The Risks & Rewards Of Reorganizing A Decade-Old Software Company
Source: Software Executive magazine
By Abby Sorensen, , Executive Editor
Act-On Software’s newly appointed CEO is leading the company on a path to profitability after a reorganization process that involved consolidating offices, making 80+ new hires, revamping its leadership team, and realigning product- and customer-facing groups.
"Just sit and listen; don’t react to each individual point. Let’s get through the whole proposal before you provide feedback.” That’s what newly appointed CEO Kate Johnson told Act-On Software’s investors before she announced her plans to cut back on revenue generating resources in favor of investing in product development. You’d think Johnson had risen through the ranks with a marketing background based on how she carefully crafted the messaging of a pitch that would inevitably stall topline growth. But Johnson’s background is firmly rooted in finance and accounting. And that’s why she pushed for a short-term top-line slowdown in order to accelerate the company down the path towards long-term profitability. She didn’t want the gut reaction of the investors to stand in the way.
Johnson wanted her board and leadership team to fully understand the end goal: Her plan was ultimately designed to make the adaptive marketing automation software company profitable. Less than six months after a massive reorganization, Act-On is already showing promising progress towards this goal. Since the start of the year it has endured leadership changes, office closings and expansions, departmental reorganizations, and hiring 80+ new employees. In late May it announced an increase in the size of its average new customer sale by 24 percent quarter over quarter in Q1 2018.
Act-On’s story isn’t the kind you often hear about through the mainstream tech and business media. For every headline about an IPO filing or an enormous round of venture funding, there are 10 times as many Kate Johnsons leading software companies who are making difficult decisions about how to best allocate limited resources. Johnson’s determination to keep Act- On down its path towards sustained financial viability is a story worth telling. The hard decisions she helped the company make — and the positive results that followed just a quarter later — are instructive for leaders at software companies of all shapes and sizes.
Lessons In Financial Discipline
Johnson started her finance career in high-tech manufacturing — certainly not a traditional start for a modern- day SaaS CEO. She explains why her experience working for hardware companies was a perfect primer for her current role: “There’s a lot more financial complexity in running a company that actually manufactures a product, rather than one that designs and builds software. When you’re a hardware or manufacturing company, gross margin is such a key concept. Gross margin is the cost to build, warehouse, and ship a tangible good. With software, you don’t have that concept, because the ‘materials’ per se are the developer’s brains and the work that they do. There’s just a different view on profit and margin.”
When Johnson left a $700 million public company that designed, manufactured, and distributed projectors, it was for a change of technology scenery at Jive Software. Back in 2008, she recalled the enterprise collaboration software company had roughly 85 employees and was bringing in about $20 million (compare that to its 650+ employees and nearly $200 million in revenue today, and May 2017 acquisition by Aurea for $462 million). During Johnson’s six-year tenure, she helped Jive prepare for the $100 million IPO filed in late 2011 (the company actually raised $160 million from it). After its IPO, she stayed onboard for another three years to help run the public company as its chief accounting officer and VP of finance.
By the time Johnson joined Act-On in 2015 as CFO, she certainly wasn’t in hardware anymore. “I actually think my background on the high-tech manufacturing side of business really benefited me when joining these software companies and helping them understand financial discipline,” she says. And when Johnson says “financial discipline,” she means, “At the end of the day, unless you’re one of those unicorns, at some point you have to prove that you can actually grow the company in a profitable manner, and that you can sustain profitability.”
For a private company like Act-On, the pressure was mounting to reach that “some point” of proven profitability sooner rather than later. Act-On was close to turning a profit in 2017, but came up just short. The company was founded a decade ago, and Johnson knew it wasn’t going to rely on any additional outside capital — on top of the $73.5 million it had already raised — to push it any further towards profitability. When reorganization plans were announced in January 2018, it was part of an effort to ensure Act-On would hit its profitability milestone within the calendar year.
"At the end of the day, unless you’re one of those unicorns, at some point you really have to prove that you can actually grow the company in a profitable manner, and that you can sustain profitability."
Reorganizing Teams & Consolidating Operations
The words “reorganization” and “consolidate” can certainly come with negative connotations, especially in the context of a press release that also announces the replacement of a CEO. Johnson didn’t try to gloss over the realities Act-On was facing when she took the reins in the move from CFO to CEO in January 2018. Instead, she matter-of-factly described why the reorganization was necessary. When planning for this year, innovation goals, communication challenges, and cost ineffi- ciencies had to be addressed in order for the company to reach profitability. That meant investing heavily in product development, closing two offices, and making a big wave of new hires. “These decisions come with diffi- cult trade-offs,” Johnson says. “We determined the best path forward for us in 2018 was to not invest heavily in sales. Instead, we’d be better off holding our revenue line steady and investing those dollars specifically into innovation and the product development life cycle.”
While Johnson’s plan may seem like a tough pill for investors to swallow, she had already worked with them for years and knew how they ticked. Speaking like a true CFO-turned-CEO, she believes in spending every company dollar as if it were her own. It’s a philosophy that has obvious appeal to the company’s investors, as did the fairly simple logic she shared with them: In order for Act-On to invest in product innovation, which was necessary to capitalize on the market opportunity and accelerate future growth, the company either needed to raise more money or rebalance its resources.
Rebalancing didn’t just mean cutting back on sales labor to free up cash for product development. It also meant consolidating operations to a single office. Before the reorganization, the company was divided among three main U.S. offices: two in California (Roseville and San Mateo) plus its headquarters in Portland, OR. Act-On’s entire engineering and product teams were in Portland, while its customer success and customer support teams were in California.
Despite the company’s best intentions to keep these teams connected through virtual meetings and a slew of communication tools, there was a cultural divide and resulting lack of a feedback loop. This disconnect was even more apparent as Act-On started embracing Agile at scale. Johnson explains, “The product development and engineering teams had their own beliefs about what they needed to put on the product road map. These ideas were completely disconnected from what the people on the front line were actually hearing from our customers about what they value from the product and where they were having issues.”
Johnson knows the approach of in-house teams under one roof and daily face-to-face communication might seem “old school” compared to “trendy” software companies with flexible, remote workforces. But the luxury of daily standups and the ability to walk over to someone’s desk has helped the development, product, customer success, and customer support teams do a better job at what Johnson describes as “capturing the voice of the customer.” In addition to moving these teams physically closer to each other, Act-On also rolled out new support packages and a new account management process. The renewed focus on customer success has already contributed to a 24 percent boost in the average size of new customers in Q1 and the addition of several key new customers.
Reorganizing Current & New Employees
The new logos weren’t the only additions during Act-On’s reorganization. Johnson was committed to getting new members of the leadership team on the bus, and to ensuring existing leaders had the right seats on the bus. Since the start of 2018, every member of the executive team is either brand new to the company or brand new in their role — a strategy fully supported by the board and investors. It’s important to note that the company’s executives were previously scattered across offices in three cities. “If you’re going to do something so risky, you need to make sure from an operational perspective that you really have it nailed,” Johnson says. “I felt very strongly that each of the leadership team members physically needed to be here in Portland. We’re at a point with making so much change that we really need everybody to roll up their sleeves, help each other, and make sure that we had the right type of attitude from the top down.”
"We’re absolutely going to be OK; we are a stronger company because of it, and we’re on that path to profitability. It’s not without its challenges and turbulent times, but yes, you sometimes do just have to bite the bullet."
Act-On’s SVP of business development was named COO, and the current CFO was promoted from his role as VP of finance and business operations. The company also hired a new CTO, CRO, SVP of customer success, SVP of marketing, and general counsel. Given the desire to have all key leadership positions physically located in Portland, a door was opened for Johnson to start with a blank page for key positions. It helped that she was already familiar with the company’s culture and its key stakeholders. By Johnson’s own admission, it would have been much harder to go from CFO at one company to CEO at another one and oversee these drastic changes.
Another drastic change in 2018 for Act-On has been adding more than 80 new faces to the Portland office. Instead of trying to change longstanding habits that resulted from the product engineering and customer success/support teams being siloed, the reorganization gave the company an opportunity to bring in new faces who were already accustomed to regular collaboration. “We made sure the types of customer-facing people we were hiring naturally gravitate towards working closely with the engineering team or with the product team, because that’s what they’ve always done in their other jobs,” says Johnson. She also explains that the leadership team intentionally drives home the importance of cross-functional teamwork in day-to-day communications, in stand-ups, and at all-hands meetings. “Making this change of consolidating actually allowed some freedom that probably otherwise would have been more difficult,” says Johnson. “We had somewhat of a clean slate to bring in fresh perspectives and hire new people that fit the culture we are striving for.”
Creating A Culture Of Transparency & Trust
Act-On’s leadership team faced a tall task in maintaining a positive work environment in the midst of these radical shake-ups. Johnson doesn’t sugarcoat that challenge — these weren’t entirely comfortable changes. People did lose jobs. People did question the decisions being made by executives. Throughout the process, Johnson’s goal wasn’t to get buy-in from every single employee. Instead, she was focused on transparency and consistent communication. She makes sure the leadership team is both visible and available to field questions. In many cases, employees shared the same concerns that lead to the reorganization in the first place. “It can be challenging to be honest with employees about what’s working and what’s not working,” Johnson explains. “But a lot of times when you talk to the employees about what’s not working, they shake their heads and say, ‘Yeah, you’re right. That’s not been working. I can’t believe it hasn’t been addressed.’”
The faith showed in Johnson by Act-On’s investors, board members, and employees is already paying off. The company exceeded its financial goals in Q1, has already expanded its office space footprint in Portland, and is on pace to continue hiring. No level of enthusiasm in an all-hands meeting and no amount of constant, transparent communication can create the kind of trust among employees and investors that real, tangible success can. And the metrics are showing arrows pointing in an upward direction for Act-On.
“Sometimes you have to make these decisions, and tough decisions are tough for a reason. But they pay off,” says Johnson. “We’re absolutely going to be OK; we are a stronger company because of it, and we’re on that path to profitability. It’s not without its challenges and turbulent times, but yes, you sometimes do just have to bite the bullet in order to benefit in the future.”