By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search
Angel Mehta: What was your first job in high technology?
Joe Davis: It was with Hewlett Packard as an engineer, designing inkjet printers. I fell into engineering in college… I was always a tinkerer as a kid, tearing things apart and putting them back together. It wasn't until I was working that I got a good chance to think about what I liked to do… I didn't follow the European model where you graduate from high school and then go to work for a year before going to college.
Angel Mehta: I didn't know there was a European model.
Joe Davis: Yes, in some countries in Europe you'll see people will finish high school or do two years of university then work for a year or two to gain an understanding of what opportunities are out there. After that they go back and finish their degree. I think there's a lot of value in that approach because otherwise, you're asking people who are 20 years old to decide a major in college, dictating what they're going to do with the rest of their lives, without really understanding what it will be like to work in that area. It is one of the reasons you see so few people working in an area that they were trained for. You have people making decisions based more upon family history and simplistic notions of what a specific job is. My 13-year-old daughter regularly says, "I'm going to be a lawyer." Well, she doesn't know what that means, but it really doesn't matter at this point so I don't worry about it. If she feels this way as a college student I would like her to find a way to see what it is like to be a lawyer before she commits to it. There are some people who at 20 years old are very directed and know what they're going to be… Bill Clinton, I'm sure he knew that he was going to be President of the United States, right? I certainly wasn't one of those people.
Anyway, I eventually got bored with engineering and became more interested in the Product Management side of the business. I started asking, "Why are we building this; why are we picking that price point; why does it need this set of features?" I realized that if I wanted to be a manager I needed to understand more about business, even if I was going to be an engineering manager. The problem at HP was that it would have taken me 5 years to get into a first line management role. It was a great company, but had what I thought was a slow growth curve for management. So I decided to apply to Business School and went to Stanford where I realized that I didn't want to run engineering. I wanted to run the whole company.
Angel Mehta: What elements of the HP culture did you respect most?
Joe Davis: There are many things I learned from HP. Even though I was not a manager, I certainly absorbed some of HP's management techniques. For example they have an open door policy, there are no offices; everybody's in cubes, even the senior management. Managers are generally in the next room or walking around, and are usually available to talk when needed. I think I have tried to recreate that open door policy wherever I have worked.
Another great HP management technique is that at the end of every quarter, all the employees in a department are ranked. I am not sure if they still do this, but I thought it was great. If there are a hundred employees in the R&D Department, you're ranked 1 to 100 and you know what number you are, which is something that most companies don't do. In many companies, the employee evaluation process is done in a very slipshod manner and managers are reluctant to deliver bad messages. It's very easy to say, "You're doing a pretty good job here but budgets are tight so you're only getting a 2% raise…" …when the reality is you had ten employees in that department and this guy was ranked Number 10. The right message is to say, "you are the lowest ranking employee in this group, and here are the challenges you face. If you want to move up the ranking here are the things you need to do." Under this forced ranking model, managers can't dodge hard conversations and mislead employees. As an employee it was scary but honest. There was no hiding behind your own impression of how you were doing. If you were ranked near the bottom of the list you knew it and you got clear direction what you needed to do to improve. It was very effective. The only problem I saw with this system was that it still was hard to get rid of poor performing employees. That was one aspect of HP's culture that I didn't like. In every organization you need to get rid of the lowest performing employees. It gives you room to bring in more talent and it sends a clear message to everyone that poor performance is not tolerated.
Angel Mehta: Let's talk about Coremetrics. What is the business problem you solve for customers, and how has the company evolved since it's creation in the bubble?
Joe Davis: The founder of the company started the business to provide a set of tools to help on-line merchants be more effective in selling products. He actually started with an earlier business where he was trying to sell vitamins and health supplements on-line and found that the tools available out there were not very effective in helping him manage his business. He envisioned a set of tools that would allow him to track what people were doing when they came to the website to help him be a better marketing and merchandising vendor. As he was building these tools for his own web site he realized there was a bigger business opportunity offering the tools to others and that was the genesis of Coremetrics. Today we support 240 different brands on-line that use our product to manage their online marketing and merchandising activities more effectively. If you are buying anything online, chances are it is with one of our customers: Williams-Sonoma, Pottery Barn, Sharper Image, Eddie Bauer, Nieman Marcus, Lands End, Victoria's Secret. It is a long list. We have most of the big name online retailers and our market share in Retail is five times that of any of our competitors
Angel Mehta: How do you differentiate yourself from competitors?
Joe Davis: There are competitors in our market who do similar things but they don't record individual data. They collect it and they consolidate it down to a set of aggregated data. They can tell you that 10% of your clients came from an email campaign, looked at this one product, put it in a shopping cart but never closed the transaction and left the website. Well, we can tell you the same information, but we can also tell you the email or possibly mailing address of that 10% and whatever else they may have bought from you in the past. This extra level of detail we provide allows our clients much more flexibility in their marketing efforts. For example a client could chose to reach back out to the 10% product abandoners mentioned above with an email campaign that might entice them to come back and buy the product they dropped earlier. The more sophisticated the retailer, the more they need the data and the more they're interested in the intelligence it can give them. For example, many of our clients regularly want to change how they categorize their merchandise. They may decide to put a selection of items on sale and in our merchandising reports they want to see a high level view of how all these clearance items are moving. With our competitors this would be hard to do because they aggregate the data at transaction time. Since we store every individual transaction it is simple for us to re-run reports under a new category scheme. In fact during the holiday season we have clients who upload a new category file to us almost every day and the system automatically makes the necessary changes. This is the type of service that gets the merchandising people at most of our clients really excited.
Before you had on-line retailing, most merchandisers had to wait quite a while to see what was selling. For a retail store they might have to wait for month end reports from all their stores. A catalog merchant gets faster feedback once a catalog is mailed but there is still a long lead time from when they determine what merchandise is included and when the catalogs are mailed. In either case it takes time to see what's working and what's not selling. With online retailing you eliminate most of the delays.
We provide instantaneous feedback to our clients. You can re-layout the website and within an hour, you can determine if it is working. So our retailers, most of whom are multi-channel, with a website and either retail stores or a catalog, can use the results of what's happening on the website to be more effective in their other channels. As an example, let's think about a large catalog merchant, someone like Lands End. In the past the marketing model was to print up a few million catalogs, mail them out and then wait for phone calls and orders to determine if they ordered the right merchandise and marketed it effectively in the catalog. They might have spent a lot of money on new merchandise with little idea of how well if it going to sell. But this has all changed. On a website retailers can test a new product and get immediate feedback on how well it is selling.
Under the old model if some merchandiser decided that orange was the new hot color they would have ordered a lot of orange items and then put out a catalogue with 20 pages of orange clothing. There is a huge cost to this in both inventory and printing costs. Instead you can now test this out easily on your web site. With an automated A/B test you can show half of the visitors a home page with orange clothing. If the retailer finds that nobody's buying the orange, they can very quickly take that stuff down off the web site with little associated cost. The savings doing merchandise testing this way are tremendous. No excess inventory to deal with, no out of date catalogs, no more decision making on guesses and gut feeling. We call this the shift to analytical marketing and the implications of it are huge.
Angel Mehta: Has the solution set moved past the evangelization stage to the point where customers understand the offering, know that they want it and now it's just a shoot-out between existing vendors?
Joe Davis: Yes. We have documented case studies showing either savings or incremental revenue as the result of using our product that's in the hundreds of millions of dollars. There are individual clients who have increased sales by $30 million in a year by doing something from the data they found in our product. So, there's no question we're way past the new interesting technology phase. This is something that almost all retail vendors are using in one shape or form. So we're definitely moving into a more mature phase and clients are now looking for recommended or automated actions instead of just getting more data. Everyone realizes they need to be more efficient and they are looking for solutions that solve problems faster and more simply. One sign of maturity is we've started to see more adoption within our clients' organizations. Instead of one or two merchandising people or one or two marketers using the product, it's now becoming departments of people working with our service.
Angel Mehta: You joined the company earlier this year… a lot of people would say that leaving a behemoth like PeopleSoft for a company of Coremetrics' size is a considerable risk. Why did you do it?
Joe Davis: A few different reasons. First, I wanted to lead a company - and Coremetrics offered me the chance to do that. Second, I wanted to be in a place where I could have an actual impact. Where the results I delivered impacted the company, not just a tiny division. I ran the CRM business at PeopleSoft… it was the fastest growing division there, but it was still buried inside a much larger entity. The stock could decline for reasons that had nothing to do with me. At Coremetrics, it's my job to make this company hum - and good or bad, I'll see the results of my performance directly. When I told Craig Conway that I was leaving PeopleSoft to run a company he understood where I was coming from - he had done the same thing himself. 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
