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Making Markets EP37: ServiceNow CEO Bill McDermott—Tech is the way out of our Economic Challenges
by Daniel Newman | June 23, 2022

In this episode of Making Markets, host Daniel Newman is joined by ServiceNow CEO Bill McDermott. This action packed discussion dives into the challenging economic situation, the role automation has to play in working through broken supply chain, labor shortages, and more. And finally, McDermott and Newman discuss the companies ambitious growth strategy and whether or not it meet its 5 year target, which is a big goal, but one that all parties see as achievable.

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Disclaimer: The Making Markets podcast is for information and entertainment purposes only. Over the course of this podcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such. 

Transcript:

Daniel Newman: While technology has seen a wave of volatility since the end of 2021, the truth is, the only way out of our current biggest economic challenges will be solved by technology itself. In this episode of Making Markets, I sit down with Bill McDermott, CEO of ServiceNow, and we explore the company’s big ambitions, the role AI and automation have to play in enterprise digital transformation, and the reason why ServiceNow as a platform stands to achieve unparalleled growth beyond the Rule of 60. Strap in because we are back and you’re tuned in to Making Markets.

Announcer: This is the Making Markets Podcast, brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation, and the company’s featured on the show. The Making Markets Podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host principal analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Bill McDermott, CEO of ServiceNow, welcome to Making Markets.

Bill McDermott: Thank you very much, Daniel. Great to be with you.

Daniel Newman: It is great to have you here. I’ve been waiting a while to have this conversation. I tell you what though, my patience paid off because an Investor Day landed in the middle of the time I initially talked about bringing you over to the show and the time we got you on. Man, that was a whirlwind and I learned so much in that day that I just think it’s going to make for such a great conversation. Good morning. You look comfortable. I’m guessing you’re at home. But by the way, what a nice little setup you got going there.

Bill McDermott: Thank you very much. I appreciate it.

Daniel Newman: Let’s start off. I want to have a little bit of an inverse conversation with you. When I started Making Markets, what went on in my mind is I said, “I want to get between the lines. I want to ask questions that don’t necessarily get asked in these short, quick hit interviews.” You’re busy building a company. Doing media as part of the gig, but of course, you don’t have a ton of time. Every interview has to count. But one of the things I always wonder about is the way a market or the way an investor or someone that’s buying your products, Bill, sees your company versus the way a company perceives itself. This goes back to this what I call the 88 Rule.

80% of companies believe they’re truly differentiated and they’ve done so on experiences, yet only 8% of customers actually feel the same way when they’re asked about it. That dissonance to me is so important. Let’s just start there. What do you think the most misunderstood thing is about ServiceNow when it comes to the way the market perceives you?

Bill McDermott: I think the people that know, know. Our biggest challenge is making sure that everybody knows what ServiceNow is capable of. Inside the company, the company has a tremendous pride in engineering. We like to believe that this is a once in a generation platform company that is designed to create incredible experiences for people. I think we’re in a business to people economy. If you can make that person on the other end of a software experience happy, make their life a little bit easier, make their job more special, you’re on your way to something.

I think the people that know us understand that whether you’re transforming IT, creating great employee experiences, creating a customer experience that’s second to none, we’re just building the future where a new application development on a low code platform is changing the game. The people that use us know that. They love that company called ServiceNow. Our big challenge is making sure everybody gets the memo.

Daniel Newman: There’s actually a pretty easy answer. What’s misunderstood is that there are some people that haven’t gotten the memo yet and getting them to board the train, get on the truck, the bus, whatever modality we want to go after here. This also kind of talks a little bit about what we had a chance to just briefly chat in the green room. You said about feel. Just kind of leaning in a little bit more to what you said there is it sounds to me like the company is a company that connects to people through emotions and feel a little bit more than just purely through technical and capabilities, which in a crowded market of very capable, very competent tech companies, I would imagine that’s something that you’re really leaning into to create this differentiation.

Bill McDermott: Absolutely. Here at ServiceNow, it’s all about the customer and the customer’s experience with our company. There are so many different things going on for digital transformation or digital business, so many different names get thrown around. But what’s really happening is companies today have to transform their business models. Their customers expect them to digitize and have a frictionless experience, so they give them what they want. We all know that technology is accelerating at an unbelievable pace. Deep machine learning and AI is just an expectation now. It’s no longer a debate, do I need it? Of course, you need it.

The question is, how quickly can you get up and running and help people do their job better so you get more productivity per person in every company? And obviously this talent war that we’re all in. Daniel, this is unlike anything else we’ve ever seen. First, it was everybody’s going to work from home, and then it was hybrid, and now it’s like the Great Resignation. And that’s transforming a little bit now where people are actually probably getting excited again to come back into the office and actually have a job because things are going to tighten up out there.
You need tech and you need experiences for people so they can perform at their absolute best. I look at all of these things as an opportunity for ServiceNow to be the defining enterprise software company of the 21st century.

Daniel Newman: I like that you said a lot of those things because I think sometimes culture is underrated. There’s the old Peter Drucker type quotes of “culture eat strategy for breakfast.” I think it’s more symbiotic than that. You rarely will have a great culture in a company that has a terrible strategy. I think people want to work for a company they feel are doing important things, doing great work, building interesting products. But I hear a lot of that in what you’re saying. I guess, as I even think about some of the coolest turnarounds or some of the most exciting startups. By the way, some of the companies have fallen off. You often look and go, “Did their products get worse? Did they lose their innovative spark?”

Maybe, but usually it started with that culture. That’s the one thing I can say after spending some time in your organization, spending time around your organization, coming to your Financial Investor Day and just kind of listening. The feeling is I heard more about culture in between the lines than you get really often in that equity sort of financial space, but it felt like the analysts were really eating it up, which is interesting because sometimes they’re so hard numbers. Everything’s like, “I changed this spot in the spreadsheet and this is my new price target.”

Bill McDermott: Yes. I think as the great Robert Kennedy said and I quote it in my book, Winners Dream, “Some see things as they are and ask, ‘Why?’ We dream things that never were and say, ‘Why not?'” We believe that this platform called ServiceNow is really the operating system to create experiences that never existed before. We’re on the cutting edge of doing things that have never been done before. There are so many cases out there where you just look at organizations all tied up with siloed systems and swivel chair operations and Excel spreadsheets and emails and things written on paper, instead of full digitized, automated business processes. I think if we look at the productivity that’s trapped not just at the corporate level where, is the company performing at a high standard?

In Japan, they have a great term called [Japanese] which means better than the best. It’s our objective to make the companies we serve better than the best in their industry, so they can win and compete and thrive. I think our company gets so excited about helping all the companies that we serve. I mean, that is what turns us on. We want to gaze externally. We want to think around corners. We want to invent the next frontier, and we don’t want to do things as they’ve always been done. Because if you do, you’ll get what you always got. We’re dreaming big.

Daniel Newman: You’re going to win the quote battle here. I’m going to run out a good quippy quotes. I’m going to move on and talk about the platform a little bit here because you leaned into that in that first answer. The platform, different, more capable, more extensible. That was something that I noticed was the extensibility of the ServiceNow platform is growing really fast. I think someone that went to an event two years ago heard what the solution, the whole stack was going to look like, and now they’re looking at what you’re offering today, and it’s like wow! You have to look externally and internally because you have to be able to bring that talent build. You have to look externally because you’ve been coexisting and partnering with a lot of companies.

You’re starting to crossover into competing, in some cases. I’m just kind of in interested as you’ve seen this massive extensibility, it’s going to help you hit those next level revenue streams. I’m going to talk to you about that and the broader economy here before we go. But how do you sort of assess where to lean in, which areas to extend into, how to manage some of these partnerships that may become a little more competitive, which, by the way, is becoming typical, so it’s not a bad thing. But how do you sort of manage that to make sure you’re putting the right investments into the right areas?

Bill McDermott: I think the part that customers appreciate about ServiceNow and also our partners appreciate about ServiceNow, we’re not out there competing against others. We’re actually blazing our own trail, and we’re doing something that’s never been done before. What we want to do is we want to take all of those systems of record that have been built over the last half century and make them all perform better. Because in their own right, they do important things. If you have an HR system and it basically accounts for your vacation days and your payroll, I mean, that’s a good thing, but that doesn’t help you get recruited, hired, onboarded, trained.

It doesn’t help you get a frictionless experience with all the services that you need, whether it’s maternity leave, a healthcare issue, or solving the management problem. All this should be so simple and beautiful on the mobile. And now that you’re coming back to work or you’re staying home or you’re working from anywhere, those journeys have to be perfect. We have to give you like an experience that’s never been given before. In fact, now the big thing is, how do I match skills with important projects so I get the best possible yield out of my great talent? I mean, this is what we’re doing. And more and more, I hear customers talk about new business models. One of the great learnings in the automotive industry is there’s a lot of competition now.

There’s a big move to EV. They’re not talking about their traditional competitors and units and face-offs on features and functionalities. They’re talking about completely rethinking the business model because the competitor that they’re focused on has done something that’s never been done before. They can’t even think about what happened yesterday. They got to dream about what’s happening the day after tomorrow. ServiceNow is that platform that enables them to do that. We could take all the investments that they’ve already made and make every single one of them better by laying this automation layer, this executional excellence layer above all those systems to get great business outcomes.

I think that is what’s really differentiating ServiceNow. We’re not competing on the day-to-day grind. We’re competing for the dreams that our customers have yet to confront.

Daniel Newman: It definitely has become a part of every platform to offer certain levels of automation. But when I listened and I was going through the last presentation, one of the things I said to myself is everybody wants to “lift and shift,” migrate, et cetera. But what it felt like you were really walking away offering is saying, “Do it on your pace with your outcomes in mind.” That was kind of what hit me was like you don’t have to necessarily lift your whole ERP deployment to the cloud. You can layer cloud capabilities with automation on top and give that feeling of performance, while moving things at a pace, whether it’s OPEX wise, CapEx wise, or talent wise that fits your timeline.

Bill McDermott: Daniel, you’re on something big here. Let’s go back to the whole dot com bust, right? The big idea there was those companies did some important things, but some of them had non-viable business models. There was kind of like a technology sprawl, and then those companies weren’t sustainable, so they went away, got consolidated, and so forth. In 2008, we all remember the financial crisis when it hit, and it hit really hard. And at that time, in September 2008, that was the moment that cloud computing became the big thing. I know because I was there for it. Every company then decentralized decision-making. They empowered their line of business executives, and they basically said, “If you can do it, do it in the and get me a fast ROI. Let’s go.”

Now you’re in a situation in 2022 where we have to take all of that goodness around the cloud computing, we have to use infrastructure in the cloud wisely, but we have to automate for great human experiences. If you’re dealing with IT and you’re trying to secure your company and manage your assets and your operations, you’re going to need ServiceNow. That’s the market leader. But on the employee experience side, we kind of talked about this already, we’re going into an environment where people are going to have to do a lot more and get a lot more output in many cases with less head count, not more. How do you do that? You have to give experiences that are frictionless and mobile and gorgeous to people so they can do their best work.

I talk about companies all the time in the new frontier about customer service. It’s not about engaging you so I can sell you more, upsell, you cross-sell you. It’s about keeping you for life and giving you an unbelievable experience where you get the right product at the right price, at the right place, in the form factor you ordered it, and then we service you. When something goes wrong on a direct to consumer level, we don’t have all these heavy models where you’re sending out technicians with millions of miles a year on the road. Things are being done in virtual reality. They’re being done in labs. They’re being done remotely. The customer doesn’t even know the difficulties, in most cases.

They’re so quickly resolved. And then yesterday, I had a very interesting conversation with a couple of customers in Germany, where they literally see all this, but they also want to build net new innovation on a platform so they have coherence from one department to another. There’ll be 750 million net new applications built on low code platform like ServiceNow in the next three years. That’s more app development that took place in the last half century. There’s really no choice. How do we center ourselves on leveraging all the things that we’ve done as a company, if you’re looking at it from the customer standpoint in the past, come up with a new operating system that gives you the executional excellence with great experiences for people?

And how do you drive incredible outcomes fast? And that’s the big thing. Yesterday, there were several conversations I had with people literally rethinking those long-term, as you said, Daniel, cap intensive projects and they’re saying, “Nomas. I have to get things done really quickly with a super ROI, but I need to do it in less than 12 months, in some cases, less than six months.” And that’s where the form factor of cloud computing once again comes in front and center. I think being born in the cloud and having this incredible platform is just such an advantage. Because all the things you did before that are still relevant, we can make them work better. All the dreams you’ve yet to confront, we’re front and center. We’re dreaming with you. Let’s go.

Daniel Newman: Well, you’ll be happy to hear this and if you didn’t see it, but I have an op-ed column I do on MarketWatch and I wrote this piece where I talked about deflationary tact. It was somewhere in between this crazy negative sentiment in the market and Cathie Wood in her bold sentiment that the future is genomics and all these things. But automation, for instance, AI, 5G, hybrid cloud, are these mega trends that I’ve basically said, “I understand sentiment and momentum and stock price pullback, but I’m talking about future earnings, revenue growth.”

That’s going to actually do much better than the market is indicating right now because those trend lines, all these companies are going to say, “Well, talent is tight. Inflation is high. We’re paying more interest on all of our debt. We need to be smarter. Let’s go OPEX. Let’s add automation layers in. Let’s get this data working for us.” I actually think companies are going to actually protect that line item. Arvind Krishna in a recent interview I did with him from IBM said the number one most protected line item he believes in the P&L right now is going to be technology. I don’t know if you agree exactly, but in the sentiment of all that, my point is I think you and I are sharing this sort of concept of teching our way out.

When we look at all the problems of our economy, whether it was our health crisis of the past year, the broken supply chain, our interest rates and kind of misunderstanding of the impact of printing cash and what it’s going to do the economy over a longer period of time, or getting people participating in the workforce so we have a more accurate depiction of what our labor situation really looks like. Machine learning, data, technology, automation, cloud, these are going to be the things that are going to solve it. Talk to me a little bit about kind of your market perception right now, what I just shared, and how are you aligning with those views and seeing sort of tech in the next few years, whereas the market has kind of seemingly gone a little negative.

Bill McDermott: I think you’re 100%, right. And that’s why I’ve always been very proud of ServiceNow as an enduring platform for a fast changing world. The world’s going to keep changing. It’s going to keep changing fast. All the things that you mentioned around the macro, these macro crosswinds are actually feeding the secular tailwinds for digital transformation. One of the CEOs that I worked with said it best. He said, “If I stop investment in the short run, it’s going to slow me down in the midterm, and I might not be around in long-term.” A lot of people don’t realize this, but if you looked at the top 30 most valuable market cap companies from 1989 to 2022, that’s not that long, okay? If you really think about a little over 30 years, there’s not a single one that is on both lists.

The only way to compete is digital and digital transformation is the only way out. Now, I think commodity tech could be under pressure. I think long drawn out, time consuming, capital intensive projects with a long fuse to value could be postponed. I think software that truly drives human experiences and business outcomes that can be achieved in a very short timeframe with highly measurable output will do extraordinarily well. That’s not to say you won’t have a lumpiness around it here and there. Just because the world’s getting fed so much information that it should go into a recession, everybody should sit on their hands and panic.

But once that kind of gets through the system and people realize the only way out is tech to compete, I think the digital transformation companies that are born in the cloud with fast fuse to value and great outcomes will do extraordinarily well. Now, I will say ones that aren’t going to get profitable, ones that are more commodity based, I mean, they’re going to be under a lot of pressure. But I think that’s what gives us so much confidence in ServiceNow that we’re going to rewrite the history books.

Daniel Newman: Absolutely. And that’s why things like discretionary, things like big CapEx, I put them on that same list. But when I came into the area of automation, process, AI, there was a reason that your company, ServiceNow, was among a small list that I said you really have to look, especially if these companies are creating profit, showing growth, building earnings, attracting talent, and then of course, able to be fast. We’re coming up to time here, Bill. Maybe just a quick response here and we can wrap up, but is all this… Just few weeks back, you had this Financial Analyst Day. You were pushing for a 16 billion number, 2026.

As we’re in this tougher moment, tougher economy, are you really I’m not going to say betting, because that’s not the right word, but you’re buying the vision and you’re basically saying with this market growth for ServiceNow is going to be much stronger than what the market is basically expecting for the overall tech ecosystem.

Bill McDermott: Oh yeah. My thesis hasn’t changed one bit. If you look at the facts, even look at the Deloitte study that was recently published where they said intelligent workflows deliver the highest increase to revenue growth, cost efficiency, and executional excellence compared to any other technology. We are the workflow automation market leader. I believe the customers need us now more than ever. As I said in the beginning of the interview, Daniel, we just need to make sure people get the memo. Because once we get in and we have an opportunity to show them that in every geography, in every industry, in every persona in an enterprise, we make success happen for our customers.

We work hand in glove with our partners. Our business cases are irrefutable and the fast fuse to value is undeniable. And that’s what it takes to give me the confidence, because my job is to make sure that our team is ready, willing, and able to help our customers get confident about what they can achieve. Once they know us, it’s lights out. That’s why we have a 99% retention rate. That’s why once we have a relationship with a customer, it grows so quickly over long periods of time. And that’s why we become the only business software company in the enterprise growing at the Rule of 60, which is the combination of revenue growth and, as you know, free cash flow.

You’re dealing with a high growth, highly successful company that’s going to be around for the ages. I think that’s another factor. Companies don’t want to go on experiments right now. They want something that’s tried, true, and proven. We’re ready to roll. We’re ready to do the best work we possibly can. And that’s why yes, I have complete confidence in the numbers.

Daniel Newman: Well, that’s one of those things that people glom onto, a number like that. Every year you’re going to be asked, “Are you still on track, or are you raising?” We’ll see, but you sound like you’ve got a plan. Definitely inspiring, Bill, as always. I’ve followed your career and I’ve listened to several dozen keynotes from you over the years, whether it was SAP or here at ServiceNow. Always very inspiring. My job as an industry analyst and as a firm is to actually make sure I take this type of info communicated to the market and let them know why we believe what you’re saying is legitimate, real, and backed by both the technology and the capabilities of the people building it and delivering it. Bill McDermott, CEO of ServiceNow, thanks so much for joining me here today on Making Markets.

Bill McDermott: Daniel, thank you very much for having me. It was a great honor. Appreciate you.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio