Given the prominence of the cloud trend, companies that offer solutions and services using traditional on-premises software and hardware need to consider how to leverage the cloud to maintain market relevance and continue growing their market share. But it’s important for companies that have yet to make the pivot to the cloud to realize that transitioning the business to the cloud model can be challenging. The painful story of how ThinkHR found its way to becoming an exciting cloud-based services company is a good example.
To increase the probability of success, companies moving to the cloud must recognize the need to change both their business model and culture. This will inevitably require adding new members to the management team with deep cloud experience. They will also need the financing to make major capital investments in new infrastructure and weather financial hardship until they can develop a critical mass of recurring revenue to offset the loss of legacy business. Bottom line: companies have to adapt to the cloud to thrive in the long term.
I didn’t know any of this in 2005 when I founded ThinkHR as an HR outsourcing firm. But I quickly realized that we had to change our business model to survive.
ThinkHR started out offering companies HR outsourcing services so they could focus on their core business. After two years, ThinkHR had 100 customers and our revenue had grown to more than $2 million. Despite the outward appearance of success, behind the scenes the company’s business model was unraveling and our product was not going to scale. We had retention problems, keeping our recurring revenue clients an average of 18 months. And the cost to deliver our product was high, leaving us with gross margins that would not position us to win in the marketplace.
Frustrated and humbled, we asked customers and partners what they really wanted. They explained that they wanted to be able to go to only one place when they had HR questions and they wanted to be empowered to do their own HR.
So we decided to make the pivot to the cloud to meet their needs. We started with a call center that was heavily supported by a continually updated online database. As customers called us, it became clear that we could answer questions much more quickly and inexpensively with our online content. Callers asked many of the same questions, and the answers already were posted in the database. We realized that this database carried more value than just the questions it answered. We had effectively established the foundation for a cloud-based HR resource center.
The next step in our pivot was to bring in Silicon Valley veteran Dan Riordan as COO and later Steve King, who has a well-established Software-as-a-Service (SaaS) economy success story, as a board member.
At this time, things really started to heat up. We began measuring and analyzing a variety of data to help gain insight into what types of information the market was seeking. If we noticed a spike in workers compensation questions, for example, we generated content to solve these questions in the future.
Last fall, prior to the unveiling of Obamacare, we developed content explaining the legislation and its implementation. As a result, ThinkHR was able to answer more than 20,000 questions for confused business owners who had nowhere else to turn for help.
We also implemented ThinkHR Learn, an online learning and training platform with more than 200 Web courses that our customers leverage to educate themselves and their employees.
Today, ThinkHR has more than 55,000 customers and is well on its way to posting annual recurring revenues of $10 million, representing an annual growth rate of nearly 100 percent. ThinkHR’s client retention rate exceeds 98 percent for five years running. And best of all, the market opportunity is huge: 2.4 million companies nationwide fall into our sweet spot, which is businesses with five or more employees.
The pivot to the cloud was far from easy, however. In fact, at times, it has been downright painful. ThinkHR revenues plummeted at the start of the transition and then plateaued for a couple of years while we worked out the kinks and traded “bad” revenue for “good” revenue.
During this time, some of our investors lost confidence and refrained from investing new money in the company until the transition was complete. I even had to cut personal checks three times just to make payroll.
The painful story of how ThinkHR found its way to becoming an exciting cloud-based services company is not that unique. What is somewhat unique is that we persevered and made it through. Experience has been the key and knowing how to fight the fight has made all the difference.
Blaise Software’s pivot
My training ground was Blaise Software, which I started in my kitchen with a fraternity brother, my new wife and my bartender buddy. The company developed health insurance quoting software for the New York and New Jersey health insurance market. For two years we owned the market with our desktop software solution, until a competitor entered the market with a faster, better and less expensive solution.
We needed to find a more cost-effective way to support our product and that meant rebuilding from scratch and cannibalizing our existing product and revenue model for an offering that had a lower price point and was less costly to support.
The Blaise transition evolved successfully, but again, that pivot was fraught with challenges. I had plenty of sleepless nights, and there were times when I thought Blaise might not make it. I had to remortgage my house, bring in new executives and make some very tough decisions. The full transition took a couple of years, but in the end it was well worth it and we enjoyed a successful exit for our efforts.
Two tenets, driven by my experience with sports (I was a NCAA wrestling champion at Lehigh University), helped me meet my challenges in the business world of pivoting both ThinkHR and Blaise:
- Things never go exactly as planned; so quick, thoughtful, strategic adjustments are required to achieve ultimate success.
- Be tough and committed to your decisions; people are watching you, and they need your leadership.
Steve Blank’s insights
I also appreciate the business theories of Steve Blank, the prominent entrepreneurship professor at Stanford and lecturer at UC-Berkeley and Columbia whose “Lean Startup” curriculum has radically changed the way entrepreneurs build companies. Not only is Blank a well-respected founder or participant in eight technology startups, he’s also an expert on company pivots.
According to Blank, a startup represents a series of untested hypotheses, and at least one is likely to go wrong. As a result, he believes, the ability to pivot on a business plan is required and necessary to achieve success. I embrace his view wholeheartedly. Whether you’re wrestling or trying to find the best market fit for your product or service, it pays to be nimble in your approach.
I asked King, who is our new executive chairman, about his pivot to the cloud. Not surprisingly, his stories have many similarities.
In 2000, he took the role of CEO at Zantaz, an early predecessor to the cloud that provided what was then called “on-demand” email archival services to financial service companies on a hosted basis. As a pioneer of these solutions, Zantaz had to make huge investments in data centers, equipment and a lot of cloud infrastructure software that, unlike today, was hard to find.
The big challenge came when Zantaz determined that some customers were not yet ready for an on-demand solution. The company was strapped for cash, supporting multiple platforms and in desperate need to rally the business around a singular vision that would win in the marketplace.
Like my experience, King said sleepless nights were part of the experience, but so was incredible personal growth for him and Zantaz’s executive team, which ultimately made the company a Silicon Valley success story. In the end, King led Zantaz from under $1 million to $100 million in revenue resulting in a successful sale to Autonomy (now part of HP).
Success can be achieved with a pivot, but you need to make sure you and your company have the vision, fortitude and commitment to see it through. A fully successful cloud transition often takes several years and a lot of patience. For companies that may be new to the cloud, it’s important to appreciate the time and effort that transition will take.
While the transition can be painful to the bottom line and sometimes to the confidence of investors and employees, the payoff of building a company with a brighter future and significant upside is well worth the effort.
Do’s and don’ts of pivoting to the cloud model
Pivoting your business to the cloud? Here are five things you should do and five mistakes to avoid when making the transition.
- Have a clear vision and be fully committed to the cloud business model.
- Make adjustments and create a plan including a detailed multi-year financial model using a SaaS or cloud methodology.
- Ensure your board and key investors are in alignment and supportive of the strategy shift.
- Have adequate funding. Moving to a subscription model requires a longer cash “runway” to break even.
- Make sure your existing customers understand what you’re doing. Create a clear and compelling communication plan.
- Attempt to pivot without first testing your hypothesis with potential customers.
- Attempt to pivot with the existing management team only. It will require different skill sets and a different culture to be successful.
- Force existing customers to convert to the cloud option immediately. Create a comfortable migration plan.
- Maintain both business models indefinitely. It’s organizationally confusing, complex and expensive, especially for startups.
- Expect immediate success. Be ready to work very hard with little to show for it for a substantial period of time.
Peter Yozzo founded ThinkHR in 2005 to deliver cloud-based services leveraging human touch as a differentiator in the underserved HR market. Under his leadership, ThinkHR has grown to serve 60,000+ employers and has created a new standard for the best way to get HR questions answered. A born entrepreneur, Yozzo also founded Blaise Software, an insurance content and health plan quoting portal acquired by ChannelPoint. Previously, he founded Mindshare Group and The Capital Group.