Description

I believe ServiceNow can deliver IRRs of ~21-30% over the next four years.

Sorry for the long write-up but because this is an ITSM business and many people aren't familiar with ITSM, I thought I'd include some more content here explaining the industry's background.

Business Description

Fred Luddy was a few days short of his 50^th birthday when his $35m net worth imploded to zero.

Peregrine Systems, the company for which he had been the CTO for 13 years, was cooking the books. In 2002, the company suddenly filed for bankruptcy and several top executives, including the CEO, went to prison. 

Luddy took everything he knew, hunkered down in his San Diego house, and coded solo for several months. He created the prototype of what would eventually be renamed as SeviceNow. 

Below I have an interview with Luddy, from 2013, transcribed. It explains well what ServiceNow does:

Dave Vellante:

Okay, we're back everybody. This is Dave Vellante, wikibon.org, I'm here with Jeff Frick. This is the theCUBE, SiliconANGLE's product. As we say, we bring you to the events around the world. We extract the signal from the noise. Fred Luddy is back, fresh off the Keynote. It was fire-marshal-full, the room was packed. Fred, congratulations, you had the room in tears, just laughing. I talked to a number of practitioners afterwards, they absolutely loved it. So, well done.

 

Fred Luddy:

Thank you, it was a lot of fun.

 

Dave Vellante:

Yeah, you seem to really enjoy these moments and it's just really gratifying, I think to see the audience respond the way they did.

 

Fred Luddy:

The audience is deeply inspirational to us. And we like to try to return the favor by showing them some new things in advance of things that are under development. Some innovations that they've been asking for some time. And they're also very supportive. Great group of people.

 

Dave Vellante:

So let's break down the highlights, of the Keynote. We livestreamed Frank's yesterday. We didn't livestream yours. I wish we did.

 

Fred Luddy:

No, people are always afraid of what I'm going to say.

 

Dave Vellante:

Yeah. Okay, that's...

 

Fred Luddy:

I don't know, but I have a lot in common with the Vice President Joe Biden, in that, I really don't know what's going to come out of my mouth.

 

Dave Vellante:

All right so let's break it down. Talk about some of the technology trends that you talked about in the Keynote and some of the things that you see, you got your big four or five there, share with our audience.

 

Jeff Frick:

The Smack, I think was a big one, because you hit the big six there.

 

Fred Luddy:

Yeah, there's no doubt that Smack, or scam as I called it-

 

Jeff Frick:

I never heard you say Smack before, or SCAM.

 

Fred Luddy:

Yeah. Social, mobile analytics and cloud, which are of course complimented by big data and virtualization, they're here to stay. They've already climbed through that hype cycle. And the next thing that's going to add to all of that is of course the internet of things. And I think this is a fairly new term, but it's talking about the tens of millions, probably predictions are 50 to 60 million interconnected things on the planet, by the year 2014, 2015. Little tiny cameras, little tiny sensors that are going to provide all sorts of different capabilities.

 

Dave Vellante:

Yeah, June is Internet of Things month, by the way, at siliconangle.com.

 

Jeff Frick:

Oh, it is?

 

Dave Vellante:

Yeah, we're going to cover this like a blanket. We've got a bunch of research that we've done on the industrial internet. Yeah and so-

 

Fred Luddy:

Exciting stuff [crosstalk 00:02:51].

 

Dave Vellante:

That's really June's editorial theme and we're very excited about this and also our partners at O'Reilly Media, have done a lot of work in this. I don't know if you know Tim. And they've done a great job at their conferences. So, we're collaborating with them on some of this as well, so were a little bit excited.

 

Fred Luddy:

That's awesome. It's going to be staggering, when pretty much everything is connected and it has, severe ramifications, doesn't it?

 

Dave Vellante:

Yeah. I mean, I think it's-

 

Fred Luddy:

Privacy versus freedom?

 

Dave Vellante:

The whole analytics theme and making Hadoop Enterprise ready, that's all nice, but the Internet of Things, given the numbers that you just cited, has just ridiculous potential. And it's interesting, you see the IBM, Smarter Planet, and now you see GE with all the commercials. It's like, you've got two big players going after it. The old saying, "One lawyer in town, nobody makes any money, two lawyers, they both get rich." Let's see what happens there.

 

Jeff Frick:

It also falls upon the movie theme, Fred, a lot, all the good movies scenes back to the future, all these great movies that predict the future and all these internet things are going to be like ET, right? They're all going to phone home. They're all reporting back their condition.

 

Fred Luddy:

They all are going to be phoning home. Absolutely.

 

Jeff Frick:

Yeah, and the other thing that came up in another conference is really how transformative to business that will be in terms of changing their business. For instance, should GE sell jet engines or should GD sell jet propulsion? Will they manage the engine and they manage everything about the engine?

 

Fred Luddy:

Correct.

 

Dave Vellante:

Or data!

 

Jeff Frick:

Yeah, not to mention the data off the engine.

 

Fred Luddy:

Yeah and you see that they're running even a television ad right now that talks about their locomotives feeding all that data right back to them so that they can maintain them and keep them at better operational efficiency.

 

Jeff Frick:

Yeah.

 

Dave Vellante:

GE, are they a customer?

 

Fred Luddy:

They're a wonderful customer.

 

Dave Vellante:

So Fred, you started our conversation yesterday and your Keynote today, talking about how proud you are, that you've been a programmer for 40 years. So talk about that a little bit.

 

Fred Luddy:

I think when people are able to find a passion, a deep passion that they're reasonably good at and they can make some money at, I mean, what-

 

Dave Vellante:

It's almost not fair.

 

Fred Luddy:

It's almost unfair. And, every day I've woken up since I've been 17 years old, I've wanted to write some code. And, pretty much, I fulfilled that dream. And, I really enjoy being a programmer. I told you yesterday, I love technology and I hate it simultaneously. I love it when it's liberating and enabling. And I hate it when it makes me feel stupid, or it makes somebody else feel stupid. And I think that has been why I've been so focused on simplicity all these years as well.

 

Dave Vellante:

I think we can all relate with that and frustrations that we've had in our lives with technology. We started to talk a little bit yesterday about the journey that is ServiceNow and I went back to sort of 2003 and you had this sort of idea to build this platform and you took us back even before that. Let's review some of that for those not familiar with the ServiceNow story. How did it all start?

 

Fred Luddy:

Well, I was working for an enterprise software company at the time and I noticed all these things happening on the internet. You had MyYahoo come out and 88,000 people customized a homepage on day-one, with no training, no instructions, no help desk. And I thought, Wow, to do that in my class of software, you'd have to take a course, you'd have to go through a one week exercise and then it would be something you didn't want and you'd have to repeat. And you saw things ... I have a brother, who sells insurance. And we're walking down the street in Chicago and his phone beeped. And I said, "So what's going on?" He said, "My wife just spent $700 at wherever it was." And I thought, "How did you get that?" He said, "Oh, Citibank lets me send SMSs when certain things hit my account."

 

Fred Luddy:

And I thought, my God, what's happening in the consumer space is absolutely stunning. And remember, this is around the turn of the century. What's happening in the enterprise space is more of the boring, old same, right? It's horrible. So there has to be a better way, a simpler way, for enterprise software. That was really the catalyst.

 

Dave Vellante:

Okay. And so, then how did you get started? I mean, you didn't start, if I understand it correctly with, "Okay, I'm going to go solve the problem of IT Service management," right?

 

Fred Luddy:

In fact, that was the last thing I was going to do. When I left my previous employer I thought, "There's a business segment I will never, ever, ever get back into." My definition of 'never' is apparently nine months. But it really started off with what Gartner ... In 2011, Gartner coined the term 'Citizen Developer.' And my vision, my view, was to be able to and this is in 2003, November 2003, be able to enable real people, real business people, to create meaningful workflow applications. And what that meant was, to get any sort of work done, typically people fill out a form, right? Whether it's a prescription that you're taking to the pharmacy, or whether it's a request for travel, or a purchase order request, you're filling something out. And there's a very simple cycle that happens in business called, request, respond, fulfill.

 

Fred Luddy:

And I thought, before we had email, which has become like a defacto workflow engine, unfortunately, clerical people used to create forms and those forms were in the copy room. And you'd go grab the pink form, if you wanted to go somewhere and you grabbed the yellow form, if you wanted to buy something. I thought if clerical workers were doing that 15 years ago, why can't those same skilled people build something today, using modern technologies? So the notion of the Citizen Developer, is somebody who is not technical, who doesn't know what a database necessarily is, who definitely doesn't know what Java, HTML, JavaScript, or CSS is. They take a platform like ours, or even forest.com to some extent, and they can create a meaningful application for their business. And that was the ... The hole notion was: Solve this problem of having to have extremely highly skilled programmers, create simple applications.

 

Dave Vellante:

Yeah. And of course at the time, dot-com had imploded and it was test a terrible time for technology. Silicon valley buildings were empty and the state of tech was, does IT matter and everybody was cutting budgets. And so you had this vision of, "Okay, just make it easier for people to develop." So you developed this platform. You started heads down, you started coding.

 

Fred Luddy:

That's correct.

 

Dave Vellante:

Okay.

 

Fred Luddy:

On November 5th, 2003, it was me, a laptop and about 25 pounds of Starbucks French Roast.

 

Dave Vellante:

And so you just programed for how long? I mean you were just-

 

Fred Luddy:

I did it about six or nine months by myself, just to really try to prove out the platform concept. And then I took it to a couple of friends of mine and showed them the platform capabilities. And we got into this funny discussion. They would say, "What, what can this platform do?" And I would say, "Well, it can do anything you want. Well, name one thing, well name one thing you want it to do." And so, this was not very productive. So back to plan B, which is still to make plan A work, was that we would build a set of apps that solved a business problem, on top of this application, to prove its value. And that's when I went back into this, I-T-S-M-I-T-O-M-A Asset Management Market that I swore I was never going to go back into again.

 

Dave Vellante:

Because you knew it, right? It was in your head?

 

Fred Luddy:

I knew it, it was an old market. It was yet, it was a very much a growing market. It was an influential market that could, that is and has been growing into something much bigger than it was. And it was tremendously underserved and expensive by very, very old technologies built in the early nineties and the early eighties.

 

Dave Vellante:

Now talk a little bit about this notion of a single system of record and why was that important architecturally? I presume it was part of the fundamental architecture, but can you talk about that a little bit?

 

Fred Luddy:

Well, an ERP department, has a life cycle of things that they go through. An IT department, excuse me. An IT department has a life cycle of things that they go through. And they typically would manage individual pockets of this life cycle in individual spreadsheets. For example, they might manage the servers, spend for a trading floor, which could be up to, in one case, a quarter billion dollars a year in a single Excel spreadsheet. With no visibility to upper management. They might be managing their project and portfolio, in essence, what they're rolling out the new stuff, again in another spreadsheet. I talked to the CIO of Verizon and he said, "Systems, processes Fred, I got about 2500 systems that I use, to run Verizon. 2400 of those are individual Excel spreadsheets on people's desktops."

 

Fred Luddy:

And, this whole notion that you have an idea, that somebody gets funded, that someone goes and procures or buys some technology to solve the problem, that the idea is trying to solve, to getting it into production, to maintaining it while during its life cycle of production, to eventually retiring and replacing it with something else, that's the whole IT life cycle that we're trying to manage as a single system of record. The reason that the single system of record is so important is that, now you can roll up the data to the CIO level. These CIOs, we have CIOs with multiple billion dollar budgets. They care about really about three things. Number one, where did the money go? Number two, where is it going to go? And number three, am I putting my company at risk, by investing in these areas? And so, by rolling up all of this information and putting some financial data around it, this upper management, now has a far better understanding of what's going on in the IT environment.

 

Dave Vellante:

Okay. But so, others have had databases, right? I mean, Cantata had a database, PROSITE had a database. What was so special about your single system of record, your CMDB? Why is it so flexible? Why is it so powerful?

 

Fred Luddy:

Well, I think there's two things. Number one, you may mentioned Cantata, which is a great product, but it was purpose built to solve only a sliver, of that ERP for IT problem. And there were many other great databases that were built to solve a sliver of the problem. And so, the way that large software companies, typically try to solve big problem, is they buy lots of stuff and then claim that it's integrated and it's not. It's integrated on the PowerPoint and it's integrated on the invoice and no part in between. And so what we decided was simply-

 

Dave Vellante:

And maybe the UI. Maybe.

 

Fred Luddy:

Maybe. It's funny, they used the term seamless, right? And as any tailor will tell you, "What's wrong with the seam? It seems to work pretty well. It looks good on your jacket." But, in any case, what we decided was all of this needed to be in one place because it's all interrelated. And, when you have an incident, when you have say a major trading system, that's having a challenge, you want to know, number one, what are all the different parts? What are all the different parts of the IT infrastructure, be it databases, servers, storage, networking capabilities, etcetera that are part of that trading system. And then you want to know what possibly is having an outage. And then you want to go into almost the asset management portion because, if I'm having problem with a piece of storage, I got to contact that vendor. I have to know who that person is that I'm supposed to get to. And I have to do this in a very timely fashion.

 

Fred Luddy:

So, the notion that these can be individual systems, is not a good notion. It'd be like, keeping track of your cash in one spreadsheet and your bank account and another spreadsheet, you would never know what kind of money you had, right? So, the notion that all of these parts are interrelated and they ... You get the most value out of them, when you can see the relationships.

 

Dave Vellante:

One follow up on that and then Jeff's got some questions for you. So, databases, today are relatively small. You try to limit their size and there's a lot of them and David Foyer and I, our CTO, when we met with Ana your CTO, the light bulb went off and we said, "Okay, all these small databases have business processes built up around them, that are sort of hardwired to the database, if you will. What ServiceNow has enabled is, I've got this single system of record. I can take whatever business process I want to draw on the board and I can apply it, to the system or apply the system to it, as opposed to having to hard wire my processes, to some module." Is that the right premise?

 

Fred Luddy:

That we can continue to just build on and keep adding to the system?

 

Dave Vellante:

That the power of that central database, that single system of record, is that I can now ... It gives me freedom in my business process.

 

Fred Luddy:

It does. The biggest issue with creating any workflow system, is knowing the people, places and things that are going to be involved in that workflow. That's the heart of our system. Not only the CMDB, but also all the locations, all the people that work there, the organizational hierarchy, all of that's loaded into this class of system. And now I can build additional HR onboarding, when you saw some of it today with this things that customers have done. Great applications that draw on that data. When Rob Phillips stood up there and created a conference room reservation system, that drew on the location, data and the contact data already in the system, you get to ... It is not just a specialized insular database, it's taking advantage of a lot of data that we already have.

 

Dave Vellante:

Seeing your vision through of what it is Jeff that you want to do.

 

Jeff Frick:

Well, what's interesting is a lot of people when they do a startup, either you come at it from a platform perspective, which doesn't usually work, because nobody wants to buy a platform, no one's got line item in a budget someplace for, I need a new platform, or they come at it from an app point of view. But then as you said, what will often happen, is you have a purpose built app, now you try to expand it and you're kind of gated by that, which you set up for that purpose built app. What's unique about your story you just described it, is you really ... You say it was a platform you designed as a platform at first, but you did kind of have the app structure, which is basically a workflow app in mind. You did build the platform, before then building the go to market app, but it since you started as a platform, seems like then it's been easier to expand it and morph it into different, kind of sub-applications.

 

Fred Luddy:

Well, that's very true. And the app, it is a purpose built platform. It does workflow, lots of workflow very well. Forms based workflow. And just so happens that, IT service management and service relationship management in general, just tends to be forms based workflow as so many things are in an organization. But I have to give you another little clue. I was visited by Paul Maritz, who was at the time, the CEO of VMware and he really liked this system as well. And he said, "Fred, how did you get so many things so right?" And I said, "Paul, this is the fourth time I've done it." I did it in several generations of technologies over several generations of computing devices and this time I think I might have gotten it more right than the other three combined.

 

Jeff Frick:

Well, the other thing you talked about in the keynote was Moore's law. And obviously Moore's law was specifically talking about microprocessors, but as we've seen with time and as the infrastructure and I was at some early ASPs in terms of networking and computational horsepower on our devices, these crazy things that we all carry around, which probably have more horsepower in them than most of the Apollo missions, I'm sure. And how that enablement and kind of this perfect storm of infrastructure coming together, has enabled cloud apps and why now suddenly we have the big three cloud apps, so before everyone was leery and it wasn't quite there and-

 

Fred Luddy:

Yeah, you're absolutely right. And there were great things that happened during the dot-com or dot-bomb era, or however you want to refer to it, we built out massive amounts of networking technology, tremendous amount. We had tremendous over subscription or actually we had tremendously overbuilt the amount of fiber optics we needed. And we're now finally taking advantage and finally hitting the ceilings on that. The other thing is that the advent of 4G networks, or whatever's going to come after that, which are slowly becoming a reality, is really making things like our phone interface, far more realistic to do than they were even a year and a half for two years ago.

 

Fred Luddy:

Moore's laws, it applies to almost every part of the technology stack has, has benefited us. And you're right about these devices. If you saw our IPhone demo with the interactive graphics and the way things were sliding back and forth, if there wasn't a massively powerful GPU in here, we couldn't pull any of that off. It just, number one, even if we didn't have that GPU, that thing would be too hot to hold and the battery would be dead in 10 minutes. And if we didn't have the great bandwidth, we would never get any information. We just didn't watch the spinning thing. It is a wonderful time.

 

Dave Vellante:

So, we're getting the hook, but I just wanted to circle back to sort of the original vision this platform, but what do you want to do with it? And so you've developed an application, you've focused on the IT problem, which is, it's an enormous TAM. I mean, the IT business is, you're talking about a trillion dollar business. You've got, 14% penetration of the Global 2000, so a long way to go there. And you're not just limited to the Global 2000. We had one customer on yesterday. He said, "Well, we started with five seats." And we've been talking, well, we need service now for all this CUBE action we have and all our scheduling. So, what we kick in the tires. And you people talk about how you got a path to a billion and all that other cool stuff doing, you're doing great, but your TAM, is limitless based on what you just described. If I can do anything with that platform, where do you see taking this thing, longer term?

 

Fred Luddy:

Well, I can't tell you specifically what kind of apps that we're going to build, because I simply don't know. But I can tell you that it's my desire and it's the company's desire, to become relevant to every employee that carries some kind of electronic device. In other words, whether you're being onboarded, whether you're being trained, whether you're interacting with HR facilities, any sort of interactions, where you're requesting work or trying to find information, it could be as mundane as, what's our healthcare policy? What's my vision policy? To how much PTO time do I have? How does our 401(k) work, etcetera, etcetera. We want to be relevant to everybody in the business from that perspective. And we will be both enabling the platform, application development capabilities and building new applications to reach further and further because, these processes that you see throughout IT, these processes are repeatable throughout our lives.

 

Fred Luddy:

If you think about what is incident management? Incident, is something which is broken and not working. So here's a classic incident, "Honey, the toilet's running," that's an incident. Resolution of that incident is simply jiggling the handle, right? That's incident resolution in the IT terms. I mean, this happens every day. Well, if the toilet runs a lot, then you want to do some problem. You want to go into problem. You want to figure out what's the problem. Is the chain broken? Is the valve thing? Is it dirty? And then you go into change management, right? I got to replace the part.

 

Fred Luddy:

Your car doesn't start in the morning. So you jump it, right? That's the resolution of the incident. Why did I have to jump it? Did I leave the lights on last night or simply the battery reach the end of life and it's never going to recharge, right? So again, that's just problem management. So we see these things not only happen throughout all sorts of things in our business life, but it's also directly applicable to a lot of personal life. And right now I think it's dreadfully unfortunate, that the major workflow engine, for most of this ad hoc stuff is in fact email. I just think it's a horrible workflow engine.

 

Dave Vellante:

Or in many cases, nothing. And so, we're talking about the Internet of Things before. I mean that-

 

Jeff Frick:

The toilet will send you the signal, right?

 

Dave Vellante:

Well, all that data, the opportunity to sort of put those pieces together is limitless or-

 

Jeff Frick:

We have to because the kids don't use email anymore. The next generation of employees don't use emails.

 

Fred Luddy:

It's all about the smack.

 

Dave Vellante:

Well, Fred Luddy, real visionary, Paul Maritz absolute, wonderful visionary as well. And that's quite a compliment, coming from Paul. We've tracked him now for many, many years. Fred, thanks for spending so much time in the CUBE. Congratulations on a great event and building a great company. Really appreciate your time.

 

Fred Luddy:

Thank you for having me. It's been a pleasure.

 

Fred Luddy:

All right. Keep watching everybody, we'll be right back with our next guest right after this.

 

---

With ServiceNow he took everything he knew and made it better. 

Luddy’s vision was to bring the consumer model of computing—beautiful user interface, working on any device (like an iPhone or iPad)—to enterprise software, and to allow any company to build any type of workflow.

What’s a workflow? Imagine the following scenarios for employees inside a company:

-       - John needs a new laptop because his laptop was stolen; he’s a developer and needs a certain configuration, model, etc.

-       - Amanda is traveling to the Dublin office in two days and needs to book a conference room. She also needs to submit receipts of the trip for expensing.

-       - George is the Chief Technology Officer in charge of making sure 4,000 servers are up and running, with the proper software installed; he needs to make sure they have the right configuration files, that there are no security issues, and needs a database of who’s in charge of what segment of his IT stack in case something breaks.

When Luddy started, people asked him what they could do with ServiceNow and he answered, “Anything!” He was right, but in order to get funding and traction with customers, he decided to focus on the last item on that list: ITSM, or IT Service Management.

Large enterprises with thousands of servers, databases, network switches, and now, cloud instances, and all the associated information (configuration, contact person, developer on call, vendor, version, configuration, and so on) need a way to monitor all these in a “single pane of glass.”

They also need a way to create workflows: “A broke -> notify B -> order C ->” and so forth. 

Over time, ServiceNow expanded beyond ITSM. Here’s the description from the 10-K:

“ServiceNow was founded on a simple premise: a better technology platform will help work flow better. The company’s purpose is to make the world work better for everyone. We help global enterprises across industries, universities and governments to digitize their workflows—the individual tasks that need to be executed to get a job done. Our technology platform, which we refer to as the Now Platform, enables us to connect systems, silos, departments and processes with digital workflows that are simple and easy to use. We categorize the workflows we provide into four primary areas: Information Technology (“IT”), Employee, Customer and Creator, as discussed in more detail below. Our IT workflows give IT departments the ability to plan, build, operate and service across the entire IT lifecycle. Our Employee workflows help customers simplify how their employees get the services they need, creating a familiar, consumer-like way to get work done from wherever an employee may be—at home, in the workplace or in the field. Our Customer workflows help organizations reimagine the customer experience and increase customer loyalty. Our Creator workflows enable our customers to quickly create, test, and deploy their own applications on the Now Platform.”

ServiceNow is the leader in ITSM (the number two is Atlassian, but Atlassian has a very different focus and go-to-market). The industry remains quite fragmented. In its early years, ServiceNow was mostly replacing BMC and other legacy vendors.

Below I share what Frank Slootman, now CEO of Snowflake, wrote about ServiceNow when he joined the company as CEO (and took it public via IPO):

“How to Spot a Potential Super-Grower

First, I was stunned by ServiceNow's extraordinary growth rate as of 2011. Something rare and special must be going on when a company can rack up such huge gains year after year. 

Second, the incumbents in this market, HP and BMC, were not popular with customers. Their products were aging, architecturally deficient, complicated, and hard to support. If you recall one of the takeaways from the previous chapter, it's always better to attack weakness rather than strength. ServiceNow seemed to have a golden opportunity to capture the customers of these unpopular incumbents.

I remember conversations later on with executives at several large institutions who were literally pleading for the chance to replace their old ticketing systems with ServiceNow. We simply weren't ready yet for their scale of operation, but they wanted us to try anyway. Knowing that this intensity of demand was almost unprecedented, we never walked away from any project, however daunting. 

The third factor that elevated my interest was a conversation with founder Fred Luddy, who revealed that ServiceNow was starting to be used for completely different use cases, beyond IT service management. Human resources departments and event managers had discovered and liked the software. This meant that it had the makings of a generic workflow platform that could address any ser vice domain. Customers saw something that software analysts and industry pundits didn't: This was a platform, not a tool. A tool is a one-trick pony, but a platform is broadly capable of many different uses. 

This really mattered because I dreaded a repeat of the Data Domain scenario, where a market eventually reaches saturation and there are no obvious ways to expand and sustain the growth trajectory. I never wanted to repeat that sensation of being landlocked. As a CEO candidate I had only sketchy evidence and glimpses of ServiceNow's future potential, but those signs were encouraging. 

Finally, the company's venture investor showed me the highlights of a transcript of every conversation the VC firm had had with customers over the previous year. This is fairly standard operating procedure for investor due diligence. It was about a 60-page document, packed from top to bottom with enthusiastic quotes and comments. Customers not only loved the product, but they also loved ServiceNow's people. It's rare to read such superlative and consistent praise about a company. 

Whenever you make a major career decision, it's impossible to know everything, but I now knew enough about ServiceNow. I was all in. There were numerous operational challenges ahead, but the fundamentals I saw in 2011 would hold up spectacularly over the decade that followed. 

Improving Execution of the Original Strategy 

In the early years of my tenure as CEO, we focused relentlessly on execution, not strategy. There was nothing inherently wrong with the current strategy, but we weren't yet close to executing it to its full potential. Finance was starving the company for resources, sales couldn't recruit to hiring targets, our cloud service was highly unreliable, and our engineering department was anemic in terms of resourcing. 

As a helpdesk management replacement offering, ServiceNow had many of the same advantages as Data Domain. We were not creating a brand-new category, just a much-improved way of doing things. Our potential new customers had a clearly identified buying center with a budget, relevant expertise, openness to switching, and curiosity about what we could offer them. It wasn't hard for our reps to get meetings or bring potential customers to our live demonstrations. The contrast between what they already had and what ServiceNow could give them was glaring. 

ServiceNow was more elegant and simpler to use than any incumbent, while solving their most vexing problems. The system was dynamic: non-programmer types could change database structures, workflows, reports, notifications, and even the appearances of forms that were used by IT people to create incidents and other IT tasks. This was entirely novel compared to legacy systems. Moderately technical IT people could now make changes on a daily basis, something completely unheard of in this class of software at the time. Before ServiceNow, changes to these systems were sporadic, if not nonexistent: too difficult, expensive, risky, and time consuming. 

We did lots of deals, but they weren't large because we were only licensing the product to people who staffed the IT helpdesk. Furthermore, our feature set was limited to a few core modules of the IT infrastructure library (ITIL) framework, the industry standard for service management. In other words, we were not licensing enough users or giving them enough functionality. Adding more of both became the underpinning of the company's growth model in the first few years of my tenure. 

Expanding Our Opportunities 

As we fought through these early challenges, new strategic opportunities started to come into focus. Our first foray into what I call "opening the aperture" was to position ServiceNow as the "ERP for IT." ERP is an industry acronym for "enterprise resource planning." IT had never previously been what we call "platformed"-in other words, it had no all-encompassing management platform. Companies ran their IT functions piecemeal, via spreadsheets and email. 

Our idea was provocative but not entirely credible because we still lacked many features and functions to make the idea of an ERP for IT a reality. We had a blueprint for adding the missing parts of our framework and test versions for some of them (such as the Configuration Management Database, a system to store hardware and software specification records) but not yet a finished, mature, and ready-for-prime-time solution. 

Once we convinced IT executives that their entire IT staffs should be licensed on this system, rather than just the people staffing their helpdesk, our market grew by orders of magnitude. So did our deal sizes. Our argument was simple: this product isn't just for helpdesk people resolving incidents; it's also for network engineers, system admins, database administrators, and application developers. They're all integral to the workflow, and ServiceNow can improve the quality and velocity of every stage of the workflow. The help. desk people were routing the incoming requests and following up on status, but the actual work was being done by other experts who needed to be full participants on our platform. 

We ran hard for years to fill in the blanks, gradually substituting all the placeholders with real products and turning the vision into a complete reality. Customers liked our strategy, even when they knew it still had a way to go. Our platform created a rich framework for numerous other functions and modules. It was a canvas that we could continue to add more innovations to in the future. 

One of the more vexing challenges was to get our own people to move beyond their original mentality of merely building tools for helpdesk staffers. Some of our sales reps were happy and comfortable selling to a narrow niche of customers, and they wondered why we were pursuing a broader strategy. I tried to convince everyone that going bigger was the only path to long-term success. I started using expressions such as "Desk"–short for helpdesk–" is a four-letter word" and "Tools are for fools." The team had to embrace and master our positioning as a platform, which would make us so much more valuable than a supplier of tools.”

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Today, ServiceNow is led by Bill McDermott, ex-CEO of SAP (an ERP company, which is interesting, given the comparison Slootman made above between ServiceNow and ERP companies).

Business Merits

ServiceNow has extremely high retention of its customers, about 98-99%. This is higher than Salesforce and Costco’s membership subscriptions. It is said that the remaining 1-2% churn happens because of M&A (and companies consolidate on one instance of ServiceNow) although that’s hard to verify. In any case, this is as sticky as enterprise software gets.

The company generated $6.3 billion in trailing twelve month revenues, growing an average of 31% over the last two years. Management has guided to $11 billion+ by fiscal 2024 and $16 billion+ by fiscal 2026 in its latest Analyst Day, both numbers up $1 billion from its previous estimate.

Free cash flow margins have averaged 30% over the last two years and have risen over time; the company guided to 33% free cash flow margins in the future.

ServiceNow has good unit economics with CAC payback of around 21 months. This is by no means world class, but given the product’s extremely low churn, a payback of less than two years seems very reasonable. 

Importantly, this does not measure the expansion of customers with ServiceNow, that is, how much more they tend to spend over time. The company shared that its 2010 cohort, for instance, has grown spend from 176% compounded since then, which means that a customer now spends 21x more than it spent with ServiceNow in 2010. All other cohorts since then also boast incredible growth rates.

Like any well-managed business, ServiceNow has made very smart tuck-in acquisitions to supplement its products, and keeps building software to solve customer pain points and feature requests. It has a number of features it frequently releases at higher price points, or added modules, which results in uplift over time as customers continue to see the value of ServiceNow’s platform.

For example, ServiceNow recently acquired Lightstep, an observability platform. It lets customers access log metrics and application traces in one place. While ServiceNow still partners with Datadog and Dynatrace, the vision for Lightstep is to focus on microservices architectures (which is where the industry is moving as it migrates to the cloud and refactors monolithic applications into microservices). Airtable and Plaid are Lightstep customers. ServiceNow quota carrying reps are now selling Lightstep as well.

ServiceNow has made several of such acquisitions over the years to complement its services (for instance: process mining and robotic process automation). As these capabilities get woven into ServiceNow's platform, they are sold at higher price points to customers. ITSM Pro for instance includes machine learning capabilities and costs 25% than the base ITSM product.

I spoke with a system integrator who told me that $300-400/seat/year is the price for one module of ServiceNow. This is different for each customer. Some might pay as low as $150. Walmart, for example, gets an all you can eat deal with no negotiation. Having them as a logo is worth it.

As the company keeps expanding its offerings, it's bumping into other companies. For example, it bumps up against Workday on its HR solution. I was told by an employee at ServiceNow that ServiceNow's offering is more expensive but customers appreciate its superior features. 

I was surprised to hear of ServiceNow's recent acquisition of Hitch Works, an employee skill matching and intelligence engine, essentially an internal talent marketplace to match employees at large enterprises with specific projects or jobs. 

Here's a blurb on Hitch:

“With prebuilt integrations for applicant tracking systems, learning management systems, human capital management (HCM) systems, LinkedIn, online survey tools and more, Hitch offers mapping and analytics for skill supply and demand, career planning and mentoring. Leaning on machine learning, Hitch automatically interprets data across project work, job postings and people profiles, then makes recommendations — this could involve matching an employee to new training courses, internal job posts, short-term projects that are understaffed and so on.

In its five years in operation, Hitch has amassed a fairly impressive roster of enterprise clients, including Allianz, Bosch and GE Digital.”

On Workflows, it bumps against Salesforce. On ITSM, it's mostly BMC-like legacy solutions.

ServiceNow can be thought of as a system of record in ITSM, ITOM (IT Operations Management), Risk, and sometimes in customer service. 

It is also described as a system of action, which can sit on top of, and stitch together, a number of legacy systems, and allow the customer to build a "single pane of glass" and avoid "chair swiveling" (going from one application to another). If the applications don't talk to each other (i.e., don't have APIs), ServiceNow can use RPA (Robotic Process Automation) to automatically copy/paste data from one application to another, behind the scenes. 

Valuation

Since mid-2015, ServiceNow has traded at a median price to free cash flow multiple of between 56-70x (despite this high multiple, the stock has been a star performer, compounding at 29% per year since then). In Q4 2018 when the 10Y hit a high of 3.2%, the FCF multiple oscillated between 51x and 64x.

Currently, ServiceNow trades at 39x free cash flow and 31x next year’s free cash flow estimate. With very high ROIC/ROE ratios of 30-50%, and sustained high growth rates of top line in the low 20s (given management guidance), ServiceNow should sustain its multiple.

I value ServiceNow at between 30-40x free cash flow. The IRRs are between 21-30% from the current price of $443.79. At 25x free cash flow the IRR drops to 15%. These IRRs are through 2026 so four years out.

Another way of looking at how cheap this is: Thoma Bravo has made two acquisitions recently at ~13x forward revenues (SailPoint and AnaPlan). They are both growing roughly at the same rate as ServiceNow (~24% growth expected next year). I don't think anyone would disagree that ServiceNow is a much superior business in terms of growth opportunity, optionality, management, competitive position, etc. Yet ServiceNow trades at 9.9x forward revenue. Thoma Bravo has a great track record so its 13x acquisition multiple is likely a bargain from Thoma Bravo's point of view.

Risks

I think the biggest risk is a deep recession, layoffs, and fewer software seats sold. But these are short-term risks. In terms of long-term risks, there are execution risks, poor acquisitions, competition. 

ServiceNow is firing on all cylinders, has an excellent management team, and by all accounts, people love working there and love working with their employees.

Bill McDermott is a sales-driven leader, not a product guy. Maybe this is a positive, not a negative: enterprise software, at the large enterprise level, is sold, not bought. And Bill knows how to sell. He is also an incredible showman.

Catalyst

Sustained growth