Laura Fay

Thanks for being interested in the relationship between DevOps and product management. My name is Laura Fay, and I am the VP of Research and Advisory at an organization called TSIA.

We're a small research and advisory firm, largely focused on helping companies transition to as-a-service, and a very significant focus on the B2B space.

And our mission really is very focused on helping companies really improve revenue and profit performance, by looking for those patterns of success from practices to outcomes. And we're very heavily research based.

We're global, and you may have seen some of the books that some of the principals of the company have put out. Anyone heard of "Complexity Avalanche," "Consumption Economics," "B4B," "Technology as a Service Playbook?"

One hand consistently up for all four. You get the prize. And some of our customers are, as mentioned, we're the global footprint, so customers all over the world, and some of the big technology vendors that you might expect. This B2B enterprise is really our focus. And my background is also, obviously, in B2B enterprise software.

I've worked for three plus decades, longer than I care to admit perhaps, in a number of startups and some of the companies you see here who acquired some of the startups that I was with.

And I cut my teeth in engineering, in software development, for the first 15 years or so of my career, coming up to leadership there, and then spending the rest of my career largely in leading product management organizations, and in a general management capacity.

And so when Gene Kim asked me to speak at this event, he referred to me as the product management ambassador to the community, and I thought that was very nice.

But so what I'm going to talk to you about today is really the changing technology landscape and what it means for the technology providers and customers.

Product management's remit within that and how that's dramatically changing and how I think the partnership of DevOps and product management can really make a big difference if it's approached in the right way.

And as always with all of the presentations I understand here, I'll make an appeal for some of the help that I'm looking for. Can I ask the AV, can you move the mouse pointer off the middle of the slide? Thank you.

So

01XaaS and the changing B2B technology landscape

I talk about SaaS, technology as a service, a lot, and I use the expression XaaS a lot. And I get the question regularly, what is it? You'll see it through some of my slides here, so I just want to put on the table that really it's a catch-all phrase for anything that's offered as a service.

And the industry generally is transitioning very significantly from traditional licensing models to offering technology on a subscription basis.

So typically, XaaS is technology and services offered to the market on a subscription basis or leveraging the technology to deliver a non-technical service.

So healthcare industry, for example, is delivering traditional software, but as a service focused on value and outcome delivery. And obviously all of this is enabled by cloud computing, which is why the DevOps relationship is so critical and obviously fueling the consumption economy.

Make sure I don't trip up here. So the world has been dramatically changing in B2B enterprise software.

The timer's not going. Mr. AV. Timer. Thank you. Things are evolving very significantly from selling, when we say complex products to IT.

So many of you are in organizations that are also consuming and buying technology from B2B enterprise vendors. And traditionally, it's been on what we call a perpetual license mode with a 20 or 25% support contract. And it's up to the IT department to go take that software and get it up and running and make it all happen.

So that's traditionally where things have been. And where things are in process of moving to and dramatically going to is selling outcome services to business users. So budgets, and you guys probably see this, how many of you are in IT versus, let's call it development core? Okay. And how many in what you would call core development?

Handful. So it's about three quarters, a quarter. Okay. So what we see in the marketplace is that budgets-- Have you seen budgets shifting to line of business?

Yeah, a few nods. So vendors are generally starting to sell more to line of business. And when they sell to line of business, it's not about features and functions, it's about what value can you deliver to me now? When am I going to see the benefit of that value?

And what business outcome am I going to get? So the conversation dramatically shifts. And for the customer, that removes a whole massive amount of complexity.

But what it's doing for the vendor is that vendor is taking complexity on board themselves, and they need to figure out how to deliver that service. And it's also the result for suppliers is that unit prices are dropping quite significantly.

So software vendors in this B2B enterprise marketplace have enjoyed very significant profits year over year. It's why the tech sector has been so attractive for Wall Street.

But in recent times, we see that products sold on a perpetual license basis to their customers has been dropping very significantly.

And the services revenue has been on the increase. Now, the T&S 50, that's an index that my company, TSIA, uses to track the largest global top 50 technology and services companies on the planet.

And as we've tracked that over the last more than a decade, we see that license revenue is really dropping dramatically.

Service revenue on the increase. But you'll notice there's a gap, and the gap is really the source of the challenge. And what you'll also see here is in the red line, which shows the trend of that perpetual license revenue going down, which has typically been sold to IT, feature function focused.

The blue line shows that going up. Sold to not only to IT, but also to line of business. And the value proposition very much shifting.

And the genie is out of the bottle here. This crossover happened in terms of more revenue from services than from software licenses about five years ago, and it's fully anticipated to continue.

And so our estimates, based on all of our measures, is that about a quarter of the technology industry revenue today is coming from what we call technology as a service. Subscription licenses to enterprise.

And when you put that together with the other services that are typically sold, like support services, managed services, professional services,

02Revenue and profit pressure in the cloud economy

all in, you can see that that is really the majority of the revenue. So that's the revenue story. What's the profit story?

And this is where we start to see some challenge. Along the top here, you'll see traditional business, we'll call them legacy businesses, that sell in the traditional manner I was describing.

Profitable. And you'll see XaaS 2.0, which is also considered to be subscription-based companies that are profitable. Amazon Web Services would be in this category, for example.

Salesforce, after 19 years, just turned a profit this year, and they're in that category, barely.

And along the bottom, we see the unprofitable line of XaaS 1.0. We'll call those cloud native, born-in-the-cloud companies have tended to start there.

Their business models aren't actually profitable, and they're all trying to figure out how to get more profitable in the cloud. And for legacy companies, we'll put people like Autodesk, Microsoft, Oracle, a number of others who are navigating this journey have first seen commoditization happening and challenges with profitability, and then moving to

offer subscription models. So in this index, I talked about where we track the 50 global technology and service companies.

Revenue flatlining to down. And profitability 16%, that might seem okay, but not when you consider that the companies in this class have typically been garnering 25, 30, 35% of operating income. And Wall Street really rewards this category for profits.

Now, you always want to be skating to where the hockey puck is going, because in this case, where the hockey puck is isn't very pretty. We also have another index we call the Cloud 40, which is the top 40 born-in-the-cloud companies, publicly traded.

So we can analyze the financials, and it tells an interesting story. We see the top-line revenue is very nice. Profitability, not so pretty at all.

In fact, negative four, you'll see, has been a significant improvement from prior years. But Wall Street gives these companies like Salesforce, ServiceNow, HubSpot, many others like them, gives them a free pass on profitability while they're propping up the revenue side of things.

But the question comes, what happens when profitability starts to slow down a little bit? We know that that spotlight's going to move. So where is the technology industry on this grid that I just presented earlier?

It maybe comes as a surprise to you to learn that a full 80% of companies are not operating on a profitable basis from a GAAP perspective, which is the accepted accounting practices.

And certainly, 80% of the SaaS companies out there are not operating on a profit as measured by GAAP. So this obviously creates some big challenges for the industry, but you'll see how this is affecting product management and then how that ultimately affects the relationship and how DevOps can help.

But really quickly, taking a look at this Cloud 40, this is the top, as I said, publicly traded, born-in-the-cloud companies. And you'll see that the majority of them are not profitable.

I mentioned Salesforce a little while ago. 19-year-old company just turned a profit this year. How many of you are surprised to hear that? Maybe a third. I used to get a lot more reaction when I'd say, "Did you know they're not profitable?" Now I can say, at least this year, they're showing some profit. Amazon Web Services reporting in the high 20s in operating

income. However, their P&L is very sort of buried within the broader Amazon P&L, and our estimate is that it's probably closer to 15%. Still very good. Still very, very good by this comparison, but not typically traditionally where the technology industry has been. But you see on the other side here that negative 4.5 on average is five points better than it was last year. So it's moving in the right direction.

03How the shift changes product management

But this is really creating a lot of significantly changing conditions. Number of different revenue streams, different business models, and KPIs to track.

Recurring revenue, product adoption. We see product and service converging.

So traditionally, product management was just all about the technology. Now it's got to be broader than just the technology. And we're seeing that low profitability in the business model.

So what impact is this having on product management? I'll just build this out. Very significant impact.

It is impacting how they're bringing new products and services to market. If you're going to have something as a subscription and you're faced with the kind of profitability profile that I was just describing, you got to figure out how to craft those offers in new ways so that you're continuing to unlock value and apply price points in that as you go.

How do you design products to really develop and deliver an immersive experience for your user base so that you're proactively driving the outcome for them?

Many companies have had traditionally on-prem software. Now they're moving to the cloud and have to think about what the deployment models for that looks like. What are the architectures for that?

How do you develop out things like microservices and many components that they may not have had to think about before?

What are the go-to-market methods? Well, you may have had access to the market via the channel distribution. That may not be viable anymore because of the economics. Telemetry and analytics is absolutely a huge factor. For B2B enterprises, it might surprise you to know that only 15%, 15% of companies have

the right telemetry in their solutions to really track user behavior, customer life cycle, and all of the key use cases.

And even less are using leverage. Even when they have the data available, they're not really good at making it available across the organization. Release cadences are speeding up. I don't have to tell this audience that.

But product management has to adapt to that, and in fact, marketing and all of the other support organizations have to adapt to that.

One company I was just talking to recently said they used to do a big bang launch every six months. They'd package up the whole series of features, put them out into the market, and do a big marketing launch.

And they were struggling with the idea of how do I market my products now if I'm pushing new stuff out to the market every day?

And then the support organization in education services going, "Well, the customer's seeing some new content before we even see it and have an opportunity to think about what that means for our training programs." So it's a massive adjustment. And even org design.

Product management has maybe product managers who might be more outbound facing, product owners that are facing into engineering and into DevOps. What are the right ratios now to keep everything in balance versus some of the traditional development methods?

And how do we engage cross-organizationally to make everything a reality? And there's more and more of an emphasis point. This statement that product management is the CEO of their product was always sort of somewhat of a cliché, but in as-a-service world, in the world of as-a-service, it's becoming more and more true because ultimately the in-market success of the solution, product managers just can't stop at launch.

They have to kind of continue to ensure that the product has all of the right components to be ultimately growing market share and growing it profitably. So there's a new emphasis on profitability.

Typical scope of responsibility of product management. So with what they do all day, they do figure out what their go-to-market strategy is, what are the financials, what the business plan for their product.

What markets are they going to go after? What's the size of the opportunity in those markets? What's the offer market fit or product market fit?

How do they monetize? How do you create a series of offerings and monetize what you can offer to the market? We've talked about there's many books and thought leadership pieces out there about this concept of the software paradox, where software's delivering more and more value, but ultimately it's harder and harder to make money.

Which puts a very significant pressure to product management to figure out how to create the right packages and solutions, and how to prescriptively then drive the customer experience to consume those, and at a price point that's going to help deliver profitability.

And then ultimately that closed loop of managing in-market success, and rapidly developing solutions and getting feedback at every step along the way.

And because the imperative is so high for profitability, which hasn't really been there, as you've seen in some of the numbers, we're seeing an increasing number of product management organizations reporting directly to either business unit leaders or CEOs.

And in recognition of that sort of strategic importance, how many of you are in organizations where your product management organization reports centrally?

Only just a handful. And so for most, is it reporting into the technology side of the house or into the marketing side of the house? Technology side of the house.

Okay. Marketing? A little less. So more on the technology, a little less on the marketing side.

Within the enterprise software space, this is what we're seeing. And to emphasize where product management really has their incentives. Their variable compensation traditionally has been around revenue.

Grow the revenue for your product, grow the market share for your product, and make sure that you deliver those features on time. Those are sort of some variation beyond that, but that's sort of the 80th percentile rule in terms of how they've been compensated.

But now there's that added component. Now you've got to drive product adoption. You've got to drive recurring revenue growth.

And product adoption is a very critical component of that recurring revenue growth. And we know that 80% of all revenue generation is going to come from existing customers.

Which is why they're measured on product adoption and stickiness. And also now measured on profitability.

So that puts big emphasis on many things like how do you... Well, we'll see in a moment what that puts big emphasis on. So if we look at the profitable technology-as-a-service formula for growth, it includes all of these elements. And I'm not going to go through all of them, but just to say that there's a critical formula that is essential.

I mentioned offer-market fit, complete offer, you may have heard of whole offer. So there's the technology piece, but then there's also strategically just-in-time delivered services or maybe other transaction services or in-app purchases or other components that complete a whole product.

With the emphasis on value and outcomes, designing, pricing,

04The profitable XaaS growth formula

and related components that deliver on that are an example. So an example of value-based pricing.

I'll take HubSpot as an example. So marketing platform. The objective of that marketing platform for the user is how do I amass as many email contacts as I possibly can? So I'll be doing campaigns. I want to capture contact information.

So HubSpot has a pricing model for their marketing platform based on the number of emails captured. That's an example of something that the customer values.

The customer's going to be driving to that, and the more they do that, the more value they're getting from the platform. And that's an example.

But companies working very hard to figure out those things. Product-led growth strategy, which is really all about prescriptively engineering the outcome for either the combination of the buyer's journey and the customer journey post-sale.

Customer experience telemetry and analytics, and of course, leveraging as much as possible automation and AI to drive scale into the business. So the things that keep product management up at night are really figuring out what is that long-term combination.

What is that strategy that's in the face of immense and increased competition in the marketplace. How to navigate the world of recurring revenue and new customer engagement models to really drive revenue knowing exactly how the customer is going to engage along the way.

Figuring out that continuous delivery and operational scale. And ultimately, oops. Yeah. And ultimately driving down cost. I didn't share a lot of the details on it, but one of the massive things that's completely out of whack in as-a-service businesses is marketing and sales cost.

For example, the average for SaaS companies that are over 500 million that have achieved a reasonable amount of scale, is about 36% of revenue.

That's high when you compare it with traditional licensed companies that'll be spending maybe 25% of revenue on marketing and sales.

Salesforce spends about 45% of their revenue on marketing and sales, and that's down significantly from much higher numbers. Guess how much Splunk spends. Guess how much Splunk spent on marketing and sales as a percentage of revenue in Q2 2018.

Any guess? Five. 72. Who said it? You actually said the number. Yeah.

Unbelievable, right? So that's an example of what's propping up that growth line is massive overspend on marketing and sales. And so this is where things like the buyer's journey, product-led growth strategies to a product-led buyer's journey, a product-led customer journey, instrumenting the products to really understand the behaviors and driving that at scale becomes absolutely critical to the viability of

as-a-service companies.

05Product management challenges and instrumentation gaps

Now, getting a little bit to product management and some of the characteristics there. So, if you look at roadmap prioritization, prioritizing the product roadmap, and delivering that prioritized backlog, to development has always traditionally been a big challenge and remains a big challenge.

The added ones that are over on the left here are new cross-organizational handshakes and accelerated release cadences. Right?

That's something you wouldn't have seen before, but it's really kind of rising in the things that they're challenged with. And in companies' quest to get the right alignments across organizations, we took a look at what are some of the typical alignments with product leadership.

And interestingly, we saw that if you combine the terms R&D and engineering together, because some companies use them interchangeably, at 55%, that's really the biggest area where product management and engineering really are aligned.

After that, it's marketing, as we were talking about. A little less on the DevOps side, but we're seeing that for companies that are less than a billion, which are more likely to be born-in-the-cloud companies, we're seeing that alignment very close. Is this a surprise?

I see one shaking head, but okay. And this is the big one that I'm just constantly blown away by because it seems so obvious, that full product instrumentation to capture the customer journey is really an immature practice today in B2B enterprises.

Now some of that, I'm surprised that some of this could be as a result of just legacy product having to retrofit.

I'm going to speed up here. The other piece of this is that when products are instrumented to capture usage, organizations are not strong on providing accessibility to the data.

So there's not a culture of that there yet. And so really the challenge is how do we accelerate the time to that profitable revenue growth, right? We know the markets have moved to consumption models. We know we've seen about a quarter of the revenue in the technology sector is moved to as-a-service subscription models, but we see through all of the data that the practices to align to delivering on that are really lagging.

06The DevOps and product management partnership

So that kind of brings us to the DevOps and product management partnership. Right? So if we look at that and kind of talk ourselves through how can we work together to accelerate time to profitable revenue, if that's the question that's on the table, there's many things that both constituencies can benefit very significantly from collaboration.

So I know that DevOps always wants to understand how they can contribute better to the business.

And product management is desperately trying to understand things like how can we instrument our products better? What are the best technologies to do that?

The technical community can help with that very significantly. Establishing shared goals between those groups really would become essential in order to drive that level of collaboration.

And DevOps, in my conversations with many folks, have had many thoughts about how they can improve the product, improve the usability of the product, improve the telemetry of the product, improve many of the capabilities of the product as a matter of finding those partnerships, finding

even one-on-one champions to have those conversations with and to get the right leadership active and engaged in that.

And the other one that I think is an interesting conversation to have is if you look at it from the value stream from code to cloud, how do you expand that on both ends, right?

How do you expand that from concept and idea all the way to customer use? So expanding it on both sides is really a very significant motivator from a product management perspective.

But obviously with DevOps in the middle, you've really got to collaborate on both of those ends around the customer experience and around the tooling to enable that.

And who better to help product management with topics of availability, reliability, and security? I don't think in all of my own personal experience, except for one company, there was anybody in product management who really understood...

They understood that they needed security, but the degree of which that really needed to come to bear was always the intelligence for that always came from the development organization and the DevOps side of the equation, and that's a significant value. So there's no question that there's significant number of topics to talk about and to get aligned on and for mutual benefit.

And I would say, in summary, there is a very profitable revenue growth, which is the thing that many of the technologies are ultimately really working very hard to figure out.

The relationship between product management and DevOps can play a very significant role. Because we have this interdependency.

DevOps can enable very significant rapid prototyping, which is really critical for the product organizations to be able to master and to be able to make informed choices of A/B testing and other aspects as they are testing the market with a number of things through increased responsiveness.

And product management with an agile approach can hopefully help the flow of work through delivering backlog and workloads to DevOps in a much more streamlined kind of a way.

And making all of that visible end to end.

07The help Laura is looking for

So finally, I think I'm out of time. The help that I'm looking for is I would love to hear from you, email, phone, any social media channel that's appropriate and understanding how does...

And even talking one-on-one, case studies, how does the interface with your product management team aid or detract from your productivity within DevOps?

How would you want it to be? And what are some of the examples that you're working with today, and if any of this has resonated in any way, and can that relationship improve?

So thank you for your time, attention, and listening today and appreciate it.