Case Study
ServiceNow: From Startup to World's Most Innovative Company

Barnali Chakraborty
Freelance Case Writer, IBS Case Research Center, IBS Hyderabad (Under IFHE - A Deemed to be University u/s 3 of the UGC Act 1956), Hyderabad, Telangana, India. E-mail: barnali@icmrindia.org

Debapratim Purkayastha
Formerly Director, Case Research Center, IBS Hyderabad (Under IFHE - A Deemed to be University u/s 3 of the UGC Act 1956), Hyderabad, Telangana, India. E-mail: debapratim@ibsindia.org

On May 29, 2018, Forbes magazine placed ServiceNow first on its annual list of the World's Most Innovative Companies. It was the very first year ServiceNow had become eligible for the list. ServiceNow, a cloud-based software company based in Santa Clara, California, assists corporate Information Technology (IT) departments to build internal applications. It also helps customers to automate non-revenue generating functions, including human resources, legal, finance security, and facilities management. The case talks about the entrepreneurial journey of Fred Luddy in founding ServiceNow. It then sets out to describe how the company managed growth throughout the years under successive CEOs (Frank Slootman and John Donahoe). The case also explores the company's innovative business model. The various innovative aspects of ServiceNow, which paved the way for its eventual success, are also explained in detail. The case ends with a discussion on whether ServiceNow will be able to continue its growth momentum without compromising on innovation under another new CEO, Bill McDermott.

Fred has been a wonderful counselor, coach, friend, as well as someone who challenges us to constantly improve our user experience, constantly make sure our products are easier and easier to use.ⁱ

- John Donahoe, Former President and CEO, ServiceNow,
about Founder Fred Luddy, in May 2018.

ServiceNow's innovation lies in its elegance. It's solving a common but complex problem (processes and assignment of work) with a cloud-native, holistic approach that is easy to maintain and use.ⁱⁱ

- Ellen Daley, CEO of Acorio, a boutique consulting firm
exclusively focused on ServiceNow, in March 2018.

Introduction
ServiceNow, based in Santa Clara, California, was placed first on the Forbes list of World's Most Innovative Company, published on May 29, 2018. It was the very first year ServiceNow had become eligible for the list. ServiceNow, a cloud-based software company, assists corporate Information Technology (IT) departments to build internal applications and also helps customers to automate non-revenue generating functions including human resources, legal, finance, security, and facilities management. Commenting on the achievement of the company, Kevin Haverty, ServiceNow's EVP of Worldwide Sales, said, "We tip our hats and thank everyone who believes work should work better. You're why we debuted at #1 on Forbes World's Most Innovative Companies list."ⁱⁱⁱ

ServiceNow was founded in 2004 by Fred Luddy (Luddy). At the age of 49, Luddy lost his job as well as his lifelong savings. But instead of getting bogged down by the failure, he applied the lesson learned in creating ServiceNow. According to analysts, the growth story of ServiceNow was a perfect example of how a company could use technology to solidify a competitive advantage. In just a few years, the company went from being fairly small to the leading player in enterprise IT services management. Its success story was such that ServiceNow made it to the IBD 50 list1 of top-performing companies with an IBD Composite Rating of 99, the highest possible rating.

Luddy not only made ServiceNow the most innovative company in the world but also turned himself into a late-career billionaire. He gave all the credit for this achievement to his colleagues. "It's kind of an undeserved feeling, because they were the inspiration. You folks had all of the ideas. I just wrote them down and thought about them,"^iv said Luddy. Luddy worked with two successive CEOs - Frank Slootman (2011-2017) and John Donahoe - to grow ServiceNow. In November 2019, former CEO of SAP Bill McDermott (McDermott) took over as the CEO of ServiceNow.v The mandate before McDermott was to grow the revenues of ServiceNow (from $2.6 bn in 2018) to $10 bn.^vi

The Journey
The origin of ServiceNow and its impressive growth could be found in the remains of an IT software-management company called Peregrine Systems (Peregrine). Luddy was the CTO (Chief Technology Officer) of Peregrine. He worked with Peregrine for over 13 years, but in 2002, the company suddenly filed for bankruptcy. It was revealed that Peregrine had adopted fraudulent methods to inflate its revenue numbers and stock price over a two-year period. As a result, several of its top executives, including the CEO, went to prison. While Luddy was not charged with any wrongdoing, his $35 mn personal stake was wiped off overnight. "I really hated my job. Losing that money was absolutely the best thing that could have happened,"^vii said Luddy. Rather than sulking over what happened, Luddy decided to work on a product that would make regular office work using IT simple for employees.

Luddy was born in New Castle, Indiana, a medium-size Rust Belt town near Indianapolis. His father was an accountant and his mother, a Catholic-school teacher. From a very young age, Luddy was fascinated by machines. At the age of 17, while working as a gofer at American Standard, he saw an HP computer being installed in his office and got the permission to use it. Way back in 1972, there were not too many people with knowledge of any coding language. With the help of programming guides, Luddy got himself hired as a programmer there.

It wasn't long before he realized that doing regular office works could become repetitive for employees. So he wrote an order-entry program for the company clerk so that they would not have to keep typing up folding-door order forms with the same information each day. "There is no better experience than giving someone a piece of technology that lets them do something they never thought they could do,"^viii said Luddy while talking about his early days.

Luddy then went on to join Indiana University and also got a job working for the dean of economics there. But he soon dropped out. He then moved to Montreal and got a job working for a French service bureau before ending up in Silicon Valley in 1976. In 1976, he joined the Amdahl Corporation (Amdahl), an early competitor to IBM,2 in the high-end mainframe-computer market. "I thoroughly enjoyed the company, and it was a wonderful experience. I was probably the most formative part of my career. There were a lot of very bright people from both a technical and a business perspective. Those people really gave me a phenomenal education to help me through the next 15 to 20 years of my career,"ix said Luddy while talking about his experience of working at Amdahl.

In the late 1980s, Luddy started working as a consultant for a software company called Boole and Babbage. In 1988, he even started a software company called Enterprise Software Associates, which was a complete failure. He then went on to join Peregrine in 1989. Peregrine used to build software for the help desk and service desk market. When Peregrine went bankrupt in the midst of an accounting fraud in 2002, Luddy started working on a product which would use the power of software to make people's lives better.

In October 2003, Luddy started a company named Glidesoft. Glidesoft's Service-now.com delivered office services over the Internet on a subscription basis (monthly, per customer). The product could be updated easily and customers were not required to manually download software from disks on different operating systems. The product was revolutionary as it was the first On Demand Web 2.0 solution (AJAX and SOAP enabled) that required only a browser and an Internet connection. Luddy became a Software-as-a-Service (SaaS)3 pioneer with a user-friendly interface designed for the regular office worker. Luddy founded the company two weeks before his 50th birthday, "I couldn't wait, because there was something psychologically that said I couldn't start a company at 50,"^x said Luddy.

Luddy started selling the product over the Internet in early 2005. At the beginning of 2005, the company had no employees. With only one $800 computer and a borrowed IP address, Luddy operated out of a Teleco closet. He used to make phone calls and convince small businesses to use his product. "We had this really great, simple platform for creating workflows, and we would go to people and say, Hey, you can do all these things with this, and they just weren't interested. So we went back and said, Okay, we say this is this great tool for doing things like IT-support management, so why don't we back that up and make an IT-support product?"^xi recalled Luddy. Finally, he convinced 12 customers to use the product free of cost and give feedback.

In July 2005, Luddy decided to launch the product in the market. He recruited five people. Luddy's younger brother Rob, who had also worked at Peregrine, joined the company in 2005 as the company's first sales representative. At around the same time, the company raised its first funds, a $2.5 mn Series A round led by JMI Equity,4 followed by another two rounds totaling $11 mn, over the next few years.

When the company went back to its initial twelve customers who had been using the software for free, they happily signed agreements to pay the company. The company charged about $25 a month per user. It sold its first major contract to WagerWorks, an offshore gambling site, in late 2005, for $2,600 a year. The company then got a contract from Edmunds.com for $35,000 a year followed by Qualcomm in 2006. "Those companies became a beachhead for us to get follow-on customers such as Hyatt. Our revenue is a recurring revenue stream. The first year we did $850,000. The second year we were at $5 mn, and in the third year we were $13 mn. We finished the fourth year at $28 mn,"^xii said Luddy.

In 2006, Glidesoft changed its name to Service-Now.com. In late 2009, when Sequoia Capital5 led the company's $41.4 mn Series D funding, the company had 100 employees, reported a positive cash flow, and had customers like Deutsche Bank, Intel, and McDonald's.

The Growth Story
ServiceNow continued to grow at a steady pace with revenue increasing by 125% between fiscal 2009 and 2010, and by 97.5% between fiscal 2010 and 2011.xiii In 2011, Luddy was named as the winner of the Ernst & Young Entrepreneur of the Year. "About seven years ago I decided to do something about the existing state of enterprise IT software. I knew there had to be a better way. Fast forward a few years and I began to realize ServiceNow has a very real opportunity to become one of the largest, most successful software companies in the world - unimaginable when it was just a handful of us in a little office in Del Mar, California. A combination of market dynamics, customer focus, innovative technology, a little luck and a lot of hard work got us here,"^xiv said Luddy.

The year 2011 was a turning point for ServiceNow too. In 2011, Luddy realized that his skills were better suited for a product role and decided to replace himself. He stepped down to the role of CPO (Chief Product officer), and Frank Slootman (Slootman) joined the company in April of 2011 as CEO. Slootman focused on strengthening the sales team and taking the product to larger, higher-paying customers like Johnson & Johnson. "Frank [Slootman] took us from a very large startup and he made us into a very large, well-oiled machine, implementing processes and procedures and really scaling out the organization in a way I never could have,"^xv said Luddy. In 2011, Service-Now.com also changed its name to ServiceNow.

In late 2011, VMware6 offered $2.5 bn for the company. While the sale would guarantee financial security, advised by Sequoia, Luddy turned down the offer. "We thought ServiceNow had a great product-market fit, a great leadership team. They're also in a winner-take-all market - you cannot name the number two company to Salesforce,"^xvi said Douglas Leone (Leone), managing partner at Sequoia.

In June 2012, ServiceNow went public. Luddy was listed by Forbes as "One to Watch" in a 2012 Forbes listing of the 400 Richest Americans. With cash from the offering, and the ability to issue new shares, Slootman started acquiring companies which offered new underlying technology and invested in Artificial Intelligence (AI).

ServiceNow's first major acquisition was Mirror42. On July 9, 2013, the company acquired the Amsterdam-based cloud-based IT and business intelligence solution company. On July 9, 2014, the company acquired Neebula Systems for over $100 mn. Neebula Systems' flagship product ServiceWatch which worked to automate discovery, mapping, and monitoring of Enterprise IT Services, became an integral part of the ServiceNow IT Operations Management (ITOM) product module. With these acquisitions, the company started growing at a steady pace. It became the most preferred destination for companies to centralize and automate regular IT help-desk tasks including recovering passwords, requesting equipment, setting up new user accounts, troubleshooting, and managing IT systems and responses.

In 2016, the company reported revenue of $1.39 bn and its market capitalization was $12.34 bn. "We finished 2016 with strong momentum and our business is firing on all cylinders. Total revenues in 2016 grew 38% making ServiceNow the fastest growing enterprise software company with more than $1 bn in revenue,"^xvii commented Slootman.

In 2016, the company decided to venture out into other areas including customer service, security, and human resources. While ServiceNow was expanding into other markets, Luddy realized that it was time to step aside and let someone else run the company. He moved into an advisory role at the company. In April 2017, the company hired former eBay7 Chief John Donahoe (Donahoe) as CEO and President of ServiceNow, with Slootman continuing to serve as chairman of the Board. "John is a highly capable and proven CEO, uniquely suited to lead ServiceNow in its next phase of growth and we are thrilled that the Board's search for my successor has resulted in John joining the Company,"^xviii commented Slootman.

Upon joining ServiceNow, Donahoe brought an intensely customer-focused culture to the company. He understood that running one of the fastest growing and most innovative software companies in the world meant relentlessly improving its core product line. While Donahoe credited Luddy for his style of management, he also said that the company was in the right place at the right time. "Digital transformation is an essential strategic need for virtually every customer that I'm meeting with and it is just stunning the consistency around that...digital transformation absolutely is at the top of the investment priorities of companies and I don't think it's driven by tax reform or even macro-economic factors. I think it's more strategic spend. So we feel ourselves in the middle of that strategic spend."^xix

In 2017 and 2018, ServiceNow made a lot of tuck-in acquisitions8 so as to add more advanced technologies and technology capabilities to its solutions. In February, 2017, it acquired DxContinuum to leverage its machine-learning capabilities and data models on the ServiceNow9 platform and across its products. "ServiceNow is at the forefront of intelligent automation. Adding DxContinuum to the ServiceNow platform will move much more of the heavy lifting of work processes to machines, freeing people to focus on the highest value work,"^xx said Dave Wright, Chief Strategy Officer, ServiceNow.

The company went on to acquire VendorHawk for software asset management, Qlue for chatbot technology, SkyGiraffe for mobile experience, Telepathy for UX enhancements, and AI startup Parlo for its technology in NLP (natural language processing).^xxi "Technology is not as useful without the talent. We have the ability to sell, so I don't need to acquire revenue or customers. We can do that ourselves. We try to acquire small companies with promising technology before they go vertical and their revenue explodes, because then it's way more expensive (to acquire them),"^xxii commented Slootman.

In June 2018, Luddy became the Chairman of the Board of Directors succeeding Slootman, who decided to step down. "I am thrilled that Fred will be our next board chair. His founding vision continues to be core to our company, to our purpose and to our focus on customer success,"^xxiii commented Donahoe.

In August 2018, the company entered into a partnership with Box, a provider of cloud-based business-collaboration services, so as to provide employees direct access to documents and folders stored and managed in Box's cloud-based content management platform.

In October 2018, ServiceNow announced that it had entered into an alliance with Microsoft to deliver its digital workflows via Azure Government Cloud to the US Federal Government as it modernized its IT infrastructure using cloud-based services and platforms. The company also stated that the deal with the US Federal Government accounted for a fifth of its total net-new Annual Contract Value (ACV) in the fourth quarter of 2018. "This alliance is designed to help federal agencies move faster and securely to cloud-based solutions. Just as we've seen in the private sector worldwide, digital transformation is becoming a public sector imperative and we are deeply committed to being a preferred strategic partner helping governments modernize, drive efficiency and deliver better experiences for employees and their citizens,"^xxiv said Donahoe.

While ServiceNow expanded its footprint in the government sector, analysts were of the view that it would be interesting to see whether the company could replicate its success in the US market in the rest of the world. The company declared that the potential for growth in the government sector would not be restricted to the US. "Initially when cloud came around, governments were a little bit suspicious and maybe a little bit slow to embrace it for security concerns, for the newness factor. I will tell you that's changing. Governments are under pressure to deliver efficiency and deliver better citizen experiences and to do that in a safe and secure way and they now recognize cloud is an important enabler of that...In Australia, and same thing in the UK, some of the State and regional governments are using our platform in some really creative ways,"^xxv commented Donahoe.

In November 2018, ServiceNow expanded its partnership with IBM to serve Multicloud enterprises. As part of the partnership, IBM would deliver its Multicloud Management Platform extended by ServiceNow's IT Service Management and IT Operations Management solutions. "As a strategic digital transformation partner to leading companies around the world, ServiceNow delivers digital workflows that create great experiences and unlock productivity. The combination of our world-class IT Service Management and IT Operations Management, with IBM's innovative solutions for hybrid cloud is transforming how people work,"^xxvi said Pablo Stern, vice president and general manager, IT Operations Management, ServiceNow. In February 2017, the company had entered into a multi-year, strategic partnership with IBM to offer ServiceNow's cloud-based service automation platform and IBM products and services.^xxvii

In May 2019, ServiceNow acquired the intellectual property and key personnel of mobile analytics company Appsee. As per the terms of the deal, the co-founders and R&D team of Appsee would join ServiceNow after the deal closed. ServiceNow did not, however, acquire Appsee's customers; the company was expected to wind down its existing business over the next 12 months. "We'll be able to use Appsee for our mobile app and browser analytics. This can be used across all three of our workflows, and with this level of visibility our customers will be able to see how customers or employees are engaging [with the application]. With these analytics, ServiceNow will be able to provide insights on user behavior. In turn, this will help us provide an improved UI for customers,"xxviii said a company spokesperson.

In October 2019, ServiceNow announced that it would acquire the cognitive search capabilities of Attivio, an AI powered answers and insights Platform Company based in Boston, Massachusetts, US. Attivio's AI powered search capabilities were expected to help ServiceNow improve its search capabilities to move beyond keyword-based search. With the integration of Attivio into the Now Platform, ServiceNow aimed to enhance search capabilities across IT, Customer and Employee workflows through the ServiceNow Service Portal, Now Mobile App and Virtual Agent chatbox solution.^xxix

ServiceNow also continued to expand its market reach through product enhancement and market expansion. From July 2019, its HR Service Delivery product was available on the SAPApp Center, the marketplace for SAP partner offerings. To expand its geographic footprint, the company opened its second largest development center in Hyderabad, India. This Center would specifically focus on AI and mobile experiences for its products.

In October 2019, ServiceNow named Bill McDermott as its new CEO. He would succeed Donahoe, who had decided to step down to join Nike. McDermott had served as CEO of SAP from 2014 until October 2019 and was co-CEO from 2010 to 2014. During his tenure, SAP tripled its market value to become a global software company with more than 437,000 customers in over 180 countries. Analysts were of the view that McDermott's global leadership experience in enterprise software and past performance of driving transformative growth and strong shareholder value would help ServiceNow to sustain its growth momentum.

The Business Model
ServiceNow operated in the high growth SaaS business vertical in cloud computing. ServiceNow offered a cloud-based platform that helped businesses by automating routine processes across organizations. Its software helped to create digital workflows, increase both productivity and collaboration across departments, and eventually create better experiences for their customers as well as users. "In software everyone claims to be a platform play, but in reality there are only a few that can make that claim, and ServiceNow is one of them,"xxx said Matthew Hedberg, an analyst at RBC Capital.

At the outset ServiceNow started helping its customers to deliver two primary outcomes: great experiences for employees and rising productivity. "For the last 30 years, software has been functionally designed and functionally bought - and while that might have improved operations and those functions, it didn't really drive great productivity or better work experiences because it didn't reflect the reality that for employees and customers, most business processes are cross-functional in nature. And a cloud platform like ServiceNow enables that cross-functional work to happen by driving cross-functional processes,"xxxi said Donahoe.

Analysts were of the opinion that the key reason for ServiceNow's success was the idea of introducing a single product in a market and eventually expanding into other niche markets, providing plenty of up-selling and cross-selling opportunities and thereby ensuring multiple avenues for growth. ServiceNow started off with one of the fastest-growing sectors in cloud computing called Software-as-a-Service IT service management product (ITSM), a cloud computing tool designed to track internal IT issues. ServiceNow had built an economic moat10 in ITSM. The company had since forayed into IT Operations Management (ITOM), IT Business Management (ITBM), human resources, Customer Service Management (CRM), and security verticals so as to enable companies to improve operations and boost productivity in a range of areas. Its customers included companies in financial service, consumer products, healthcare, and technology (Refer Exhibit I).

According to industry observers, ServiceNow differentiated itself from its competitors through the simplicity and customizability of its products. The cloud-based software which was delivered online via a subscription-based revenue model could be quickly configured and rapidly installed. Once installed, it offered a single collection center for requests, data points, and checklists, which could be analyzed by algorithms to predict needs, point out concerns, as well as measure efficiency. In addition to streamlining service, ServiceNow improved automation and analytics through AI. Third-party app builders contributed through customized apps such as those for tracking security incidents like shoplifting or broken windows in retail stores or tracking the status of endangered animals in a park.^xxxii

In 2017, ServiceNow unified its customer success management, professional services, training and certification, and the partner ecosystem teams into a single group reporting to its Chief Revenue Officer Dave Schneider. "This unification makes the clear connection that customer success is an extension of the sales team, to ultimately help both land and expand efforts. This progression of ServiceNow's sales and support engagement model reflects the company's growth as a strategic partner to customers, and sets the business up for ongoing growth across its product portfolio moving forward,"xxxiii said Meaghan McGrath, Analyst at Technology Business Research Inc.

Nonetheless, analysts were of the opinion that despite the company having one of the best business models and establishing itself as a market leader in ITSM, its future prospects would depend on its ability to gain market share in other areas of IT, in addition to its capacity to create a market for service management platforms beyond just IT services. According to Donahoe, cloud computing was still in a nascent stage in terms of usage by businesses, governments, and institutions. "I think we're in the third inning of the cloud tailwind. And therefore, when we look at our share of wallet, so to speak, a share of what we think we can grow in many of these customers, I think, we're a quarter of the way there, max. More like maybe 20%,"^xxxiv he said.

While ITSM and ITOM continued to be the biggest revenue generator for ServiceNow, the company was using machine learning11 to increase productivity and help employees provide a great experience in the area of customer service, HR, and security. To explore these new markets, ServiceNow leveraged its large and rapidly growing network of partners. In the second quarter of 2017, 58% of ServiceNow's net new ACV came outside ITSM compared to 40% in the same quarter in 2016. "As I've said before, many of the world's largest systems integrators are rapidly investing in ServiceNow's ecosystem. Increasingly, we're being leveraged across the enterprise as customers pull our platform and multi product capabilities into HR, Customer Service Management and Security,"xxxv said Donahoe.

Unique Features
ServiceNow generated steady growth with the digital transformation of IT systems compared to its competitors that offered software and applications in the cloud. The company ranked among the fastest growing in the application software industry. According to analysts, its business model offered some competitive advantages, especially in the medium and long term. According to Dave Vellante, Chief Analyst at Wikibon, a research firm, "The Street loves the stock, customers are happy, the ecosystem is expanding dramatically. ServiceNow is one of the best stories in enterprise software, period."^xxxvi

Expansion of Existing Customer Relationship
ServiceNow's IT services had a solid competitive advantage as it allowed the cross-selling and expansion of services in its customer base. This played a crucial role in creating long-term relationships with its customers. In 2018, ServiceNow's renewal rate was 98%, making the company a leader in customer retention within the industry.^xxxvii "They have cemented themselves as the number one IT partner for the biggest companies in the world, and they don't get fired,"xxxviii says Alex Zukin, Analyst at Piper Jaffray.12

Considering the high switch cost of services such as ITSM and ITOM, customer retention gave greater long-term strength to the revenues of the company. Moreover, the diversification toward promising opportunities including customer service, human resources, and security, was expected to help the company unlock new sources of growth in due course.

ServiceNow aimed to move beyond just helping companies automate internal IT functions. Though its rapidly evolving and expanding expertise had helped it to grow its customer base, the company intended to engage itself throughout the process - from post sale to renewal. This strategy was expected to help ServiceNow expand beyond the IT operations base. "The area where we're increasing our focus is in the sort of full customer lifecycle, from post sale all the way through renewal where what I heard from customers was, 'Help me implement and help me get maximum value out of the product, and then help me translate that into business value, that we can demonstrate'. But what we're going to do is put a little more focus on customer success, so that we're capturing and documenting and codifying the business value that gets created, which helps a CIO or an IT department within their organization demonstrate the value they are driving inside their company and frankly helps us on upsells, on price realization and on landing new accounts,"^xxxix explained Donahoe.

Entrepreneurial Culture
ServiceNow's internal culture had a profound impact on the steady growth of the company. While the company was growing to become a large enterprise, it remained vibrant with entrepreneurial energy. This energy encouraged the company's engineering team to come up with fresh ideas. The company operated as a flat organization where if an employee had an idea or needed help, s/he could directly approach the appropriate person without having to go through a lot of red tape. "At ServiceNow, leadership isn't a title but rather a deep-rooted culture that exists at every level within our engineering team. Every person on my team is a leader who embraces the growth mindset. We're willing to take risks and continually build upon lessons learned,"xl said Mike Lents, Vice-President of Service Engineering.

For example, data science employees in the company found that the customers managing their SaaS software confronted two main challenges. They faced a difficulty in identifying the software purchases throughout their organization, and also wanted to know how well that software was being used. Sensing this problem could take up an enormous amount of time and effort for the customers, the data science staff developed algorithms and machine learning models to identify software purchases from the financial and expense data. The company also had proprietary integrations with top SaaS vendors that could identify software licenses that were being underutilized and could provide automation to de-provision those underutilized licenses. "Our cloud-based platform has various integrated features that help companies solve and simplify complex workflows - in other words, our features are built to integrate with each other. We gain experience not only in the feature that we work on but also have a broader understanding and experience working with all other features. We learn to build smaller connecting blocks to solve a large, complex problem,"^xli explained Sri Vattikuti, Software Manager, Engineering Department, who managed quality engineering for ServiceNow's IT Operations Management teams across a suite of applications, including configuration database, operations intelligence, and Blazent.

Operates as Customer Zero

The company operated as customer zero which meant its engineers relied on its cloud-based workflow platform exactly as its customers would. This model gave them unique insights into the customers' experience and their requirements and into how they could help accelerate product development. The company believed that it was important to develop empathy for people and their jobs before developing technology for them. In Luddy's own words, "For the longest time, it was hard for me to admit I didn't know something. What changed my life was realizing it was OK to ask. It was about developing that user empathy, about listening to people and their challenges. My advice would be to develop humility and ask questions. Don't be afraid to show your lack of knowledge."^xlii

With steady growth rates and innovative customer-centric products, ServiceNow became a major cloud vendor for leading companies. In 2017, it launched a mobile app that could handle the complete journey from the onboarding process of employees to their day-to-day work, relocation, leaves of absence, and off-boarding. The app could be used to find information from where the desk was, to who the co-workers were, to the maps of the office, sending questions to the staff coordinator, addressing payroll questions, and IT issues. "So take employee onboarding, which is a multi-departmental experience, right? It touches multiple areas: you've got to get your badge from security, you've got to get your desk from facilities, you've got to get your laptop from IT, you've got to deal with finance, you've got to deal with compliance, you have to deal with HR. So it's more than just an HR experience, it's the full end-to-end experience... . That's what's driving really strong demand for our HR products and we think that's going to continue. And I'll note, as I have several times, that is very complementary with what the HCM providers are providing. It's not in competition with them, but very complementary to provide the best end-to-end employee experiences for our customers,"^xliii said Donahoe.

ServiceNow's smooth and efficient onboarding process added to the efficiency of its own workforce as well. "ServiceNow has one of the most streamlined onboarding processes I've ever witnessed, especially when you account for its compliance requirements and complexity. Although the ServiceNow platform takes time to learn, there is a well-defined set of training and tools that enable new engineers to be up and running quickly. I've been impressed with how our two most recent hires were able to contribute to the product quickly even though they needed to learn a new development platform,"xliv said Brian Geihsler (Brian), Senior Manager, Software Engineering. Brian was a co-founder in VendorHawk.

Strong Financials
ServiceNow's strong financials added to its growth story and made its stock more attractive than that of its peers. ServiceNow had delivered double-digit growth in revenue since 2007. The company had also delivered a steady earnings stream which it was able to achieve due to the expense discipline implemented in the company, and higher contracts value, which in turn helped in an expansion of margins.^xlv "Basically, this firm is on a roll. This quarter did not alter our now six-year-old assertion that this is a special company that is likely to scale to become a significant platform,"^xlvi said Richard Davis, analyst at Canaccord Genuity (Refer Exhibit II).

In January 2019, ServiceNow announced the financial results for its fourth quarter and fiscal year ended December 31, 2018. In 2018, the company reported a 36% increase in revenue, which went up from $1.9 bn in 2017 to $2.6 bn in 2018. The company suffered a net loss of $26.7 mn, an improvement compared to the $149.1 mn net loss reported in 2017. As of December 31, 2018, ServiceNow had cash and cash equivalents of $556 mn, compared to $726.5 mn in 2017, and net assets of $3.88 bn, up from $3.55 bn a year earlierxlvii (Refer Exhibit III).

ServiceNow posted a net income of $7 mn and subscription revenues of $666 mn in Q4 2018, representing a 33% year-over-year growth. The company projected ongoing growth for 2019 of at least 34%. "We finished 2018 with our strongest fourth quarter ever, continuing our momentum as the leading digital workflow company shaping the future of work. Our role as a strategic partner to the world's largest enterprises continues to accelerate. As we look to

another strong year of growth in 2019, we remain committed to enabling companies' digital transformation by making work better for people,"xlviii said Donahoe.

As of 2019, ServiceNow had approximately 5,400 enterprise customers, including almost 75% of Fortune 500 companies. During Q4 2018, the company closed 51 transactions with more than $1 mn in net new annual contract value. As of the end of the fiscal year 2018, the company had 678 customers in total with more than $1 mn in annual contract value, representing a 33% year-over-year growth. "Total backlog including deferred revenue at the end of 2018 was $5.1 bn, representing 35% year-over-year growth. Strength in the fourth quarter was driven by expansions of existing customer relationships, which contributed to a record $1.5 bn in total contract value booked,"xlix said Michael Scarpelli, CFO, ServiceNow. As of the end of the fiscal year 2018, the company had 74 customers with more than $5 mn in annual contract value, an increase of 54% year on year. In 2018, while 18 customers spent more than $10 mn compared to 5 customers in 2017, 3 customers were spending more than $20 mn in 2018 with ServiceNow.l

Between March 2017 and March 2019, ServiceNow's stock price increased by 312%. In February 2019, the stock price had gained 4.5%. Analysts were all praise for its revenue growth. Between March 2017 and March 2019, the company reported revenue growth at 31% per year.li ServiceNow's annual revenue grew from $13 mn in 2007 to $1.93 bn in 2017.lii In 2017, the company had announced its goal of growing at a 32% compound annual growth rate over the next three years to achieve $4 bn in annual revenue by 2020.liii The company also aimed to reach $10 bn in revenues in the near future (Refer Exhibit IV). Analysts were of the view that ServiceNow had the potential to reach its target by cross selling complementary services to its customer base. "The world is at an inflection point of intense digital disruption, which necessitates that every company focus on digital transformation. Every company I talk to is experiencing this. For IT organization, CIOs and C-suite leaders grappling with these changes and challenges, we intend to become an indispensable enterprise-cloud partner and helping them create the future of work,"liv Donahoe said.

ServiceNow's competitors included Salesforce,13 Microsoft, IBM, and Workday14 (Refer Exhibit V). While the majority of the company's revenue came from growth in ITSM and ITOM - which together generated 61% of ACV in 2018 - the 'emerging' categories including HR, customer service, and security, generated 30% of ACV in 2018.lv According to Brad Zelnick, analyst at Credit Suisse,15 the opportunity presented by these categories, estimated at $34 bn, was even larger than the overall cloud-based IT market, which was about $27 bn.lvi To utilize this opportunity, ServiceNow focused on building its team which could capitalize on the projected growth. "We're kind of building out the team that you need to compete on not just the path to $4 bn, but the path from $4 bn to $10 bn. So for instance, user experience: you've heard me and other ServiceNow exec talk about the importance of user experience, the

importance of mobile. Well, a year ago, we had 25, 30, maybe 40 user-experience people. Now we have 100, and we've hired really strong people. We took advantage of getting a group - we made an acquisition and a group of user-experience professionals who were available and we moved on it,"lvii said Donahoe.

In October 2019, ServiceNow announced its financial results for the third quarter of 2019 ended September 30, 2019. The company reported subscription revenue of $835 mn, representing 33% year-over-year growth. During the third quarter of 2019, the company closed 46 transactions with more than $1 mn in net new ACV, representing 84% year-over-year growth. The company had 809 total customers with more than $1 mn in ACV, a 32% year-over-year growth in customers.^lviii

ServiceNow increased its full-year 2019 subscription revenue guidance to $3.235-$3.25 bn. The stock price of the company increased by 28% in the fourth quarter of 2018 and 275% in the last three years.lix "We delivered another strong quarter, continuing our focus on driving customer success and expanding our footprint across 75% of the Fortune 500. We are pleased that companies are turning to ServiceNow to be their strategic partner for digital transformation when they want to unlock productivity and create leverage with their technology investments,"^lx said Donahoe.

The Road Ahead
Analysts are of the opinion that ServiceNow would continue to expand its customer base as well as existing relationships, which would help the company to reach its growth target. Moreover, a steady subscription and renewal rate and a strong balance sheet would continue to help the company achieve double-digit growth across regions including the US, EMEA, APAC, and North America. In 2018, the global SaaS market was estimated at $74.8 bn with cloud SaaS accounting for 67.0% of total sales. In 2019, this market was expected to be over $94 bn. The global SaaS market was estimated to grow at a CAGR of 21.4% until 2024.^lxi

With this opportunity, analysts are eager to see how ServiceNow would create new avenues for growth. The company emphasized that new categories could be created within the crowded SaaS marketplace by interconnecting the workflows that other SaaS products were creating. ServiceNow emphasized that while the customers were availing themselves of its applications for IT, customer service, and HR, they were looking forward to a product which could interconnect these workflows across the entire enterprise. "As one CIO told me, he doesn't view us as just another cloud partner. Instead, he sees ServiceNow as the platform that creates a multiplier effect in his cloud ecosystem because our enterprise capabilities link together other systems and platforms enabling seamless digital workflows that create great experiences and unlock productivity - and that's what every C-suite executive I speak with is looking for,"lxii explained Donahoe.

The demand for cross-functional work was gradually changing the classic categories of enterprise applications including ERP (Enterprise Resource Planning), HCM (Human Capital Management), and CRM (Customer Relationship Management) that had existed for the previous two decades. Simultaneously, some of the market leaders had also changed the value propositions for their products. For example, SAP16 was redefining the CRM category using ERP data. SAP Customer Experience integrated various solutions for marketing, sales, retail, and CRM. SAP had acquired Qualtrics, the global pioneer of the experience management (XM) software category.

Analysts expect ServiceNow's growth to continue in the coming years with further innovations. With the rise of AI and machine learning, the company would surely face stiff competition. However, its focus on digital transformation would help it gain a competitive edge over its competitors. With ServiceNow's user-friendly approach, these additional tools would help the company to drive customer satisfaction and scale up business growth. According to William Fitzsimmons, Analyst at Morningstar, "We think the company is well on its way to its goal of surpassing $4 bn in revenue by fiscal 2020 and expect it will eclipse $10 bn in revenue by fiscal 2027."lxiii

Under Donahoe, ServiceNow attained a market cap of $41 bn by the end of October 2019. The challenge before new CEO McDermott is bound to be a daunting one, according to analysts. Over a 10-year period, McDermott had been credited with growing SAP from a market cap of $39 bn to $163 bn. Now he has the onerous task of almost tripling the revenues of ServiceNow by leading the company into the next phase.

McDermott said that he looked forward to achieving the $10 bn goal, though he felt that this was going to be a new challenge to him as ServiceNow's business model was different from that of SAP. In his own words: "I've seen a lot of different business models, and [SAP has] a very different business model than ServiceNow. This is a pure play cloud."^lxiv

End Notes

1. Kathleen Chaykowski and Mark Coatney, "From Broke To Billionaire: How Fred Luddy Built The World's Most Innovative Company," www.forbes.com, May 29, 2018.
2. Meghan Lockwood, "Why Service Now (Really Is) More Innovative than Tesla," www.acorio.com, May 31, 2018.
3. Ibid.
4. Ibid.
5. Ron Miller, "Bill McDermott Takes Reins as ServiceNow CEO Sooner Than Expected with New CFO," https://techcrunch.com, November 18, 2019.
6. Ron Miller, "Bill McDermott Aims to Grow ServiceNow Like He Did SAP," https://techcrunch.com, October 24, 2019.
7. Kathleen Chaykowski and Mark Coatney, "From Broke to Billionaire...," www.forbes.com, May 29, 2018.
8. Ibid.
9. "Servicing IT: ServiceNow CEO Fred Luddy (Part 1)," https://www.sramanamitra.com, March 10, 2010.
10. Kathleen Chaykowski and Mark Coatney, "From Broke to Billionaire: How Fred Luddy Built the World's Most Innovative Company," www.forbes.com, May 29, 2018.
11. Ibid.
12. "Servicing IT: ServiceNow CEO Fred Luddy (Part 1)," https://www.sramanamitra.com, March 10, 2010.
13. Dan Primack, "Why ServiceNow May be Worth $2 Billion," https://fortune.com, June 19, 2012.
14. "Fred Luddy, "ServiceNow Founder, Named 2011 Ernst & Young Entrepreneur of the Year Award Winner," www.prnewswire.com, June 21, 2011.
15. Kathleen Chaykowski and Mark Coatney, "From Broke to Billionaire," www.forbes.com, May 29, 2018.
16. Ibid.
17. Nicole Henderson, "Former eBay CEO Joins ServiceNow as CEO and President," https://www.datacenterknowledge.com, March 1, 2017.
18. Ibid.
19. Stuart Lauchlan, "Government Opens Up For ServiceNow as Customer Growth Continues to Swell," https://diginomica.com, October 25, 2018.
20. "ServiceNow Acquires DxContinuum," www.servicenow.com, January 18, 2017.
21. Brian Sommer, "ServiceNow - Assessing Growth, Product Line Extension and New Markets," https://diginomica.com, May 17, 2018.
22. Reinhardt Krause, "Meet The 'Fastest-Growing' $1 Billion Enterprise Software Firm," https://www.investors.com, February 21, 2017.
23. "Technology Executive Dennis Woodside Joins ServiceNow Board of Directors; Company Founder Fred Luddy to Become New Board Chair," https://markets.businessinsider.com, April 25, 2018.
24. Stuart Lauchlan, "Government Opens Up For ServiceNow as Customer Growth Continues to swell," https://diginomica.com, October 25, 2018.
25. Ibid.
26. "IBM Expands Its Partnership with ServiceNow to Serve Multicloud Enterprises," https://newsroom.ibm.com, November 16, 2018.
27. Nicole Henderson, "Former eBay CEO Joins ServiceNow as CEO and President," https://www.datacenterknowledge.com, March 1, 2017.
28. Ron Miller, "ServiceNow Acqui-Hires Mobile Analytics Startup Appsee," https://techcrunch.com, May 13, 2019.
29. Joe Davis, "ServiceNow to Acquire Attivio's Cognitive Search Platform," https://blogs.servicenow.com, October 23, 2019.
30. Reinhardt Krause, "Meet The 'Fastest-Growing' $1 Billion Enterprise Software Firm," www.investors.com, February 21, 2017.
31. Bob Ivans, "Inside ServiceNow's Boom: the Rise of Digital Workflows," https://cloudwars.co, February 6, 2019.
32. Kathleen Chaykowski and Mark Coatney, "From Broke to Billionaire: How Fred Luddy Built the World's Most Innovative Company," www.forbes.com, May 29, 2018.
33. "ServiceNow Delivers Solid Earnings Thanks to Growing Enterprise Customers," https://siliconangle.com, January 31, 2018.
34. Brian Deagon, "ServiceNow Finds Seemingly Limitless Growth in Cloud-Based World," www.investors.com, August 31, 2018.
35. Bob Ivans, "Inside ServiceNow's Surge: How It's Become the Most-Innovative SaaS Vendor on the Planet," www.forbes.com, August 15, 2017.
36. "ServiceNow Delivers Solid Earnings Thanks to Growing Enterprise Customers," https://siliconangle.com, January 31, 2018.
37. Brian Nordli, "How ServiceNow's Engineers Build the Software They Would Want to Use," www.builtinseattle.com, December 20, 2018.
38. Kathleen Chaykowski and Mark Coatney, "From Broke to Billionaire...," www.forbes.com, May 29, 2018.
39. Bob Ivans, "Inside ServiceNow's Surge: How It's Become the Most-Innovative SaaS Vendor on the Planet," www.forbes.com, August 15, 2017.
40. Brian Nordli, "How ServiceNow's Engineers Build the Software They Would Want to Use," www.builtinseattle.com, December 20, 2018.
41. Ibid.
42. "Fred Luddy: "We'd Rather Listen Than Talk"," https://workflow.servicenow.com, May 9, 2019.
43. Bob Ivans, "Inside ServiceNow's Surge: How It's Become the Most-Innovative SaaS Vendor on the Planet," www.forbes.com, August 15, 2017.
44. Brian Nordli, "How ServiceNow's Engineers Build the Software They Would Want to Use," www.builtinseattle.com, December 20, 2018.
45. "ServiceNow: Profitability Is Added to the Growth Story," https://seekingalpha.com, February 5, 2019.
46. Brian Deagon, "ServiceNow Finds Seemingly Limitless Growth in Cloud-Based World," www.investors.com, August 31, 2018.
47. Campbell Kwan, "Servicenow Sees Revenue Increase 36 Percent To $2.6 Billion," www.zdnet.com, January 31, 2019.
48. "ServiceNow Reports Record Fourth Quarter and Fiscal Year 2018 Financial Results," www.businesswire.com, January 30, 2019.
49. Ibid.
50. Bob Ivans, "Inside ServiceNow's Boom: the Rise of Digital Workflows," https://cloudwars.co, February 6, 2019.
51. "Shareholders Are Raving about How the ServiceNow Share Price Increased 312percent," https://simplywall.st, March 1, 2019.
52. Paul Greenberg, "ServiceNow: Solid and Uncertain - a Company in Transition," www.zdnet.com, May 22, 2018.
53. Brian Deagon, "ServiceNow Finds Seemingly Limitless Growth in Cloud-Based World," www.investors.com, August 31, 2018.
54. Bob Ivans, "Inside ServiceNow's Surge: How It's Become the Most-Innovative SaaS Vendor on the Planet," www.forbes.com, August 15, 2017.
55. Dan Romanoff, "ServiceNow: Differentiated Software Drives Share Consolidation and Expanding TAM," http://analysisreport.morningstar.com, June 16, 2019.
56. Kathleen Chaykowski and Mark Coatney, "From Broke to Billionaire...," www.forbes.com, May 29, 2018.
57. Bob Evans, "ServiceNow Dreams of $10 Billion as Digital Transformation Spikes Revenue 45%," www.forbes.com, August 28, 2018.
58. "ServiceNow Reports Third Quarter 2019 Financial Results," www.servicenow.co.it, October 23, 2019.
59. "Cloud Stocks: Expect ServiceNow to Acquire from App Marketplace," www.sramanamitra.com, May 1, 2019.
60. "ServiceNow Reports Third Quarter 2019 Financial Results," www.servicenow.co.it, October 23, 2019.
61. Aditya Raghunath, "Here's what could Drive ServiceNow's Revenue Growth," https://marketrealist.com, April 18, 2019.
62. Bob Ivans, "Inside ServiceNow's Boom: the Rise of Digital Workflows," https://cloudwars.co, February 6, 2019.
63. Brian Deagon, "ServiceNow Finds Seemingly Limitless Growth in Cloud-Based World," www.investors.com, August 31, 2018.
64. Ron Miller, "Bill McDermott Aims to Grow ServiceNow Like He Did SAP," https://techcrunch.com, October 24, 2019.