ServiceNow CEO Bill McDermott recently stated that the company plans to triple its revenue to $15 billion in the next five years. Workflow providers do not obtain new sources of income through mergers and acquisitions, but pursue organic growth-an ambitious strategy anyway.
As diginomica pointed out before, reaching $15 billion in this time frame is not a given. But in order to better understand ServiceNow’s approach to this goal, Chief Financial Officer Gina Mastantuono provided some interesting details about the company’s growth strategy at a recent Deutsche Bank Technical Conference.
Mastantuono pointed out that, over time, ServiceNow’s “land and expansion” approach to customers is helping it win contracts with larger ACVs, as buyers look beyond ITSM and consider what other benefits the Now platform can bring. . ServiceNow’s core customer base still exists in its ITSM products, but in recent years it has been expanding to other functions-especially where the workflow intersects with customer/employee participation.
Mastantuono also pointed out that the cultivation of ServiceNow’s partners and service integrator community is a key driver of growth, which was lacking before CEO Bill McDermott took office.
The CFO’s comments are worth noting because they point out that in the future (if successful) ServiceNow’s enterprise-level platform will become a supplier’s reality. Given that workflow involves all corners of the enterprise, if it can effectively explain to the company the importance of workflow redesign, then there is a good opportunity there.
Mastantuono pointed out at the conference that COVID-19 has promoted many trends in the digital enterprise market, and ServiceNow can make good use of these trends. she says:
The long-term tailwinds between digital transformation, cloud computing and workflow really cross over at this incredible moment, and we find ourselves a part of it. ServiceNow is really in a good position to take advantage of this opportunity.
This business model is very flexible and predictable. We have such a strong backlog. Our RPO (Remaining Performance Obligation) for exiting the second quarter was slightly less than US$10 billion, at US$9.5 billion. 80% of our business comes from existing customers, who truly understand that ServiceNow is critical to their operations and business. Our renewal rates are amazing, 97% and 98%, depending on the quarter, and we don’t expect this to change.
Extend beyond the core
Although the total potential market for ITSM and asset management is still large, ServiceNow’s expansion beyond ITSM is critical to its future growth. Obviously, McDermott views ServiceNow as an enterprise-wide platform game, and it is wise to rely on the company’s technical architecture and single data model. With this in mind, Mastantuono pointed out how ServiceNow can attract buyers “beyond the core” (its core is ITSM). she says:
These other products and product portfolio lines are indeed growing faster than the core product lines. Our core is still very strong. However, the extended range of our product suite does enable us to reach larger deals with multiple products and new customers. And we also attracted new customers, new customers outside of IT, which is great.
By 2024, we expect that about 35% of new business will come from customer and employee workflows, of which creative workflows will account for 20%. Therefore, more than 50% comes from these emerging workflows, which is remarkable.
ServiceNow is pursuing a “land and expansion” strategy, and Masantuono stated that the company’s average customer spending during the quarter “increased significantly.” At the end of the second quarter, it had more than 1,200 customers paying more than $1 million in ACV, a year-on-year increase of 25%. This included 62 customers who paid more than $10 million in ACV. Mastantono added:
The average transaction size increased by 50% year-on-year. So we really see that this solution sales method that provides all the functions of our product portfolio does continue to drive more multi-product transactions.
Mastantuono said that the organization’s investment is focused on application modernization and operational transformation, which forces IT and business functions to work closely together and take action as soon as possible. Therefore, ServiceNow believes that its low-code products will also become a key driver of future growth. Mastantono said:
[IT and business] Really focus on improving efficiency and being more agile. And there are not enough developers to build the applications that companies need to truly transform their business. Therefore, you see this low-code trend because of the huge unmet demand in application delivery.
Therefore, we see a very strong partnership between IT and business lines around low code. As security becomes more important than ever, IT really wants to deal with the proliferation of applications in their organization, right? Therefore, cooperation between IT and business units in application development will be more important than ever.
Therefore, with our launch of Quebec in June, we are providing new low-code tools that can really help move application development out of the hands of developers and truly transcend the boundaries of the engineering organization. In the hands of citizen developers.
Cultivate the SI community
Mastantuono also said that ServiceNow will continue to focus on mergers and acquisitions opportunities, but she expects that the company will “continue to follow the same script” to acquire companies to acquire technology and talent, rather than making large-scale acquisitions. The executive team focuses on maintaining a common platform and data model because it considers this to be a competitive advantage. she says:
We are the only cloud software company with a revenue of $5 billion without large-scale mergers and acquisitions, and we are very proud of this. When we talk about a beautiful data architecture model of our platform, it really helps us.
Obviously, when it comes to large-scale mergers and acquisitions, we are always looking for the best opportunities that may bring great value to our customers and shareholders. But this means that the valuation is very strict. This means being very disciplined in how we think about things.
However, ServiceNow sees the system integrator community as a huge growth driver for its future. As mentioned above, before Bill McDermott joined the leadership team, the supplier had been trying to stimulate this, but now it seems to be getting more and more attention. Mastantono said:
They are essential to drive successful implementation and truly help us customize products for different industries. They are definitely our very powerful thought partners, and they are important promoters of our path to 15 billion US dollars.
Seven of the world’s top ten consulting and system integrators have pledged to build more than $1 billion in ServiceNow technical practices and management service products in the next three years, and the remaining three of the top ten are expected to commit more than $1 billion this year.
My point of view
Obviously, ServiceNow is fulfilling its growth promises in time. The company’s recent data highlights this point. But as the company continues to expand beyond its core ITSM functions, it needs to find its best by clarifying “workflow opportunities” to the line of business. Fortunately, ServiceNow has a good track record of demonstrating these use cases, and we have seen these use cases in many events. But as I said before, ServiceNow needs to consider how to bring best practices to companies that consider the intersection of employee + customer experience and the role of workflow in it. This means understanding the corporate-wide challenges, as companies consider making it easier for work to flow through their organization—it is essential to have corporate-wide conversations with influential people.
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