Pathways to SuccessPosted: July 21, 2014
Recently there have been major write-ups on tech companies that have pursued very different strategies to achieve their desired financial results. The contrast between blue chip IBM and Software as a Service (SaaS) pioneer Salesforce.com is remarkable. Box.com, one of the newer cloud storage and file sharing services, is charting yet another course.
Why IBM is in Decline. IBM, under the realm of CEO Samuel J. Palmisano from 2002 – 2011, doubled earnings under a plan called Roadmap 2010 and is on schedule for a repeat with Roadmap 2015. This extreme focus on profitability and wooing investors has left a trail of wreckage for new CEO Ginni Rometty, who, inexplicably, seems committed to follow the same path. Catastrophe may be looming for one of America’s greatest brands. The singular and narrow focus on quarter over quarter, year after year earnings may not be sustainable in the long term. There are many cycles in the economy and in business that may not fit this smooth curve approach. Also, while meeting short-term profit goals, IBM is paying the price in terms of low employee morale, suffering customer service, lack of innovation and lagging technology.
Understanding SaaS: Why the Pundits Have It Wrong. At the other end of the spectrum, there are many SaaS companies or cloud providers that lose more money annually than they earn in revenue. One example is Saleforce.com, one of the early pioneers (founded in 1999) of cloud-based CRM systems. They incurred a net loss over the past couple of years due to their focus on growth rather than margins. It’s a vicious cycle: to fuel growth, they spend a lot to acquire customers, which negatively impacts margins. See Salesforce Q1’15 Earnings: Revenue Growth Strategy Continues To Trim Margins to learn more.
Tech companies like Box.com spend more on marketing than they generate in revenue. Box.com has the dubious distinction of having a financial profile that it is out of line even compared to other SaaS companies. THE BOX IPO ANALYSIS: This Company Is Burning Twice As Much Cash As Any Comparable Company is enlightening. Customers and employees alike will pay a significant price if one of these companies implodes.
What is the right balance? How do mature companies continue to fuel innovation and growth while also serving their shareholders? How do you allocated monies in your budget for innovation and growth while also delivering bottom line results? Is there a balance of investments in people and customers to achieve long-term sustainable success?
A moderate approach that may serve both maverick and mature companies equally well is based on the patient use of capital and a balanced portfolio. Companies that plan seeds now for growth that will be ready for harvesting in three, five or ten years will experience some ups and downs, but the overall trend will be positive.
In the end, only time will show which path is sustainable.