ServiceNow’s Year-End Goals: What Customers Need to Know

ServiceNow has some ambitious growth goals as made evident by their most recent earnings call.  They will focus on certain key metrics to meet their revenue targets while increasing their remaining performance obligation numbers to ensure they are able to reach their revenue goals over the next five years.  ServiceNow CEO Bill McDermott and CFO Gina Mastantuono have made the goal of reaching $11B+ by 2024 and $16B+ by 2026 abundantly clear.  Now, it’s up to the customers to use that information wisely at the negotiation table to maximize the value of their investment.

Based on their most recent earnings call, ServiceNow is going to be focused on deals that include product and spend expansion.  Growth in these areas is key to ServiceNow staying on track for their year-end goals, which will in turn inform their goal of reaching $11B in revenue by 2024.  Here, I will explain how customers can critically analyze ServiceNow’s earnings call and prepare as ServiceNow’s year-end approaches.

 

Key Metrics ServiceNow is Focused On

Vendor earnings calls provide key insights for customers to leverage since the C-suite shares exactly what they are prioritizing. The following are the key metrics ServiceNow is prioritizing that customers should keep in mind as they navigate net new purchases or renewals:

• ACV Growth

In FY22 Q2 earnings call, ServiceNow revealed that of the number of customers paying over $1M per year reached 1463, which represented 22% y-o-y growth.  Customers need to look at this metric from an Annual Contract Value (ACV) perspective to understand why it matters to ServiceNow.

ServiceNow wants to continue to show growth for that ACV number because it shows strength in product adoption, moving customers to more robust and costly editions while also supporting the ability to reach loft revenue targets set in the short and long term.  Thus, customers should think about ServiceNow’s focus on product adoption growth and moving customers to more robust editions as they’re considering making these types of changes to their ServiceNow portfolio.  ACV growth is incredibly important to ServiceNow, and if done appropriately, you can use this knowledge as leverage to ensure the right overall deal is in place with ServiceNow.

It is also worth mentioning that if ServiceNow knows they are not likely to obtain ACV growth from a particular customer because of little interest in product expansion, ServiceNow will lean heavily on price increases to achieve some degree of ACV growth.  Hopefully, customers faced with this have price increase protections in place.

• Number of High-Paying Customers

ServiceNow also made it a point to call out that the average annual spend of the group paying $1M per year was about $3.9M per year.  They also mentioned that they surpassed 100 customers that are paying $10M per year, a 50% y-o-y growth.  This is another set of critical numbers for customers to pay attention to.  You can fully expect ServiceNow to continue pointing to these numbers to show even further strength in their offerings and the ability to execute to their “land and expand” strategy.

If you’re a ServiceNow customer approaching $4M and $10M in annual spend, you can bet ServiceNow has your name on a list of top targets that they need to get over these important thresholds.  Getting you over the $4M and $10M hump not only helps boost the average ACV number, but also helps them post above the 100 customers number, a huge milestone for them.

• Portfolio Expansion and Net New ACV

ServiceNow makes sure to show the market where net new ACV is coming from when they post their “Net-New ACV Contribution” numbers.  Technology workflows like ITSM, ITOM, SPM and SecOps made up 62% of net new ACV contributions in FY22 Q2.  Customer and employee workflows like CSM, Field Service Management, HRSD, and Procurement Service Management made up 22% of net new ACV contributions.  Then there’s creator workflows that made up 16% of ACV contributions.

The interesting thing is that that these contributions remained fairly flat y-o-y.  The biggest change was seen with customer and employee workflows, where the net-new ACV contribution went down 3% from the year prior.

Additionally, 16 of the top 20 deals contained 5 or more products.  If you’re considering adding products to your existing portfolio, and by doing so you would either surpass 5 products or add a product from a workflow not yet being utilized, you have significant leverage you can bring to the negotiate table.  ServiceNow wants to continue to increase the number of deals that have 5 or more products and show net-new ACV contributions across all of their workflows.  It is critically important for them to be able to show their strength in product, portfolio, and platform adoption.

• Renewal Rate

The renewal rate is another key component to ServiceNow’s success.  That number currently sits at 99%, up 2% from last year’s Q2.  Additionally, 85% of their business comes from existing customers and actions like adding products to their portfolios.  ServiceNow will focus on tapping into their existing customer base to get them to expand product adoption, ideally across all of the available workflows.

They also know that the more products adopted the more “sticky” their customers become – customers are more likely to renew with ServiceNow.  The more “sticky” the customer is, the more likely they will be able to also increase the customer’s ACV.   Beyond driving product expansion and moving customers to more robust editions, the more “sticky” the customer, the easier it is to get away with price increases because they know that the customer may not have a choice but to accept the price increase.

What to Expect from ServiceNow Moving Forward and How Customers can Leverage These Goals

CEO McDermott and CFO Mastantuono both made it a point to say that they are confident that they can reach over $11B in revenue by FY24 and over $16B in revenue FY26.  In fact, these are targets that ServiceNow recently raised during the Financial Analyst Day at Knowledge 2022.

During the recent FY22 Q2 earnings call, they gave guidance that ServiceNow is expected to drive $6.9B in revenue by the end of this year.  To reach this year-end target, ServiceNow will continue pushing for net-new products, additional workflow use, and more robust edition movement into deals with the ultimate goal of increasing the customer’s ACV while making them even more “sticky” to ensure high renewal rates and future growth.

In addition, customers can also expect price increases from ServiceNow.  In scenarios where a customer is on the fence on whether or not to add a net-new product or move to a more robust solution, you can fully expect ServiceNow to use price increases to influence the decision.  This is especially likely for clients who do not have price protections in place.

ServiceNow may be willing to remove or lower certain price increases if the customer was able to add a new product.  They will also use the price increase to inflate the cost of staying “as is,” thus making the move to the net-new product or more robust edition more appealing.

ServiceNow will also lean on their partnerships, specifically their partnership with Microsoft.  Their technology workflows are expected to help customers streamline the migration of existing workloads to Microsoft Azure.  This partnership is a strategic move for ServiceNow because it creates an expanded co-sell opportunity with Microsoft enterprise sales.  Microsoft is a powerhouse with a massive customer base.  Being able to tap into that sales team and those relationships to help customers migrate to Azure could be a key growth opportunity for ServiceNow.

Customers also want to keep an eye on ServiceNow Impact.  Impact is a critical piece of ServiceNow’s ecosystem strategy, setting a new standard with respect to fast deployment and value realization.  ServiceNow also knows that the faster a customer implements one of their products, or many products, the more likely that customer is to expand the use of their platform.

Impact is charged based on a percentage of product spend, with one free, basic tier and three paid tiers.  Impact, and especially its paid tiers, is being aggressively pushed right now.  McDermott and ServiceNow understand if they are successful in getting customers to add Impact, it will have a significant impact on ServiceNow’s ability to accelerate revenue growth.  Given the fact that Impact’s pricing is derived from a percentage of overall product spend, the more product you utilize, the more the line item spend goes up.  This is much like the maintenance fees SAP and Oracle customers paid and continue to pay.

Additionally, McDermott pointed out during the FY22 Q2 earnings call that ServiceNow started to see customers elevate large purchases to the C-Suite, resulting in elongated deal cycles that are expected to persist for the remainder of the year.  Despite this, ServiceNow says they have a strong pipeline, a lot of which came from their Knowledge event earlier this year.  McDermott also said that while sales cycles are lengthening, deal sizes continue to get bigger as more materials are negotiated.

As ServiceNow looks for customers to add more products, they know they must get the attention of the C-Suite; that’s the group that needs to be influenced to be able to make the decisions and make ServiceNow a more strategic partner for platform use.  Even though this process is lengthening the sales cycle, ServiceNow is still confident that they can close the deals.  In fact, they are not only confident that they can close the deals, but ServiceNow will use that extra time to sell more and push more products and solutions like Impact.

Customers need to understand the behind-the-scenes of ServiceNow.  They are laser focused on getting that C-Suite attention, getting ahead of the sales cycle, and using this elongated time to sell you more.  If you’re going to adopt their product, it’s all about obtaining the right (and appropriate) pricing, terms, investment dollars, and commitments given the commitment and spend you are giving them.

All of these metrics are important to ServiceNow, and they are going to aggressively push customers to adopt more and spend more so they can surpass their lofty and public revenue targets.  McDermott has even stated that ServiceNow has a very carefully thought-through plan to not only get the deals that may not have come in when expected, but use that extra time to sell more product.

The Bottom Line

It’s critically important that customers have a plan that is as carefully thought out as ServiceNow’s plan.  You need to get ahead of this by understanding the value you have received to date, your go-forward requirements and what you should be getting from ServiceNow commercially moving forward.

You also need to map out how to approach ServiceNow appropriately to get the best deal possible.  Customers give ServiceNow a lot, and it is certainly true that ServiceNow more often than not provides a lot of value back to its customers.  However, customers need to ensure they have the relationship and commercial deal in place with ServiceNow.

One of the best ways to increase your leverage at the negotiation table is to bring relevant benchmarks and proven best practices when it comes to strategy and approach. UpperEdge has the most extensive database of ServiceNow benchmarks available today and a group of subject matter experts to help you with your ServiceNow needs.

Learn about our ServiceNow advisory services or contact us to discuss how to create leverage in your unique situation.