BACK TO Business ResilienceZINNOV PODCAST | Business Resilience
In this brand new episode of the Zinnov Podcast, Pari Natarajan, CEO, Zinnov, talks to Rick Crandall, Chairman, Donnelley Financial (NYSE-DFIN) and CEO Enterprise Software CEO Roundtable.
The enterprise software industry is currently undergoing a rapid transformation marked by several noteworthy trends. Firstly, the shift towards cloud computing continues to dominate the landscape, with businesses increasingly adopting cloud-based solutions to enhance scalability, flexibility, and accessibility. In parallel, the sudden rise of Generative AI has disrupted workflows and talent decisions. Cybersecurity remains a paramount concern, leading to a growing emphasis on robust security solutions as the threat landscape evolves. Finally, the demand for remote work tools and collaboration platforms persists, reflecting the new normal of distributed workforces. These trends collectively shape the enterprise software industry, emphasizing the importance of agility, innovation, and digital resilience for businesses striving to remain competitive in today’s dynamic market.
The episode explores two crucial aspects – how the enterprise software industry is growing and how strong leadership traits are the crux of successful organizations and teams.
In today’s rapidly changing business environment, leadership is more critical than ever, and enterprise software is at the forefront of innovation and transformation.
Discover how leadership traits such as adaptability, resilience, and innovation are essential to navigate the complexities of the digital age. Discussing the latest opportunities in the enterprise software industry, the leaders uncover what major global trends are shaping the industry, the pulse of Mergers and Acquisitions, and how valuation metrics are evolving.
Whether you’re a seasoned executive, a rising star, or just curious about the future of business, the episode offers something for everyone.
Pari: Hello everyone. And welcome to a brand new episode of the Zinnov Podcast, the Business Resilience series. I’m Pari Natarajan, CEO of Zinnov and today we are sitting down with Rick Crandall. Rick wears multiple hats. He was the CEO of a public international tech company for over 25 years. He’s a veteran at enterprise software, banking and financial service technology, digital media, retail marketing, and medical equipment. Today he serves as an advisor in corporate governance, marketing, and corporate strategy in various industries that are becoming more dependent on technology. An avid mountain climber and author, Rick has multiple publications to his name. Welcome to the episode, Rick.
Rick: Thank you, Pari. Pleasure to be here.
Pari: It’s great to have you with us. For today’s conversation, I want to discuss how you have witnessed the rapid transformation of the enterprise software industry. So let’s just dive right in. The big topic, we’ll start with the elephant in the room. The big topic right now is how is the enterprise software industry leveraging AI and more specifically Gen AI. And have you seen a change in the way enterprise software is being built and how do you see the progress in the next three to five years?
Rick: Well, that’s a big question. Let me try to summarize and if we want to dig into something, we, of course we can. Enterprise software companies clearly have gotten the message that Generative AI is important and its both tremendous opportunities as well as some dangers and risks, and it’s early. It’s premature. So I would say that we’re in a prototyping phase of companies both, uh, on the internally using Generative AI for internal operations in a number of places, and then building it into products to release externally. There’s also a whole new category of software companies that are starting. Companies who are intermediaries between those who want to use Generative AI, and the actual base products and platforms themselves. There’s a lot that’s needed. There’s a lot of tools that are needed because it’s not as easy as it looks at first blush to the I. T. Departments.
Pari: Got it. What do you, what do you see? I mean you recently had the Enterprise Software Roundtable. And when you talk to the CEOs, how do they say, do they see this as an opportunity or do they see it as a threat where come upcoming VC-funded startup could potentially disrupt their business with some completely new innovation in the current sector.
Rick: It’s definitely looked upon as an opportunity. The threat part of it is if they don’t move as fast as their competitors. I would say they’re less concerned about VC startups, because it takes infrastructure. It takes a number of different parts of an organization to make a real Generative AI type application work, and to make it scale. It takes some resources. Now, of course, a VC startup can get significant financing from the venture capitalists. But the bigger concern that’s expressed is are we moving fast enough? Are we learning how to use this technology fast enough so that we can stay apace or keep ahead of our competition?
Pari: Got it. Got it. And then I want to dig a little bit on the opportunity side, right? And the opportunity for enterprise: the large enterprise. When you talk to the large enterprises, what they say is, hey, I’m looking to improve productivity of my team, both white collar workers, as well as, you know, even developers. And a lot of times with this, when you improve productivity and they reduce the number of people, the value gets aggregated with the enterprise software companies. So we kind of see that as a big opportunity, the more and more people, like it happened in RPA industry, when the number of people gets reduced in a particular process. The value is captured by companies like UiPath, Automation Anywhere, and Kofax and others, right? Do you see that as an opportunity here or it could be a completely new revenue stream what they would create?
Rick: Right now, what’s being looked at for external products: where can knowledge be better taken advantage of? And I would say that the most significant use case that is being worked on now are in helplines and customer support areas. Because there’s a huge amount of data that is available internally from all the call ins that happen and all the support that’s given. And any one support person really does not have ready mental access to all of it. It’s just too much data. And so, large language models are very helpful in that regard and so that’s where both in terms of internal use which means that you’re making things more efficient with your knowledge workers meaning you probably need fewer knowledge workers and on external products how to provide counsel to customers in a customer support context based upon all this data. I want to quickly say there’s a danger side to this and the danger side is – not letting your internal data get mixed with public data. And that’s a whole subject that can be discussed as well. And that needs to be very carefully managed.
Pari: And if you look at the wave of transformation, which has happened in enterprise software right? Initially, you know companies moved to a subscription model, then subscription to SaaS. And we saw private equity firms looking at each transformation as value creation opportunity, and then came in and acquired the companies to move them to subscription, then to SaaS, re-platform the companies. And a lot of those heavy lifting is almost done, right? So over the last 20 years, we have seen large companies like Vista, Thoma Bravo have done an exceptional job in doing that. What would be the value creation opportunities in the next few years?
Rick: Well, first of all, value creation from the standpoint of the companies, as opposed to the Private Equity firms, is all about continuing to sense what are customer needs and how to deliver better solutions to those needs. So, you know, being problem-solving is critical for customers. And with this new technology, with AI, you could be delivering features just for features sake. That’s not really the new opportunity. Most customers complain about software companies that talk about product features as opposed to what do the products actually do. The value creation is a question of what are the areas that the newer technologies can be used so that you can perform them better. I haven’t yet heard of uses where a brand new capability is brought to the market. It’s more a question of how do we deliver what we’ve been doing but at better scale, with better intelligence, with lower cost and with greater customer interfacing. And that’s where these the focus points are right now with with Generative AI as one of the new technologies.
Pari: Got it. Very, very interesting. Customers are looking at outcomes from deploying with enterprise software companies, so they have to think through a solution centric approach. To solve a customer problem rather than think it in a product feature perspective. And how do we use AI to drive those solutions? It’s going to be a key transformation lever going forward. Great.
Rick: Customers like enterprise companies most when they’re talking to the customer about what the benefits are as opposed to what the product features are. And it’s a lesson every software company needs to learn.
Pari: And in the Enterprise Software Roundtable you did recently, what are some of the priorities of 2024 where the CEOs talked about, or opportunities or challenges? We talked about Gen AI, outside of that are there major themes which came up?
Rick: Well, one of them certainly, and probably applies to most industries, are concerns about geopolitical influences. And, you know, will something happen that is a black swan kind of event? China doing something or Russia doing something even more than what they’re already doing which would have an impact on global markets. And those are things that are very difficult to plan for. But I got to have a plan B. But understanding what the probabilities are, and there are experts in the geopolitical world that, have opinions. We spend a fair amount of time talking about that as to what ought to get built into company plans for 2024. The other thing is that the capital markets have been relatively quiet. Mergers and Acquisitions events have been down, IPOs have been almost non-existent. But it’s beginning to look like those windows are starting to open. There has been an increase in Mergers and Acquisitions activity. And there have been some very high profile IPOs recently. And we’re hoping that what that means is that window opens because that generates a whole new wave of economic opportunity.
Pari: Got it. So that’s the geopolitical risk and as well as the opportunity for them to maybe even do tuck in M&As and use it as a way to grow the company. What about talent? What are questions around the talent required for building some of these modern technology. Is there a concern or they think that that’s something they have in control?
Rick: Talent if we’re talking about the newest technology, which is the explosion on the scene of Generative AI, talent is almost non existent. And where it exists, it’s in very concentrated forms. A lot of AI professionals, have been and are in Google. There are some in the other major platforms, of course, like Microsoft, and others. But for a enterprise software company that has been functioning quite well that now needs to develop expertise in the AI arena, it means talent acquisition or reaching out to outside companies that already have developed their abilities in the AI area to get moving. And I suspect it’s going to be more in that latter category, using some of the newer products that are just coming on the scene that are intermediaries, between using and having a platform for AI. But as well using resources at consulting firms who have already begun the process of both training and acquiring staff in the AI area. There’s a huge shortage.
Pari: Very interesting. And we’ve also seen, startups in the AI space. A lot of services companies are getting created, consulting and services coming and creating exactly to your point being the intermediaries, to make it, deploy it in both enterprise software companies as well as in enterprises. So this is a big change. For private equity investors, the rule of 40 has always been the main criteria, but how will this metric change in the future for investors looking to buy enterprise software?
Rick: The rule of 40 is one of only many metrics, but it is one that is most often talked about in, evaluating software company performance, financial performance. It’s the revenue growth rate added to the cash flow percent, or in some cases EBITDA margin, and that the two are supposed to add up to the 40 percent or higher. And that has been very growth oriented, that metric. Because the larger percent has been the growth rate. And in some cases, even highly valued software companies have been all about growth and have had no profitability.
But that has really changed in the last year to 18 months. For a couple of reasons, but it’s been now biased much more towards profitability, which means EBITDA growth or cashflow production. And in part, that’s because of the rise in interest rates. So you now have interest rates and at least with public companies, you compare that with profitability. And that is probably going to be around for as long as interest rates are high and increasing. When we look towards the future, this is my own view, that once we head towards stronger markets, more growth oriented markets and lower interest rates, we’ll see this rule of 40 being biased back more towards growth.
Because growth is really what indicates that you’re gaining market share and gaining in market share is what really generates economic value for an investor for a PE firm and others. It means you’ve got real strength in comparison to your competition.
Pari: So the short term, the focus is more on EBITDA, but the long term when hopefully the interest rates will normalize, you’d get back to growth as a primary metric, even within the rule of 40.
Rick: Yeah, there’s another motivation. Private Equity firms have strongly purchased into, or invested into the software world and they’ve been helping software companies move through the business model changes they need to make, that public mark public markets don’t seem to understand. But now there’s some of these companies invested in by PE firms that are eligible to become public again. And to think about the IPO window opening in 2024, which looks like and we hope will happen, the profitability needs to be shown as much as growth rate to the public markets and to the investment banks.
Pari: Got it. Because that becomes one of the key exit mechanisms going into 2024 rather than selling into another private equity market company.
Rick: Both will happen. But certainly the IPO, receptivity is something that will receive a bunch of software companies moving out into the public market.
Pari: And switching he topic a little bit. I want to talk a little bit about leadership. You are an avid trekker, mountaineer and spent a lot of time in nature. And what are leadership traits from all your experience, both in a professional life, as well as others you think are required for enterprise software CEOs to navigate this uncertain time for the next year or so?
Rick: Well, I would say the first thing is to stay connected. To stay connected with what is really going on and it’s staying connected with the new start-ups and what are they doing? What are the VCs investing in? That’s kind of one side of the picture-staying connected with peer CEOs. What are they concerned about? And there is discussion, even among competitors, as to some of the things that are going on out there. And what we ought to be aware of, staying connected. Of course, with customers is absolutely critical, as to what is it that they’re seeing that are new problems on the horizon or current problems that need to be resolved better. That’s a responsibility of a CEO to be outward facing.
Pari: Interesting. So that’s going to be a key a dimension rather than just focused on operational reviews, EBITDA margin improvement, but being networked with the ecosystem. Great. And many of these enterprise software companies, some of them has scaled quite a bit, up to $10 – 20 billion, but many of them are anywhere in the range of $100 million to $5 million. They’re owned by Private Equity firms. They’re looking to scale. And you have worked with CEOs of companies which have scaled to $10,20-30 Billion. So are there traits you see in CEOs who are able to scale their companies to several billion dollars in revenue, which you have observed in your experience?
Rick: Well, that’s tough to figure out. So, if you’re interviewing for one of those CEOs to bring somebody on you’re looking for somebody who number one is growth oriented, and has a risk profile. They’re not risk averse, but in addition, you’re obviously looking at somebody that’s been experienced. So what’s been their background and do they have evidence in their background that they have been successful in meeting goals? The private equity firms have usually a portfolio of CEO types who they can drop into companies and so when they buy a company they’ll either assess if the current CEO can continue in the job that he or she is in, or they need to put in one of their own people. And so the characteristics, I mean, obviously you want intelligence, you want somebody that’s outward facing somebody that can communicate both verbally and in writing, somebody who’s, again, a risk taker. And who has a growth mentality.
Pari: Got it. Growth mindset, risk appetite seem like key aspects. And you also mentioned about being more connected, going forward.
Rick: And, and ability to communicate. And I stress that because I see people coming up from lower in the ranks who have not really, not really developed skills in communicating. and I’m not talking about three letter acronyms on social media. You’ve got to communicate to your staff, to your investors, to your customers and that’s, that’s a set of skills that, I’m not sure has been emphasized well enough in recent times.
Pari: And that is the other, major debate, compared to product versus sales oriented CEO. There’s been going on for a long time, right? But the current period where technology is changing quite dramatically and you need to have a keen ear to what the customer thinking and react and build products, do you see that we are going into an era where a product centric CEO is going to be a lot more important than a sales centric CEO, or how do you see it? I mean, you, you meet them all the time.
Rick: I think there’s no correct answer here. It really depends on the individual. If I look at the CEOs I work with and I have I’m actively working with in a Roundtable that I’ve managed for many years with CEOs from between 50 and 60 larger software companies. And if I did a look across and I profiled the group, you would find all the above – you would find sales-oriented, you would find product-oriented and technologists, even some who are financially oriented, although that’s a lesser category, I would say, in this group. Any leader has to feel that way that they’re hiring people better than they are in a variety of disciplines. That in my mind, that’s the best leader. If somebody thinks that they need to be the smartest person in the room at all times, they’re not going to succeed at having the right team.
Pari: And Rick one other question I had is – you have run this, Enterprise Software Roundtable for the last 25 years and you’ve done it very consistently. I’ve presided a couple of those forums during COVID. We had them meet a lot often because they got to be a lot more connected. What is the secret of creating something which is long-lasting and for 25 years, right? Building a network is, it’s, it’s non trivial. So what are some of the secrets of building something like that?
Rick: Pari, you have been with this group a few times and provided some very valuable counsel. You’re recalling back to when we were 25 years old. We just passed our 30th year. We just had our 60th meeting. We meet twice a year. What are the secrets? The secrets are, first of all, it needs to stay at a peer level. Any roundtable, whether it’s a CFO roundtable, if it’s a CIO roundtable or a CEO roundtable, whoever’s leading it needs to make sure that those are the people who are in the room. So a policy of no substitution for the member is critical. If somebody can’t make it, they just can’t make it to a given meeting. But if you start allowing substitutions, the next thing you know, you don’t have anybody in the room of the title that you’re looking for. So CEOs only.
A second thing is to really encourage the right kind of peer level interaction and conversation. We use what’s called Chatham House rules, which a lot of organizations do. And what that means is that once you go outside the room, you don’t attribute specific comments to specific people’s names. And that allows for a confidentiality of conversation that is really critical. And in the event that there are public companies in the room. It’s also important to have a policy that there’s no trading in the stocks of the public company within at least months after the conversations are being held because there’s probably insider information being put on the table. Those are some of the really critical things when CEOs get together and I would suspect with any group of people get together, they’re not looking for talking points. They’re looking for real information. How do people really feel? And there’s a bit of confidentiality about that that needs to be preserved.
Pari: Great. And if one of the CEOs want to join your network, how do they go about doing that?
Rick: They can just contact me. If they’re a CEO of an enterprise software company, that generally revenues above $100 million and into the billions, that’s the general range of what we’re talking about. I’d be delighted to speak with them. I would say every six months we get three or four turnovers at least due to Mergers and Acquisitions, so there’s always an opportunity. This isn’t a business that we want to have hundreds of CEOs. We’re looking to have enough so that there’s 30 people in the room. If you had 60, it wouldn’t be intimate.
Pari: Sure, sure, Great. So they just have to reach out to you if they are a CEO of a $100 Million + company. Great. Thanks Rick. It was great, discussing with you on what’s going on in the enterprise software business and what is required to be a successful CEO of an enterprise software company. Thanks, Rick. I really enjoyed the conversation.
Rick: Thank you, Pari.
Pari: Good to talk to you.