The First Wave to Change: From Premise to SaaS with Roland Zelles pt 2

Foreign.

Welcome to the Rethink Sales podcast. I'm Mark Danolo.

And I'm Michelle Seeger.

And we're talking about transformation Delusion. Why do we expect big results, repeat the same old patterns and how do we change that for our lives in our businesses? And we're picking up in this episode with part two of our conversation with Roland Zealous.

I want to shift gears a little bit and talk about the customer side. And so what's really interesting for me is like you know, how did you approach them? How did that go? Right. So how did you decide to go out to your clients? Your customers? What was the messaging like? I know that there were concessions made along the way but just reaction and, and what you did.

We did. We didn't run into this one and, and we're surprised. I think it was the, the most funny roundtable I had which was with a set of CEOs German CEOs at that time. And they were like as long as I'm in my job we will never have a cloud application in place.

Oh interesting.

Like oh and then you know you start the whole conversation about why actually having a kind own computing center is, isn't so safe. But anyway I think you know and then you can imagine we have lots of large OEMs, automotive companies who claim their computing center, their compute power is bigger than any of the cloud competitors, blah blah blah. So what we people were afraid of one thing going in from a perpetual model into a subscription.

Yeah.

Is you create this interdependence. It's a commitment but it's a commitment from both side and helping a customer understand that they actually gain power and they're much more involved in what you do. But they believe they have this, this is this one sided dependency because when you live about like a perpetual license it's like a product. You buy a product, you own the product and now you sign to a service. And it took a while where that customers lost the discomfort. I think some, some of the customers especially in the world we came from or with engineers and makers and products people have a product thinking. So they did not yet made at that time didn't make the transition from I you know I build a machine or I, I build a car, I sell it and that's it. But you know there service with that later on you find things like you know I think Tesla was great, they changed more even on the automotive. But I think a lot of the customers suddenly thought about oh I built actually I built one product. And then customers can Sign up to a service and in winter they have steering wheel heating. In summer they have seat heating and some seat cooling, then heating in winter. So that actually how you can move into a service contract with your customers. Predictive maintenance, Internet of things. I think when you talked about the changes. So we help customers how they can change their own business model. And customers who started to progressively think about that one then also were more willing to go there. But at the beginning it was like, oh, okay, you just want more money.

Yeah, you just isolated me as a customer. So you said something very interesting that I just want to not get lost in the conversation. Which is what you knew and what you understood is the customer believed that they were in control, that they had control and they would lose some of that with that SaaS model. So that's what it is that you were looking to overcome. And it was more of a thinking than maybe reality from your position. So I think that's an interesting thing is understanding what is it that's important to them and then how you address that. Did you end up using any case studies of customers that were successful to demonstrate to others? Was there anything else you did?

First of all, I think it's a good point. It's like what is fact and what is fiction? I think on this, I think this is one effort, I think training your sales organization and marketing on the communication, how you communicate. So yes, we did that. But what we did at the very beginning, because we were like had no example to follow. We did something I appreciated a lot at the time, which was war games. Think it's sometimes the word the name is sometimes little tricky depending on the time and the culture before what we did for each like the big change, but also for any announcements. We always had a group of people together where certain like a team of three to five people always they were playing various competitors. So they become the competitor. Some became groups, were customers, some were the industry representatives and some were the customers. And then okay, what, what is. What could be an argument? If you are the competitor, how would you. How would you. What is your counter strategy to that one? How you make it a better business? If you're a customer, you know, how can you destroy that? Why would it be a problem? So, and the more time you spend with that, I think the better your argument become. And also you correct a lot of things, you know, while you get into that one, because you do that then you test the story with your customers, you improve it further. And then, then you go out and then at least you have A a good framework where you can, can work with the other thing it did. Despite the kind of put yourself in the shoes of a customer, put yourself in the shoes of competitor. The more you practice it, the better you become in that one. And that also drives on the cultural change I mentioned earlier that you will be able to challenge without being a disbeliever or being against the change you challenge because you put yourself in the shoes of a customer or you act like a competitor. And, and this helped also building a trust in the organization that like okay, we a customer point of view, that's the way it looks like. How can we improve the model? How can we make it more customer friendly?

Yeah, I want to go back to the, and I love the war gaming thing because it seems like one of those things that a team just wouldn't take the time to do because that takes, it takes thought, it takes effort. You have to set aside time to actually do that when you're kind of like running and trying to make the business grow. But I think that's a very thoughtful approach.

With the.

Revenue. And I wanted to get back to this question of how you were growing. You had to get to this 5 million customers in just 5 years when it took 30 years to get to a million customers. And we talked about that briefly before. But my question is very simple. How did you actually do that? Because, because when we look at your quarterly euro year over year quarterly revenue growth trend which you shared with me last time we talked, it looked like from maybe it was late 2015 through almost 2018, you had negative year, year over year quarterly revenue growth. Right. And so how do you actually, how did you actually get there when you're, when you're kind of going into this trench like you did?

Yes. Yeah, it's that I think this was one of the scary parts in the sales organization and also in the finance community, as you can imagine. Because I mean it's profits and cash flow and it goes to the point earlier, what is fact and what is fiction?

Yeah.

So when I, when you, when I look back I think. But what happened all the time is because of, of, of the industry and the widespread of our technology, we very often became a reference point for pricing in the market and at least in the volume market. And then this goes back to the history of orders where we started like 80% of the functionality for 20% of the price. So we drove a lot of. That's how orders came into the volume. Over time, I think it was more than 100 of the value but still for 20% of the price. What we completely underestimated in that mark was cloud and the change of the business model. And I give you, maybe I briefly talk about that one. The first one is when you, when we move from a perpetual model to the subscription model, we change the pricing from whatever the. Let's assume the perpetual price was hundred, the subscription seed now was 40. So in going down so much on the price and having a very competitive offer already helped them. And this is still true. I think the idea we had is okay, you make the products disappear and customers really consume capabilities you have and the ones they need at the right time. The only way to do that is on a platform and you only get to a platform and cloud, I think you have to move to a SaaS model. So that was the original start, was really okay. You see the divergence of the industry. You move to platform, customers can consume whatever they need at the point in time. And then little bit of a pay per use model. And that's where we started. And then later on, of course, I think the financials came in okay, how you make that work and how does it work in a subscription model? So this was the second thought. So we always had this vision of okay, this is how it's going to work and why it's a better world for the customers.

But, but, but the customer, like you said in the construction industry, they may not have evolved their thinking to the level that you have. Right. So you're saying this is how you're going to work in the future. And they're like, really? Okay, so did you have to carry them along to paint that vision?

It's, I think it was, if you go by the, for the industries, I think the more difficult one was manufacturing. Okay, the construction was more easy because there were a lot of studies around at that time, like Stanford, constantly every year they published that productivity of a work in the construction industry was actually declining on a year over year over year over year basis. So there was there was this pressure. If you look to the balance sheets of construction companies, the profitability is not very high. I think the return of capital employed is good, but not the profitability. So from a business point, I, I think it was more easy to argue. And as I mentioned earlier, they're moving workers from a gloves and shuffle into an iPad user. And it's just a simple example is what happens at a construction site is every day somebody has to control whether the security defenses are still okay. You have all this quality and safety regulations. So somebody Walks around and fills in papers every day in the morning and every day in the evening. And then on a Friday this goes to whoever is leading the construction site. They had to type it all in and put it on a computer rather than do it real time with an iPad and a punch list. And you just do it and the work is done. The ROI was just crazily high. I think they saved a day per. Per week per person.

Wow.

So it wasn't, it wasn't very difficult on that side. And then all the other things came along. Manufacturing was a bit more diff. And, and I think what helped is because in in there's no ip. Okay. In, in construction, if you have a building, every building is a prototype. You don't have a mass production. And, and how you produce something isn't really a secret. Okay. So the industry was sending things around in email, Dropbox and whatever storage they could find and sharing documents. So nobody was really afraid of the Internet and the openness of it. So that's why I think the adoption went fast. There was just no technology because it wasn't an attractive market because the company's profitability was low. So nobody really provided a lot of technology because these companies weren't very high on the investment side. Just to make it to demonstrate you the challenge. The only if you look all industries and investment in IT construction was the second lowest. Only hunting and fishing was investing less in it.

Wow.

So that why no technology was. So it's a little bit of a chicken egg. And I think this change drove a lot of.

Yeah. So hunting and fishing, like building fishing lodges and hunting camps and stuff. Probably not on that. But if you could find a lower cost solution to go into construction. I get it. So with the manufacturing it was a harder sale. Was it harder to paint the vision for them or was it because of the IP or what was it that made it hard?

So one thing is if you produce something a million times, 100 million times or only 10,000 times, the big thing is Six Sigma. Okay. Six, six kind of wrong goods in a million produced items. So is con the kind of quality of the decision and the security of the decision is going a little bit against what we all have talked about with transformation. Like speed is more important than being 100 sure. On the decision. So it's a. That's the cultural clash. The second one is ip. I think they're so worried about the IP because if you build something, whether it's a golf club, a desk, a car, what you know, you can think Rockets about the most complex goods the industry we in the model. What the engineer does the all IP sits in the model. And for them to think about this this is in the cloud can be cracked and come somebody can steal it. Right Is it just drove them crazy. I think they. It took a while until we were able to explain them. Okay. This is re engineering. You can do a lot of re engineering. You can find it anyway. And you. You move your innovation into software. So it becomes. They become a software and a service company. As I mentioned earlier. You have a product and you sell it and then kind of you sell and forget into okay. You create a customer relationship. And then actually you. A lot of the innovation you have is in and your IP is actually also in software. So then you're also less worried about this part. So this was. Was one of the changes. The other thing is they were highly high had a high investment in it. So if you today and this was possible at that time when we did that you could go on the Internet, you order your car and they can give you the delivery date back. Okay. And everything was already managed through software. Lots of kind of hundreds of subsystems. And then the systems were coordinating okay and whatever. In seven months some company who produces the windshields have to have the windshields at the. At the belt. The imagination what can go wrong when you touch any of the systems just drove people crazy. And that's kind of slowed down the willingness to make changes because they never thought about this one. But nobody disagreed that they have to move. They just weren't agreeing. Okay. Why should I be first have find somebody else who goes first. I'm. I'm worried and I think it was a surprise because at the beginning I would have expected the people who are very tech savvy which was manufacturing would immediately understand it while construction would take a long time. And it actually turned out to be the opposite because the non techies were like that helps me a lot. While the technology savvy people were like were worried about the changes they had to do.

So I want to talk about the sales organization. You've got direct sales and a reseller channel. And we know that there's actually it's a two part question. The first one is I know that you faced some friction and there were some changes that needed to take place. You mentioned for example the growth of inside sales. So I wanted to first just talk a little bit about you know what needed to change with the model and were there things maybe you didn't expect. And then I'll follow that up with an incentive conversation because that's really important.

So this was, it drove a lot of the.

Yeah.

Churn on the employees is we knew, we were, we were convinced, okay, we need inside sales. So I did, you know, we did build up from. We had no inside sales at all.

Because.

Totally I'm an engineer and a lot of our people, our employees were engineers and an engineer sells to an engineer and you cannot have a non tech person sell it over the phone. Okay. This was kind of the, the myth of fact and fiction are different. So in building up these inside sales teams, I think, you know, I was, for instance, I, I did Barcelona in Europe. So we moved from like 0 to 500 people.

Wow.

And, and you, you start at the beginning and then I think you, you figure out actually it's, it's not so different. And we, we knew it. So which went along with the change of the sales organization. I, we asked people, you are, you're on the road three days a week and I think all calendars are published. And if people didn't go, you ask why? And then their typical argument was, you know, it was on the phone. Which is perfectly fine. But why should I pay somebody, pick a number. $180,000 to be on the phone in the field versus somebody who does the same job for one third of the cost or for a quarter of the cost in an insert sales sum. So we were sure this seems is going to work. So we started in like a moving of. For instance, I had, we had 12, I had 12 people every two weeks and trained that and moved and then just, you just add and then, you know, it becomes a machine. The, the big difference is you had to move to a standardized sales approach and a standardized sales model. So, and then driving a lot of automation, of course, like you know, with basic things I think everybody's using. And, and then you learn how what works, what doesn't work goes back to okay, you have a, you have a script what works, what doesn't work based on the customer. And then you, you start to automate things. Then it become better and better and better. So the big thing was really customer. There's a, there was a kind of.

A.

The notion of okay, I want to talk to an engineer, but I think you, you want to talk to somebody who is interested that you are more successful. So changing customer expectation and changing, changing also the internal expectation was a big challenge because the product for product sales is very important because that's the connection to the customer. But the problem is now there wasn't an engineer. So we had manufacturing engineers talking to the manufacturing customers and then they were talking to the manufacturing product group. So you broke this one. So they had to take over the task of, okay, they connect to the customer fully, fully understand what customers want, how they need it. So you don't have the sales team in the middle of becoming your Sherpa, trying to find out what makes sense or not. Sales is here to sell. And of course we provide you customer feedback and customer experience and make all of these things. But we're not like you're helping you to create your development roadmap. I think that was for the product team, one of the big so which I think they had to figure out, okay, how to do, how to do that on the inside. It turned out very fast. I think success is always like when you have 12 people every two weeks. And then success kind of proves that you're right. And, you know, you always have the chance to slow down or accelerate when you see your assumptions were wrong. I think the biggest. The biggest challenge was then that technology. Your technology team wasn't set up because if you have a field sales organization, they. They able to figure it out themselves. Now you have a machine. So suddenly your internal IT department is not set up. Okay. Telephone system. You need somebody who is constantly changing, optimizing salesforce tools, everything. So you had to suddenly had to hire a whole armada of IT people who help you to. To keep the machine running and go faster and faster. Because I mean we had only some. We didn't have a lot of time to reach to the 5 million.

Wow.

Customs.

And what did you guys do in terms of incentives? How did that change?

So the tricky one, the internal wasn't so difficult because you can always align incentive plans with what you want as a company. In simple terms, if I mentioned a perpetual license was 100 and the subscription was 40.

Yeah.

So we just. We just planned and make things equal. So I think for the sales people didn't make a difference. And then as. As after. After the like first introduction, which was in the middle of the year, you overweight on the subscription and make sure they do the right thing and the money will help them to get the right incentive. So that's. That was simple. The tricky one was that. That channel.

Yeah.

Because the partners is a cash flow business. And when you have your kind of snake, golden snake and you burn into cash and actually negative. We lost money. I think was the first and only time in the history of the company that we lost money. The partners are in the same boat, but they don't know whether this all works out and whether all your great stories are true. So helping them to not kind of cut half of the organization out and making the change there. So what we did is. And you know, that was a tricky one also for the finance community is we made the change in the middle of the year. The reason for that was, I think when we spoke with partners and you had to trust them that nothing leaks out, that they knew they have time to build cash flow and create a buffer to go with us. And then also if you split it up on two half years, it makes it a little bit more challenging for us as a company because ideally you want everything in like now and then from that minute it goes up. If you're a partner, you want it as slow as possible. And how you. So what we did is we did it in the. They change in the middle of the year so they could build a cash advance. We're burning into it. And then like in the. The year after when. After 12 months, typically you. That's. That's a. That was the toughest one. Then it started to grow so they could get there. And then you had payment cash incentives. So we did a lot of these things because this was one of the biggest worries I had at that time, because honest, 80, about 80, 85% of the business was indirect resellers.

Oh, wow.

We were worried that we would wipe out our partners just going bankrupt. So, yeah, you know, lucky. I think it all worked well. I think partners were trusting us and it also made. Made it easier in the future. You know, we just. When before I retired, we moved from a reseller model by sell into an agency model and.

Oh.

Yep.

Luckily, because of the great experience, partners actually were believing, I think was. It was probably more scary than this one what we did with them, but I think we got them through and I think that's all very successful business. But it's. That was tricky internally, in my opinion. The internal one is more easy because it's a large company, you have enough money, you control a lot of the changes. The external is difficult because it's very programmatized and you. Yeah, you have a lead time. And also there's less tolerance for getting things wrong because you, you impact a lot of. A lot of other companies. I think at that time we had 1500 partner companies.

Wow.

And you know, and more than 10,000 salespeople. So they do impact a lot of people with the wrong decision.

So did, did you lose any significant portion of your partner network during the transition?

No, it grew. We also, I think it looks. Looked very different afterwards because what was clear and I think we. And we constantly were talking about acquisitions. Size matters on that one, to become larger and having. Being a larger partner. So we, we incented mergers and acquisitions with partners. So you know when. And this is like, you know, long, long time ago, but I think when I started, I think we hardly, as a company, we hardly had $100,000 deal. Now, you know, nobody, Nobody's blinking when you do a $25 million deal. I think 100 million, okay, that makes, that makes the press same as partner. If you had a million revenue with us, I think you were hero partner. I think they were invite. You know, this was a great thing. And, and nowadays I think, you know, I cannot talk about that. But it's. Half a billion is a good partner.

Yeah, yeah. The numbers, the numbers have changed.

And they acquired. I think we didn't lose anybody. And we told everybody who's like, okay, this is. I cannot survive with this one. I cannot even make the year that they sold the business. And our contractual framework helped a bit because customers were always ours. So.