HEAD IN THE CLOUDS: ServiceNow’s CFO Resigns and Cloud Price Protection Myths

It is hard to stay on top of the latest news, events and rumblings tied to cloud computing and the cloud vendors responsible for it.  For many of us, our memories are not what they use to be, making it even harder to keep up.  Here are a few conversational topics that have come up recently, along with my thoughts, perspectives and observations:

ServiceNow’s CFO Mike Scarpelli Leaves for the “Next ServiceNow”

ServiceNow announced last week that CFO Mike Scarpelli is leaving during Q3 of 2019.  This announcement came shortly after ServiceNow’s Q2 earnings release.  Scarpelli has been at ServiceNow since 2011 (pre-IPO) when the company had annual revenue of roughly $100M with about 400 employees.  It has grown since then to a $2.6B company with roughly 8,600 employees.  Regarding his departure, Scarpelli said:

“This is an extraordinary company, and I couldn’t be more confident in ServiceNow’s opportunity to become a $10B company.  That’s why I felt this is the right time for me to find my ‘next ServiceNow,’ and return to doing what I love most — scaling innovative start-ups into successful companies.”

The first question is, how will this impact ServiceNow moving forward?  Ultimately, ServiceNow will be fine and they will continue to march towards becoming not only a $10B company put perhaps even an acquisition target of a much larger vendor, like Google.  The second question, and perhaps the most interesting, is where will Scarpelli end up and has he already identified his “next ServiceNow”?  My belief is, he has; and it almost seems too obvious.

Also last week, it was announced that one of Silicon Valley’s darlings, the up-and-coming, fast-growing cloud data warehouse technology company, Snowflake Computing (Snowflake), was switching CEOs.  Out goes Bob Muglia (former Microsoft veteran) and in comes Frank Slootman.  Muglia has shown no interest in rushing to IPO and Slootman is known for taking technology companies public.   So why is that interesting?  Beyond the clear direction Snowflake is now taking towards IPO, Frank Slootman is the former CEO of ServiceNow (one of the companies he took public).  In fact, he was CEO while Scarpelli was CFO.

As Slootman and Snowflake work towards growing its base of customers and revenue, it makes perfect sense that Scarpelli would be the perfect choice as CFO to help make that happen.  From Scarpelli’s perspective and based on his comments about wanting to scale innovative start-ups into successful companies, it makes perfect sense for him as well.  My guess is an announcement is coming soon that the band is getting back together.

Did your Cloud Vendor Really Give You a Price Protection?

Beyond upfront pricing and discounting, the most critical component of any cloud subscription agreement is long term price protections.  I could even argue that it is the most important, given the high likelihood of renewal.  The problem is, most cloud subscriptions are either ambiguous regarding what will happen to the pricing you have been living with, or if there is a provision that provides a “protection”, it is full of conditions that effectively remove any protection you felt you had.

Ideally, and this is often difficult to achieve without the right strategy and approach, your cloud subscription agreement should have a period (i.e., subsequent to your initial term) in which that great upfront price used to get you to adopt is still available to you.  In other words, your pricing should remain flat for a period beyond your initial term.  There could even be an argument that your pricing should improve but that is for another time.

Most customers that do achieve a renewal term price protection, achieve a commitment that their pricing will not increase by more than a stated percentage, or a cap on the price increase.   The problem is that even with an achieved cap or commitment to not increase upfront pricing, there are most likely also conditions included that effectively diminish, if not remove completely, the protection that certainty you think you have.  Here are few we typically see:

• You must maintain, at a minimum, a certain quantity of products or volume of users. More often then not, the entire quantity and volume must be maintained.  What if you don’t need that volume anymore?
• You must maintain the same exact set of products. What if you don’t need the same products anymore?  What if you simply need other products?  What if the product name changed or is actually no longer commercially available?
• You must renew for the same length of term as your initial term. What if there is uncertainty moving forward and the market has changed, and a shorter duration is more appropriate?

Needless to say, it is important, if not critical, to be on the lookout for these conditions and address them in parallel with any discussions you are having around renewal term price protections.  Without proper renewal term price protections, you are setting yourself up for downstream exposure and limited leverage to correct.

Comment below, follow me Adam Mansfield on Twitter @Adam_M­ansfield_, find my other UpperEdge blogs and follow UpperEdge on Twitter and LinkedIn.

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