Yammer raises $85 million, now what?

Yesterday, social software maker Yammer announced it has raised $85 million, bringing its total funding to $142 million. Not shabby for a company with an estimated revenue run rate of some $30 million. The real questions though are what happens next, how does it compete with the likes of Chatter, can it remain as an independent software company or will what it does become part of the fabric of new software going forward?

From the blurbs:

“Yammer launched the category of Enterprise Social Networking and pioneered a new model that drove unprecedented adoption in the enterprise,” said David Sacks, founder and CEO, Yammer. “This significant influx of capital provides us with the resources to expand quickly and strategically, innovate rapidly and extend our market leadership.”

Adam Pisoni, co-founder Yammer said to me that Yammer believes there is a significant growth opportunity and that it is seeing an explosion of interest in what it offers. He hopes the company will triple revenues in the next year. That may sound ambitious but in a market that remains in the early adopter phase, this is not an unreasonable assumption. On to my questions:

Q: When so much social software (like Chatter) is free, how does Yammer compete in the long haul?

A: "The reason that enterprise software fails is because of lack of adoption. The thing that we've done at the core is to build software that encourages adoption and is built to empower employees. We have a 98% renewal rate right now. We have customers that have renewed multiple years in a row for more money than they came in with. We are now seeing multi-year deals and more of the seven figure deals. We let people try it out for free or at a lower cost knowing that companies will spend a lot more money on it. That's proven to be a winning formula."

Q: If you're coming through the back door then what do you do about CIOs who view Yammer as on the 'wrong side' of the house?

A: "Very early on we heard a lot of that. The thing CIOs are interested in today are far different from two three years ago. With this idea of user choice you can look at this as CIOs losing power, on the other hand you can look at this as delisting (CIO) their buying. It's not every company that's ready. It's not just that Yammer gets in through the back door and spreads organically we have now a pretty large consultancy arm. We're in there talking about integrating with IT, identity systems and business processes. That's a relatively new thing for us."

Q: What partnerships are going to be most important?

A: "We're building integration adapters like SAP, Dynamics and Salesforce. We want to bring SIs into that conversation. In large organizations we're relying on the Deloittes. They did a rollout to 200,000 people. They said it was the fastest software rollout. They're going to actively make it part of their practice, we're talking to them on this now. The problem for the consultants is that social software is not highly configurable. We try to make it so that it is very easily rolled out and integrated and in many ways that's not what they're looking for. The majority of the cost is around change management. It's definitely its a mindset shift for them."

Q: I'm not sure that layering social software over existing processes achieves transformational benefit. What happens if we start completely re-engineering our processes?

"The business method of command and control is not allowing customers to change quickly enough. They need to decentralise but in order to that they need better visibility of what's going on. Historically, companies have relied on BI. It works up to a point but is too slow. Super Value (supermarket chain) is giving up a level of control and predictability to gain adaptability that's leading to proven ROI. What social has proven thus far is that you can have more efficient and happier employees. In the next year or so we'll see far more tighter integration to processes and a realisation that you have to give up a level of predictability and the notion that everything is going to be static. I don't know that any of us can predict what it will look like in a few years time."

Q: What are the top three things that companies need to understand to make a buying decision?

"Decentralisation is clearly an important theme and while bottom up is important, it needs top down as well. They will have to make an investment. They have to be prepared for change so for example transparency brings many issues. Those discussions are happening. Social is different, it's not just another piece of software. Only the software that's put to delivering value and continues to add value will survive. If they cant prove it will get adopted then it will be seen as too risky."

Q: How do we deal with those management layers that are entrenched and resistant to change?

"I think it is a long process for a very large company. We try to do it in pockets and let it spread. It's far better to create beach heads but then we also know that they will need help. Transparency helps expose those that are hiding in the organisation and over time it gets harder for those people to avoid being found. We're growing the consultancy arm to help those businesses out."

At the end of the Q&A I came away with several impressions:

1. Yammer believes it can become a substantial company, continuing to do what it does but adapting itself over time. My concern is that as large ERP vendors figure out which of their softwares must remain in static form and which need to become more agile, that social elements will become baked into the core offerings, potentially sidelining Yammer.
2. The company remains confident it can be a solid stand alone business in the near term as providers of a layer on top of existing processes which will change over time. I'm not so sure. I agree that we don't yet know how process engineering will shake out but then I am yet to be convinced that social software provides the end game ingredients to let that happen. It may well turn out to be a significant part but not the whole.
3. The pace of change and speed with which new solutions are coming to market creates a confusion in buyers' minds. Yammer believes that by saying it is a cross software glue, it is acting as a neutral party in helping companies adapt and so is more rather than less acceptable. It's an interesting point but one that can only be proven right in those companies that do not believe in having a single throat to choke for most business applications. However, as is evident across all research, however standard a company may believe itself to be, there is always more than one incumbent.