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ShoreTel 2.0: Transforming for a Hybrid Future
In this Q&A, CEO Don Joos shares his vision for remaking ShoreTel as a company that can play on the premises, in the cloud, or at a cross-section of the two.
A lot has changed since ShoreTel's Don Joos accepted the CEO title in August 2013 and shared his insight with me for a No Jitter post. Those were turbulent times at ShoreTel, marked by a low stock price, discord between the premises and cloud divisions, and high executive turnover. Today the waters are much calmer, with sales outperforming the overall market, financial performance improved, and development of a common platform for premises-based and hosted offers.
Along the way, ShoreTel has launched a whole new endpoint portfolio, and fended off two unsolicited takeover bids. In January, Shoretel reported its second-quarter 2015 results with better-than-expected revenue, mostly driven by its premises-based products. The cloud side reported 36% year-over-year growth in bookings with improved margins. And soon the company is expected to launch its new common platform.
On the job, Joos spends about a third of his time at ShoreTel's Sunnyvale, Calif., headquarters and more than that on the road meeting with customers, partners, and investors. His other life is at home, which is currently in Austin, Texas, with his wife and three sons. He enjoys cooking, running, and early morning intense Insanity: The Asylum workouts. The best time to reach him appears to be around 5 a.m. -- in whatever time zone he happens to be at the moment.
I caught up with Joos recently for a look at where he's been at CEO and to where he's headed. What follows is an edited version of our conversation.
What about being ShoreTel CEO was harder than you expected?
Joos: Entering the CEO role, I had a good feel for where the hard work would be. Leading a transformation of a company requires a lot of work to "connect the dots" for people (employees, partners, customers, investors, etc.) so they clearly understand what are the critical pieces, how and why all the pieces are interrelated, and how they come together. It also involves alignment on a shared set of cultural beliefs that define the characteristics of the organization when we are at our best.
To me, there is nothing more powerful than having the entire company understand what we are trying to accomplish, how we plan to get there, and the manner in which we get there. These are all foundational building blocks in shaping ShoreTel 2.0, which is more than just the product technology roadmap; it involves transforming all aspects of the company (billing systems, CRM, configurator tools, portals, implementations, website, messaging, service, and support) to be positioned for growth in the hosted market while continuing to be competitive in the premises market.
Explain how ShoreTel succeeds with its mantra of simplicity? I thought simplicity came at the cost of features, and this is a very complex and sophisticated market.
Joos: Simplicity doesn't have to mean simple. Our customers have very complex communications needs; we'd have a very limited market if we approached them with a light set of features. When we talk about simplicity, we are really referring to removing complexity. Too often a product becomes laden with features that become difficult to access or understand. If the functionality is important, then it should be simple to use.
Our approach, the ShoreTel way, is our belief that "there is a better way to do this." To quote Albert Einstein, "Make things as simple as possible, but not simpler." So "brilliantly simple" isn't just a marketing tagline for us, it's in our DNA. It started the company and it's at the core of the transformation we are currently undertaking. We are extending that approach to every facet of our customer interfaces. The simplicity comes from how we interface with the customer and our partner, not the technology. The technology is sophisticated and we've made it transparent to the user so it is easy to deploy, manage, and use.
You sell hosted services directly and via an agent model. How do you manage channel conflict, and why do you need both paths?
Joos: First, I'd like to state that we operate a channel-powered model at ShoreTel; our partners are an important extension of the way we do things. Our direct sales efforts have been focused purely on cloud growth while we continue to successfully ramp the channel community. Over time, I expect more and more of our business to come through channel rather than direct. Also, since partner programs take time to ramp, this provides us two simultaneous growth paths. Given the growth rates of cloud-based communications and the relatively low penetration rate in the overall UC market, we have been successful in mitigating and limiting channel conflict. I would attribute this success to how we have integrated and aligned our sales structure, modifications to our compensation plans, and focus on the necessary tools within our CRM to effectively manage channel conflict. As an important step in our channel program development, we actually have a betagroup of partners work with us to help shape the program.
ShoreTel and many other hosted providers consistently report double-digit growth. Meanwhile product revenue across the industry has been nearly flat. Do you see this trend changing, and how so?
Joos: While we watch the industry carefully, as you'd expect, and we are following the product revenues reported by the various industry analysts, we are not experiencing the same product downturn as some of our competitors even as we post solid growth in cloud communications.
I'd also like to point out that we see the market slightly differently than being a pure cloud or pure product sale. We believe the customer will force the industry to look at the market as being more flexible, a hybrid approach. The cloud-only companies are betting that all the product sales will cut over to cloud. While I believe there is a good growth opportunity, I simply don't believe that it will be a flash cut. We believe customers are looking for flexibility in how they implement IP telephony and UC solutions. That's why we have engineered a common platform to ensure that when we develop functionality it can be deployed in the cloud, on-site, and in mixed environments. Customers are increasingly looking to deploy applications in the cloud or bring branch offices into the cloud or looking for last-mile reliability for their cloud deployments. We are unique in being able to meet the needs of all these deployment models with a single solution.
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Creation of a common platform for cloud and premises-based products seems like a huge risk in R&D as well as a big threat to the installed base -- not to mention a training challenge internally as well as for customers and partners. Why take on such a big endeavor?
Joos: I see this as one of the mega trends of 2015 and beyond. This is really all about taking the customer's view of communications needs and building a solution that fits. We currently operate both cloud and premises communications solutions inside ShoreTel, and it became clear that there were subtle differences in the way the solutions worked and our customer's expectations of them. Only by providing a single user interface based on a common platform can you provide a truly seamless user experience regardless of a cloud or premises deployment model. This provides a greatly simplified story for our channel partners and deployment models that make sense to our customers, with flexibility, and also provides an integrated experience across endpoints and applications. That's why I undertook this significant reshaping of ShoreTel.
With a common platform, we will actually be able to develop one ShoreTel solution that can be delivered in two models (cloud and premises) and allows the customer the flexibility to deploy in three ways (cloud, premises, hybrid). Not only is this exactly what customers are asking for but it is a very efficient use of R&D resources, allowing us to continue to focus on innovation while simplifying and speeding time to deployment for our customers. Plus a single, intuitive user interface cuts training costs for our customers and partners.
This common platform is probably ShoreTel's biggest undertaking with hundreds of engineers around the globe working on it. Yet, ShoreTel still managed to report growth in market share and revenue last quarter. Are you over the hump on R&D? When do you expect to realize returns from all this work?
Joos: We expect to introduce the common platform in the April timeframe with announcements at our partner conference. I think about the transformation we have gone through in three distinct, but related, phases. Firstly we had to build the right foundation. This involved significant work with our cost model, consolidating and moving our data centers to Texas and implementing enhancements to our channel program to enable partners to also sell our hosted offering. This phase was predominantly completed in calendar year 2014. We then shifted to the migration phase, during which much of the focus was on maturing our go-to-market [GTM] initiatives, continuing to execute our roadmap, and the migration of our financials, as recurring revenue now represents 46% of our total revenue. As we introduce our common platform, I see us shifting to the acceleration phase. This is where we reap the benefits from the first two phases. Our GTM initiatives have continued to mature, we expand our hosted offering outside of the U.S. market, and recurring revenue as a percent of total revenue continues to grow above 50%. I view our partner conference in April as an early step in the acceleration phase. And, as you have noted, we are already realizing returns as evidenced by our most recent quarter's results!
With the cloud, the competitive landscape is very different than it was for ShoreTel five years ago. What might cause major changes in what companies ShoreTel see as its primary competitors over the next five years?
Joos: The hosted market is very fragmented right now, but it's typically not the competitors I can see that worry me but the ones I can't see. I'm confident we have the right pieces to win in the market; it's something disruptive that we haven't yet seen that keeps me awake at night.
Recurring services represent about 40% of ShoreTel revenue. What percentage of your time and personal capacity go toward the recurring part of the business, and is it growing?
Joos: The hosted market continues to be a growth area, which is why I am positioning the company for the growth in the hosted market while continuing to be competitive in the premises market. Recurring revenue is now 46% of our total revenue and a large percentage of our sales and marketing efforts are directed toward cloud growth. But our R&D efforts are very much on introducing our common platform, which can be deployed in either scenario. This provides us with great leverage going forward as we benefit from scale and scope, and the emerging hybrid market segment.
How will ShoreTel and other enterprise UC firms successfully compete with freemium cloud services for conferencing and video?
Joos: Nothing is free; there is always a cost associated with an offering. It is about the trade-offs you are willing to make. The customer segment we focus on wants the full capabilities of a UC solution but it also expects an integrated experience due to how people work today. For the very low end of the market, these offerings may be good enough but the customers we focus on expect a "brilliantly simple" solution.
Popular opinion holds that the UC industry will continue to consolidate. As one of the smaller of the major players, do you expect more unsolicited offers? Are you waiting for the right partner or price?
Joos: I can't comment or speculate on any future or potential acquisitions that we might make or companies that may see ShoreTel as attractive. I am focused on building a great company. I see the cloud provider marketplace as very fragmented, and I believe the market leaders will be defined over the next couple of years. But I do see ShoreTel as uniquely positioned to lead the market transition with our common platform, applications, and endpoints. So I feel we have all the assets we need to execute our strategic plans and if opportunities present themselves, then we will carefully consider them, but it will be incremental to our plans.
You mentioned the common platform will be a major part of next month's partner conference. Anything else planned?
Joos: It's really much more than the introduction of a common platform; this is about transforming the company to take best advantage of the market opportunity ahead of us. The common platform puts the customer at the center of the R&D thinking and spend, but we have to evolve as a company to grasp that opportunity and accelerate. Under the covers, almost every facet of ShoreTel is being changed in some way to leverage this new platform, [as I mentioned]. This transformation is integral for the new, customer-driven market opportunity, hence the introduction of ShoreTel 2.0 at the partner conference. I'll see you there.
Dave Michels is a contributing editor and analyst at TalkingPointz.
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