, right?
Mike: Yeah, I'm on the Smartsheet board, I'm on AMD's board and I'm on two nonprofits.
Grant: Cool, one of the things you were talking about sort of early in your career, which I think is interesting, are some of these technology transitions, right?
I always look for platform shifts as like the big opportunity.
And so can you just talk a little bit about how these platform shifts and technology transitions--
You talked about it from mainframes to minis from minis to workstations.
Where are some of those? What are some of the consistent lessons and just some of the backstory around how those transitions happened and how you took advantage of it at different points in your career?
Mike: Why they happened, it's a really good and interesting question because I don't think enough has been said and enough has been written on why it happens.
And I think that that leaves a lot of companies, both that consume technology and build technology a little bit lost in their strategy.
It happens, in my opinion, for a handful of very fundamental reasons, and top of it is talent.
There's just not enough good talent around. If you take a look at the salary wars we've all went through, the talent wars we've all went through.
We're all looking for the same people, and there's never enough of them on a global basis.
One of the things that happens with technology is someone comes up with a technology that makes it easier for someone to take an idea and transfer that into a digital representation. I mean, that's the fundamental shift.
The mainframe is still one of the best platforms for crunching numbers.
It has been traditionally very, very difficult to take your idea and translate that into a digital representation of what you really want.
And on the mainframe you were stuck with Assembler, PL/I, Cobalt, Fortran, all third generation programming languages that were kind of difficult.
And then you moved onto, and by the way, it was all batch processing and what people wanted was real time, and that's where the advent of the microcomputer came through.
And there was a whole host of those technologies, and they were significantly less expensive, and they didn't require longterm contracts that you had to have with some of the timesharing vendors back in the time.
So it was a business model change. It was access to technology, and it was just easier.
It was just easier to work on a VAX PDP 11 or a MicroVAX than it was to work on an IBM mainframe.
Same thing happened with the Sun Microsystems. When those workstations came out, they were very, very powerful.
And the idea that you had your own workstation, that you could run complex software on was a novel concept.
Before you couldn't write software that could run on a mainframe, that could do the things you could do on an Apollo workstation or a Sun workstation.
So it's always been about the talent to manage, the talent to build and then of course the application.
How does the application fit the user's need?
You couldn't imagine what we do on a mobile application being on a MicroVAX or a Sun workstation or an Apollo workstation or an HP workstation.
And to the extent that the consumerization and the constant need to make things easier and give you the applications that you want.
I mean, that's caused the change in every one of these platform changes.
Grant: Okay, interesting. So the thesis there being that basically technology and sort of the power to run applications was always sort of constrained, controlled.
And then basically now these platforms make it more and more and more available.
Mike: Well, I mean, absolutely. I mean, take for example, I mean, you're an expert in Kubernetes.
I mean, it'd be hard for you to argue that Kubernetes is not a sophisticated piece of technology that's actually requires a fair bit of skills to get up and running.
The fact that you can abstract that now and make it easy for an average person that doesn't have deep computer science skills or deep infrastructure engineering skills, to be able to get a microservices platform up and running so they can run their application and it can auto-scale and auto fail.
I mean, 15 years ago, the ability to have auto-scaling and the ability to have real time fail over, I mean, those were super expensive, extraordinarily complex pieces of software that only the largest companies had.
Now two guys and a dog in a garage in a radiator shop can get that, and they wouldn't think twice about it.
Grant: Yeah, it's really interesting. I love that thesis. It's funny because I was kind of computing over our transition that we see, right?
And trying to think about how it's sort of continuously putting more applications at the hands of users and giving them more access.
And that's, you're right. That is an underlying trend within all of these transitions.
And then now that they happen, right?
So like now, okay, these transitions are always going to happen, and it's going to happen more and more.
Taking advantage of that from a business perspective.
Obviously, some of your competitors didn't make the transition as well and you made it better. And so you win.
How do you align the organization? How do you make that transition as these platforms make that transition?
Mike: I mean, it's one of those things where early on in my career, I mean, I didn't have much say in this, I was a doer.
I wasn't the person responsible for strategy and you kind of work your way up the ladder and you start having a little bit more say in what the strategy is.
And one of the things that I've found is you have to always have some budget put aside for experimenting with what the next new thing is.
And Andy Grove is a CEO of Intel, he wrote a book that was titled "Only the Paranoid Survive."
And here's Andy Grove who brought a lot to technology management for sure.
And he was always afraid of the next person out-thinking him and making his product set irrelevant.
Steve Jobs has put all of us through hell. We will adopt Mac products and he will go and change all the interfaces to them.
And you have to go out and buy all new cables and cords, and it drives all of us crazy.
But the point that these two people are making is that you got to be on top of that, and it's painful and it's hard, and your team's not going to like it.
Your investors are going to hate it.
I remember I was at a conference once, and Jeff Bezos was speaking before me.
And he was on stage with his CFO. And one of the knocks on Amazon, fair or unfair, is that they spend a lot of money.
For the amount of revenue that they take in, they don't generate a lot of operating margin.
And the analyst asking Jeff the question, this is when he was launching Kindle.
They're saying like, why would you want to go into this hardware business?
Oh my goodness, why do you want to be vertically integrated? Just kind of going on.
How deep are you going to go on this? And he looks to the CFO and he says, "How much money do we got?"
He goes, "We got money." He says, "I'll spend it all." End of story.
His desire to continuously push and solve for what people want, even if they don't know they want it yet. There's a handful of people that have done that through time, and he'd be one of them for sure. Steve Jobs would definitely be one of them, and what they do, if you pay attention to them, they're always squirreling away enough operating margin that they can start testing those experiments and then have the courage to put it into production. To go whole hog and say, this is going to be better, and I'm going to go make it better.
Grant: Yeah, okay, that's interesting. So it's a constant attention to what is next and identifying new problems and just tirelessly pursuing a better way.
Mike: I mean, if you're going to be running a tech company, or if you're going to be a product manager at a tech company, you have to love doing that.
You have to be so unhappy with the status quo.
You just have to wake up in the morning and just be disappointed every single day that this is how it works.
I mean, is this the best we can do?
We've got to be able to do better, or you've got to be so enthused to go talk to your customers or potential customers and really deeply listen to what they want and try to imagine how you're going to solve that either in the context of the company you're in or in the products that you have or something that's going to be net new.
Those are the ones that really do special things.
Now, mind you, a lot of people think like that, but they don't have the execution chops to make it happen.
And I can't tell you how many people I've met that are just brilliant, brilliant product managers, but they couldn't organize a two car parade.
It's not good enough to be a visionary.
You have to map that to true executional chops.
And there's a lot that comes into that.
You have to be very good with people or you have to have someone working very close with you that's very good with people and people management, talent evaluation, talent performance.
How do you motivate these people?
How do you inspire them to be great every day, all day? I mean, these are the kinds of things that the great leaders that build beautiful, meaningful products.
These are kinds of things that they do.
Grant: I love the, be so disappointed in the status quo, you wake up every day.
That's so perfect, that's very true.
When I interview product managers, I'm always like, tell me about something in your life that you think is just so wrong and you want to change.
Anything, just like day to day life.
Because I think, to your point, really good product people are paying attention and they see everything as opportunity to improve, and they're like, "Oh, I would change this, I would change this, and we could do this better."
I love that, that's so true.
Mike: The thing about leadership though, as you're thinking about that, if you're the CO or you're leading a significant team, part of it is your own personal maturity.
If you're carrying around that chip on your shoulder all day, every day, you wear people out.
So you have to learn the appropriate way to deal with that frustration that is constructive within the culture of your company and the context that you're dealing with.
If you're walking around just like moping and just unhappy all the time, who wants to be around you?
You have to be inspiring, and you have to talk about how great the new thing is going to be.
And not disparage the old thing, because if you're in business, you need the old thing to pay the bills, to make the new thing.
So you have to really be thoughtful about that.
I can remember early in my career, I'd be so enamored with a piece of technology that I'd forget about all this other technology I was supposed to support.
And the fact that we had literally hundreds of customers on the old technology that paid us a king's ransom for it.
And they don't want to hear that they're on the wrong technology.
They want to hear about the way that you're going to help them evolve to the new technology.
And the fact that they've made an investment in this technology is going to help them get to the next level and the fact that they picked you and they trust you that you're going to be the one that's going to help them.
And that they're better off to work with you and the technologies that you've selected and implemented and put together than to work with anybody else.
These are things you learn as you make a few mistakes along the way, and isolating your customers is usually not good, not good at all.
Inspiring your customers, very, very good.
Grant: Yeah, so first I would totally agree that if you're a leader, you have to be excited about what you're doing and you've got to inspire folks.
I mean, generally I think about it as like, I love the opportunity to make things better, right?
So to me, like it's not a criticism.
It's more like, oh, look how great it is that we get to go make all of this stuff better.
The status quo isn't great, but we get to go make it great. That's fun. That's what we're here for.
I would also ask question around this idea of customer perspective, right?
If we're constantly changing, and this is a really relevant thing for a lot of companies where you have a product that's paying the bills, but you have a new thing that you're so excited about.
How do you manage that tension and how do you sort of pull those customers over, like, what's the best approach?
Is it rip the bandaid off and force a transition date?
Is it like, do whatever you can to support the existing customers, as long as possible on the old thing?
How do you think about that? What framework do you use to weigh those decisions out?
Mike: We have a couple of things working for us today that we didn't have 10, 15 years ago.
First of all, SaaS and subscription revenue.
So SaaS as a delivery mechanism and subscription as a business model.
If you're in for the subscription, then you have a software as a service so you have a way of controlling the application.
If you're thinking about that, you got to be thinking about evolution.
I mean, if you're a SaaS company, you're not doing a re-implementation, I mean, to do a complete cold re-implementation and charge of customer for that in SaaS, that's a hard sell.
You have this business model and this set of technologies and security now, that I think SaaS has very well accepted.
The only times that it might not be, if you have latency issues on where you run the application, some applications are so compute intensive and require real time response that the SaaS business model does not work well for them, but it's very, very small--
But in general, for most business applications and consumer applications in particular the SaaS technology and the subscription business model work hand in glove.
Now, how do you build that application to run on that SaaS model?
Well, you should be using Agile. And if you're using Agile, that means you're going to have customer validation constantly in what you built.
I think if you're smart about this, and you're constantly bringing a customer into what you're building and really getting that customer validation, it's not just one customer. It has to be more than one customer.
And I think most people are okay with understanding, early beta versions and to the extent that you're willing to give them a discount on the subscription to be a beta customer, see how this software is going to work in the real world.
I mean, there's a lot of techniques you can do to help a customer get from where they are to where they want to go over the course of time.
Now, when you get into broad, big tectonic shifts in technology, this is where it gets a little bit more difficult.
And I think that becomes very contextualized. And I wouldn't predict that there's a one size fits all for making that happen.
Different industries are going to handle that much, much differently.
Grant: Right, so one thing that even--
I worked at a SaaS company called LivePerson, and we made a pretty public transition onto a totally new version of the SaaS product, right?
So we went from the sort of legacy platform to the new platform.
And it was actually required some reintegration to make the transition, and I've seen a lot of companies make pretty dramatic transitions, even thinking about Salesforce, even the transition just to like go to Lightning or they make these different, maybe not annual changes, but every five years or 10 years, you sort of have a replatforming or some team wants to rebuild from the ground up.
And then it requires new work for your customers.
In that world, and then we'll get into acquisitions, which you've done a lot of too, but I'm guessing in the acquisition world, you need to take somebody off of maybe a product that you acquired and eventually get them using a consolidated product set.
And so is there any kind of specific framework you use or think about with enterprises?
Is there a costing model that you're using? How do you evaluate how long to support customers?
Do you continue to increase the price for long-lived support, or how do you think about it?
Mike: Well, I mean, once again, I won't give a one size for all but I'll give you a couple of scenarios that I've used that actually seem to make sense.
First and foremost, at the beginning of it, what's in it for the customer?
If you're getting them to upgrade and there's not something materially beneficial to them, that's a hard sell.
Mike: I mean, if you're in a regulated industry or in retail, they will tell you that you are not upgrading me in certain times of the year.
Large companies that are regulated, you're going to go into a production environment, that's a test environment, and you're going to have to go through a significant testing phase.
So they don't want to have a lot of micro releases.
They can't do that 'cause they have to test the whole system, so you really have to think about any kind of shift like that and answer the question, what is in it for the customer?
If you're doing a significant technology refresh and your software isn't going to be better, faster, cheaper, more feature functionality, lower the customer's costs, give the customer an opportunity to increase revenue, decrease costs--
If you can't answer those questions, you're going to have a hard sell.
If they have to do a re-implementation, they're going to stop and pause and probably RFP that piece of work and go take a look at everybody in the market.
So you really have to think hard about that.
There are situations that make sense where you buy it, you're doing an acquisition and once again, you have to believe that your product is better than the company that you're acquiring.
You're doing a customer-based acquisition, which means that you've modeled the probability of the number of customers that will leave the acquired platform and do something other than with you.
And there's math that will tell you, depending on how you model it, what that threshold is.
And if you think that threshold is in your risk profile, you can make that work.
I did that when we bought a company called Verve.
Verve was one of our number one competitors.
It was a fine company, we were both duking it out in the marketplace.
We ended up doing a little bit better than them.
And they could see that the path that we were on was going to be, we were becoming more formidable a competitor, and they had a lot of great customers.
And I did a customer-based acquisition.
And so I bought the company, and I shut their platform down and I provided their customers the tools.
And we paid for most of the services to port them over to Taleo from Verve. So what was in it?
I mean, I firmly believed that our technology was better and given the choice no disparagement to Verve, they were a good company and a good leadership team as well, but we just advanced a little faster than them.
And if a customer had the cold chrome of a gun up against their head where they had to pick one or the other and their cost was the same, they'd pick Taleo.
And so I modeled that transaction that if I got 65% of the customers, this transaction would be 20% IRR. And our board agreed to go do it.
And we ended up with 88% of the customers. So it was an absolute home run.
So this is where we drove in an incredible amount of revenue in a very short period of time.
The fact that we had a lot of capital on the balance sheet, meant that I can go build new products.
So I did a onetime customer acquisition of all these customers, and I had other products that I was selling to them.
They were delighted in the way we treated them through the conversion.
We were a vendor that they trusted and they were more than willing to buy other products in our stack, and that was when the company really took off.
Grant: Interesting, and you say you paid for the services to transition those 88%?
Mike: Yeah, what we did is when we were looking at the transaction, the question is like, what does Verve's data model look like compared to our data model?
And what would it take looking at their configuration files?
And we wrote a lot of nifty code that would do the conversion so that we could do it very quickly, and there was a certain amount of money that I was willing to pay, to help a customer get onto our platform.
And I actually didn't want to do it completely for free because free doesn't mean you have commitment.
And I wanted them to answer to someone, to a CFO saying, "Hey, we're going to do this. It's going to be a better system. It's a more stable company."
We were public at the time as well.
So there's a whole list of reasons why we'd said "This is going to be better for you," but I wanted them to put a little bit of skin in the game just to make sure that they understood that there was, we're burning the boats here.
You're going to come over to Taleo. You're not going to continue to run this other system.
You're going to pay us our subscription fee.
I'm not going to change the cost of your subscription for this term, and I'm going to use my professional services team that was trained in making these migrations.
And we spent the next year just banging through these.
Grant: Interesting, and did you have to break any contracts to do that, or did anybody have like a four-year contract?
Mike: Obviously, the question that you're afraid of is are they going to go to one of my other competitors instead of going through moving from Verve to Taleo?
Are they going to move from Verve to company XYZ?
Grant: Sure, but I mean, is there also like a--
If Verve had sold any longer term contracts, would that have prohibited that transition, where they're like, "No, we paid. We have a contract that says we have this platform for four more years?"
Mike: Yeah, but they do that, but I don't think anybody would want to be on a stagnant platform for four years.
Grant: Got it, got it. Okay.
Mike: Yeah, once again, what's the value of the company?
I mean, this runs the company, this is the recruiting engine.
This is the performance management engine.
This is the learning management engine. This is the compensation engine for the company.
You want to be on the best you possibly can get. I mean, you don't want to be on an old tired system.
You want to be on the best system. I mean, this is the fundamental thing of every single company is, how good is my talent?
How do I know that they're worth what I'm paying them?
And how much should I be paying them, and what am I doing to make them better tomorrow?
So I felt that we had something that was critical to every single company.
If you take a look at it, it wasn't industry vertically aligned.
We had all the aerospace, all the banks, all the insurance companies, a ton of retail companies.
So this is fundamental to how every company runs.
Grant: Got it, and so for them it was like, what's in it for them is this platform is no longer going to be advanced.
By moving over here, that's kind of the stick and here's the carrots. We're going to pay for this.
It's better because we've been winning all these deals against them.
And realistically, you could take that same framework and apply it internally, right?
It doesn't have to just be from an acquisition.
It could be from, hey, we kind of made a small pivot to solve the same problem in a different way, and now we want you to move over and you use that exact same framework to get there.
Mike: Grant, you're looking at it at 100% the right way.
You've got to ask yourself, what's in it for the customer?
And it's got to be material.
The other thing that happens in enterprise application software that--
I'll use Siebel as an example. One of the things with Siebel, they had a whole bunch of SKUs.
They charged you for everything.
And eventually people got tired of that said, "Listen to me, what do I get for this maintenance revenue?"
"All I'm paying for is the ability to call your help desk? "
And that every new thing you do, "it never gets baked into the product."
So as a product manager, you really have to be answering the question, " how much value am I giving this customer? And what am I charging for that? And what is a fair market price where the customer feels like they're getting value for what it is they're buying."
I mean, when you have your product or service that is separated from that, you're going to bump into rough air.
Grant: You just kind of made that pricing model click for me.
And the fact that the reason we went from perpetual to subscription is so that you can, instead of having to pay for version 5.0 of Siebel or this add on, every time they could develop something new.
Instead of that being an additional perpetual license that you buy, it's just part of the subscription.
You get the whole package. It seems so obvious now because that's how all software is really delivered these days is through a subscription, even if it's delivered on-prem, right?
If you have enterprise or any of these other applications, they've long been installable, they're still delivered as a subscription where you're getting all the updates constantly.
So I didn't realize that the old perpetual model had really focused on selling add-ons and things like this.
Mike: We got a little carried away with that in the mid '90s.
It didn't work very well. I mean, once again, that's kind of what forced the business model of subscription revenue is people were tired of paying for maintenance.
You charge me a ton of money upfront, and then, oh, I got to go hire someone else to implement it.
And then you want 30% of what I originally paid in maintenance and all I get to do is call you about the things in your software that don't work.
Whoever came up with that business model, I don't know if they were a genius or a psychopath, but it lasted for like, since the '60s, all the way up into the late '90s, and then software as a service, as a delivery platform, came out with the context of a subscription.
And it really changed the balance in the relationship between a software/infrastructure provider and a customer.
Grant: Yeah, that's true. I mean, the SaaS delivery model was as much, the business model was maybe even more disruptive, right?
Mike: I mean, there's a bunch of them that all are enabled by it, like the concept of try and buy, land and expand.
These are not buzzwords.
The management teams that really understand how they work, they drive a prolific way in the way you organize a company, the way you incent the company, where you spend your dollars.
And what they do is they break down a lot of the silos that we've had coming out of the traditional, early 2000s, 2010, 2012.
I'm a Montblanc pen, cuff-link-wearing, backslapping. I'm going to buy you a steak salesperson.
That's just not the way modern enterprise software companies go to market anymore.
You go back 10 years ago, and central casting, that's what they sent you.
Grant: Yeah, it's funny.
We started this conversation talking about transitions in technology, but just as important are these transitions in trends and go to market, right?
And the models that we're using.
Mike: I mean, once again, I do have a bias for product. I do have a bias for the kinds of things that I've spent my career in are more technical sales. When you meet the modern sales professional today, they're very technical, they're very polished. Their skill level is much, much higher than it was 10 or 15 years ago because these people, they've really got to understand the product.
And if the product is the technical sale, they've really got to understand the technology. They have to be a good negotiator because if you're going to be a foot-on-the-street salesperson, you're usually selling in the context of an enterprise license agreement subscription. You're not selling the one-offs of small contracts. You just can't afford that anymore.
And your interpersonal skills and true empathy for the customer and the ability to build relationships with customers, as well as internal--
I mean, I am so impressed with the modern sales professional today. They're very, very smart.
They could equally be, they could go into product management, they could go with the finance, and they could go into the executive management.
This new cadre of true enterprise sales professionals are very, very impressive.
Grant: Yeah, I kind of grew up in the product world.
And then when I found out what the account executives were making, I was like, maybe I made the wrong career choice.
Mike: It's a hard job though, it is a very, very difficult job.
It's one of those jobs that is, performance management is pretty simple.
This is your quota, this is your customer satisfaction.
How happy are your customers? And how much have you exceeded your quota by?
And it's one of the few professions in enterprise technology other than running infrastructure management and looking at uptime where we know exactly how well you're doing.
Grant: Yeah, very quantifiable.
And so I want to stay on Taleo a bit more because there's a ton I want to talk about at CA, but so at Taleo and one of the things I think it's really interesting, you kind of mentioned before we started recording, that that was an area where you had to lead it through a recession, right?
And I think, obviously, in this post-COVID world that we're in, there's a lot of turmoil and uncertainty, but I think a lot of the advice that's come out and people are talking about how to do layoffs, how to do all these other things.
But what's really interesting is, is how do you really grow through this period, right?
How do you turn this into a growth opportunity, which it sounds like you did? So I'd love to get your insights on that.
Mike: Well, there's two things, if you want to grow through a recession, there's two things that you can't control that you have to have.
Sometimes it's better to be lucky than good.
First of all, if you're in a recession, whether you're a good company or a bad company, and you don't have a balance sheet, you're going to be marginalized for sure.
And then the second thing you have to have is you have to have a product or a service that the market you're serving is, it's required.
Those are two things that are fundamental. For example, would you want to be selling hotel reservation software right now, right?
Would you want to be selling anything really to the airline industry right now?
Would you want to sell anything to the hospitality industry right now?
That's going to be tougher unless it's something that they need to make themselves more agile as we come out of the recession.
So if you have those two things working with you, then it comes now you have decisions to make.
And the decision that I made with our board when we bumped into the recession in 2000 and in 2007, were two that I've lived through in executive positions.
2007, I was lucky enough to just finishing up an IPO.
And so I had a lot of cash on the balance sheet.
Taleo was always very cautious of cash. And I think we were regenerating 20 to 25% operating margins at the time for a SaaS company, which is pretty good for a SaaS company.
Salesforce.com, it was growing a lot faster, but they were generating one or 2% operating margins.
And the big thing that I wanted to index on and say, hey, look it, now is the time for us to do two things.
Let's fire up the R&D organization. Let's go and index on our net new SKUs.
Let's double down on those because right now we'll probably need to slow down our spending on sales and marketing because who are we going to sell to?
Selling to a net new customer is going to be difficult. Selling to a existing customer is going to be easier.
And if we can bring product to market that existing customers will want, I mean, the cost of our sale goes down.
We have a relationship with them. We have a master service level agreement in place.
The friction of getting something done was going to be less. So we really focused on shoring up R&D.
The second thing we did is we really looked at the customer base and said, who are we going to sell to?
And who do we think needs our product?
Here in the height of the recession, the biggest contract we signed was with Starbucks.
Starbucks in a recession is still hiring 200,000 people.
Mike: 200,000 people, so high volume retail was a segment that we really focused on because in good times and in bad times they needed to hire people.
And if we could give them a solution that could make it better, faster, cheaper for them to hire.
Amazon became a big customer in 2007.
Amazon was growing like weeds in the recession, if you recall, the consumer was still spending, and they were building out massive warehouses.
They were putting distribution shops and delivery shops all over the place, and they became a very big customer.
Yum! Brands was another one, where I'm going back 10 or 15 years now, but they were still hiring in the hundreds of thousands of people.
Neiman Marcus was, and unfortunately they just filed for chapter 11 last week.
But even in the recession, they were still hiring an awful lot of people.
So if you really think and know your customer base in the segments, and you have a value proposition that's going to help them with their lot in life, I think you can still grow, and by having a very specific strategy and knowing that customer base...
We had a guy by the name of Neil Hudspith that runs sales. He ran sales for DocuSign.
Neil was a hawk on this. He knew that customer base so well.
And he really was instrumental in thinking through where--
He was not willing to accept that we could not grow Taleo, and he did not want to lay off any of his sales professional.
And he took it upon himself to really think through a strategy of, where could I position the sales force and aim that cannon to go fire at places that were going to be high profitability targets?
And then lastly is acquisitions.
Values were compressed in 2007, and acquisitions that we could never pencil out because the amount of money that they believed they were worth compared to what we were willing to pay, the gulf was too big.
All of a sudden, a whole bunch of things became actionable in that timeframe.
And so with a strong balance sheet and strong execution, we felt the confidence to be able to go do acquisitions in the downturn.
Grant: And is that when you did the Verve acquisition?
Mike: In that we did Verve, I bought learn.com.
We picked up a couple of technology tuck-ins that were very, very helpful to us.
And a lot of people couldn't get multiple bids on some of these deals because the people that were likely to go buy them just didn't have the balance sheet to support them.
And then back in those days, there wasn't as much growth equity.
Traditional, private equity was only at big buyouts and really focusing on EPS rather than top line growth.
Grant: Yeah, okay, we talked about initially you said you wouldn't want to be selling software to the travel industry or the hotel booking, right?
So those are fairly vertical applications. Taleo's much more horizontal, right?
Grant: And so when you do have a horizontal product, your customer base is generally across a handful of different segments, right?
So you mentioned high growth retail sounds like a segment that you leaned into.
Were there segments that you had to sort of walk away from because their businesses were declining?
And you were like, "Oh, we need to stop working with them, or they're going to stop spending as much." How did you handle those customers?
Mike: Well, in 2007, it was all things financial services.
You couldn't get anybody's attention for like six, seven months.
Grant: Had that been a vertical that you were focused on?
Mike: Huge, I mean, the good news about financial services is they pay their bills.
So I didn't have to worry about them paying their subscription.
They were more than happy to pay their subscription, but the probability that they're going to buy another SKU or an adjacent SKU of ours, just didn't happen.
And then obviously they're not buying more capacity.
They were laying off people by the truckloads in 2007.
The strange part about it, they hired them all back, literally, 12 months later.
So it was a relatively compressed recession by relative standards, but it kind of begs the question.
To whipsaw an employee population like that, just as a person studying business, you got to ask yourself the question, what am I doing today to make sure that I'm never doing that to my own workforce?
Grant: Yeah, I mean, and that whipsaw was an order of magnitude smaller than the whipsaw we all just went through with COVID, right?
Mike: For sure.
Grant: Let's dive into acquisition.
So it sounds like that was an important growth strategy during the recession because you were able to get compressed values, but then when you were at CA during a point of time where obviously the biggest bull market in history, acquisitions was also a key strategy.
So talk a bit about sort of doing acquisitions through that time, how CA approached it, and then some of the challenges and strategy around that kind of acquisition oriented business.
Mike: Well, the first thing is when you're at a large cap company, as a CEO, your job is to do acquisitions.
You cannot have all that cash accumulating on the balance sheet and not pay it out as a dividend, do a share buyback or do acquisitions.
So as part of your capital allocation strategy as CEO, one of the things you have to be able to do is put that capital to work or give it back to shareholders.
And so it's difficult to take a $50 million company and grow it 100%. It is more difficult to take a $5 billion company and grow at 5%.
These are not-- The swaths of capital that you need to add to try to get these big companies to grow, it's just really, really hard.
It's very, very difficult to do that organically.
It takes three to four years for an enterprise product to start getting traction, and by start getting traction, I mean, adding 50, $60 million to a $5 billion company, it doesn't move the needle.
And you take a look at companies that IPO at 100, 120 million of revenue.
I mean, it just takes a lot of energy to get organic development. Now, it doesn't mean you shouldn't do it.
You should absolutely do it. I think your company is better off by focusing on organic.
An IRR on an organically built product that's successful is about 80%.
Most companies use a VC hurdle rate of about 20% minimum to do an acquisition.
So by definition, if you can build it organically, you're making a better use of shareholder money.
The problem is the time to value where that company actually moves the needle of the internal product. It's just very hard, so you need a complementing strategy, which is acquisitions.
Now, acquisitions are tricky, I call them CEO killers.
I've been fortunate enough, I've spent $2.4 billion in acquisitions and bought 24 companies.
So I've done a lot of acquisitions.
None of the ones that I've done have ever failed and some have done wildly better than others, but I always looked upon it, because I learned early on in my career, is a lot of CEOs get fired for mishandling acquisitions.
And I don't want to be that guy. It's dangerous, I mean, this is a hot stove, be aware.
So a couple of things, rules of thumb I have for acquisitions, number one is I am going to be intimately involved in acquisitions.
I'm really going to understand the company. I'm really going to understand the management team.
I'm really going to understand the product.
I'm going to really understand how the product strategy fits into the context of our company.
Secondly, is I've always built my own M&A team, both at Taleo and at CA, and I've always built my own strategy team, both at CA and Taleo.
So, picture your own investment banking team, internal, your own McKinsey, Booz Allen team, internal.
Now I would get outside providers to help when, if it was an international acquisition, I was definitely using bankers.
If it was something that was overly complex, greater than $200 million purchase price, I would say you're starting to get into some level of complexity.
I would definitely use bankers, but I really wanted us to really own the decision of what it is we are buying and what we are buying.
That was extraordinarily important to the whole management team and myself in particular.
So I'd have a banker flowing through my office several times a month, dropping a book off that this company is getting ready to go into a process.
This company is thinking about it. I would want to look at that, but if there was something I was interested in and my team hadn't already been doing work on it, I mean, that's a mistake.
We've dropped the ball somewhere along the line. I like to go buy companies.
I didn't want to be sold companies. There's a big difference between the two.
So the first thing is we have a three-year rolling strategy and in the three-year rolling strategy, we list the potential acquisitions that we would like to go make.
And we're monitoring these companies.
And to the extent that we feel that the valuations are right, our ability to execute is right.
We have an understanding of what that company does and their product roadmap.
I would never do a hostile. I think that the amount of calories to go do a hostile is just too high.
I'd want to make sure that the management team was super excited about us owning them.
And they really had a vision for how they were going to work within the context of our company.
And then before I wrote the check, I wanted the integration strategy nailed, especially the fundamentals.
And there was a few fundamentals that were nonnegotiable for me and the management team.
Number one is we're going to integrate the financials right away.
You can't run a publicly traded company and have two sets of financials.
It's just too risky, and that's the first thing that we wanted to integrate.
And then I think you have anywhere between one and two years to make decisions on the rest of the integration.
Some products that had a different business model, keep the sales and marketing teams isolated, let them do what they want to do.
Some of the product stuff, if there's no synergies with the rest of the company, keep the product teams somewhat isolated and independent as they want to go build it out.
And then in some instances where that doesn't make sense, that there's going to be massive synergies if we bring these two products together and integrate them very tightly, you want to make those calls.
But I think anybody that says, day one, we're going to do this kind of a integration that's very harsh, I think that that doesn't work for everything.
On the other hand, if it's two or three years later and they're still operating as an independent company, I mean, what synergies have you driven?
I mean, now you've just bought revenue and I can guarantee you that you're probably not adding enough value to that company, that the synergies are going to be sufficient to meet your business model.
Grant: One of the first things you said, I thought was really interesting was about this IRR target, right?
So you're saying 20% IRR, if you're going to spend 100 million, you want to be returning 20% a year. How do you model that out?
Mike: Could you be a little bit more specific?
Grant: Yeah, so you sort of mentioned this 20% IRR as like a target for a board to feel good about an acquisition, right?
Mike: Yeah, I mean, first of all, most management teams, they're pretty good at cost synergies.
And I haven't had a whole lot of disappointment in people figuring out how to cut costs.
I also don't think that takes an incredible amount of intelligence. The place where you get hurt is revenue synergies.
And what happens is a team will, when they see the results, they know that if you have a two handle, it's probably an easier conversation with Mike.
If it's less than a two handle, it's probably a more difficult conversation. And so how do you make the two happen?
You go on a spreadsheet and say, instead of selling, $50 million in EMEA, we're going to sell $70 million in EMEA.
And then when you decompose, how did you get that $20 million?
I mean, how many more salespeople did you hire?
How many marketing dollars did you put into it?
What assumption did you make for the time it takes for a sales rep to get ramped?
Have you checked that the product that you're selling is language and compliant in the countries that you want to operate in?
And so these are the kinds of things that if you've been around the block a few times, you have to go ask these very detailed questions because most acquisitions fail on revenue synergies, not cost synergies.
So it's so easy and so tempting to get caught up in a deal that you want to get the deal done.
There's so much that can be done with this, that you start making those revenue synergies look a little too rosy, but that's the place where I would advise any executive to index on because that's usually where you get hurt.
Grant: Got it, so that's where you're doing this kind of modeling and planning around, what's it going to look like when we buy them?
How do we put it to market? And then you're really going through all this.
I mean, basically all the same financial planning that I would do for a fundraise, you're doing that for an acquisition to think about, what's the capacity planning and all the other pieces?
Mike: To do that an acquisition, one plus one's got to be more than two.
I mean, how much more than two is the question, but I mean, I think if you're not careful, one plus one could equal less than two.
And so you really want to understand, like, how does this affect the customer base?
Have you cannibalized the revenue of your flagship product by making this acquisition?
I mean, the product that you're bringing has to be very attractive to your customers or else--
Let's say a customer paid you $100 for your product, and now you bought this other company, and that product is, say, $50.
If the customer only has $100 to spend, and your value, in their eyes is only $100 for both products, that's a pretty tough set of economics.
Because now, some people would argue though, well, we kept the customer, and so our gross margin stayed the same, but you just wasted a ton of shareholder dollars in the purchase price of the company.
Grant: Right, there's so much here.
I mean, I think about it, getting your perspective is super helpful because it allows folks to think about not only how to execute acquisitions, if that's a phase that they're in, but also how to think about how acquirers are thinking about their acquisitions, right?
And sort of just like you want to understand, like if you're selling software, how the person who's buying the software is thinking about it.
I think this is the same, much more valuable sale.
So really, really interesting to hear about how you model this out and think through it.
Mike: Well, the other question that I see a lot of folks get wrong, trust me, I've gotten this wrong myself, is you always think that it's the same buyer.
And I think you have to index that down a little bit because you say, well, you're selling to the CIO.
Well, that's a pretty broad thing.
Of course, the CIO is going to be involved in anything technical that gets bought in a corporation and the CFO, but the amount of calories it takes to sell to the person that's making the decision, that's what you have to look for.
Because if it's two separate buying departments, there's two different leaders.
So your economies of scale with respect to selling, they're not going to be there.
And what you always want to do is you want to have one person represent as many products as possible competently with the company.
I'll give you a perfect example.
Security, 30% of our revenue at CA was security, separate sales force, it all reported up to the CIO, but that purchase was different than every other infrastructure purchase that was done.
And the language they speak, the subject matter expertise with respect to the industry was different.
And if you were to buy a security product and not understand that your infrastructure salesperson was not going to be able to add much value, if any value at all to that.
And yet you model that that sales professional was going to be able to introduce you into all these different accounts, you're going to take a hit on that, that you're not going to get the productivity that you would expect.
Grant: Yeah, you could probably teach a master's class in acquisition.
It's so interesting to hear your thoughts on it.
I know you have a hard stop right now, so I want to let you go, there's a million other questions.
Maybe we can try to get you on again. This was really amazing.
Mike: Well, why don't we see how your audience likes it?
If they find it interesting, maybe we could do a little more, but I'm really honored to be part of your program.
I love the infrastructure management space. I love helping executives think through how they're going to be successful.
I mean, it's in everybody's best interest for these smaller companies as they start dreaming of what they can do for us to give them a leg up, any chance we get, because I think we all benefit when we have great technology and great leaders leading companies.
Grant: I couldn't agree more. Thank you so much for being here.
Mike: All right, Grant, you take care.