Can Slack Fend off the Giants to Succeed in the Enterprise?

April 28, 2017

I’m going to use Slack as a study of how a well-funded unicorn that has done extremely well with SMB customers can advance its chances of success with enterprise customers despite the heft wielded by large incumbents such as Microsoft and Google. What I hope to illustrate is the importance for executive teams to understand the different strategies and “muscles” required to Play for Power (i.e., achieve dominance in selected target markets) alongside what they have to do on a daily basis, which is to play for Performance (i.e., make their numbers). For lack of a suitable mental model and corresponding KPIs, boards, CEOs and management teams tend to conflate these two goals. Doing so can be extremely costly in terms of misplaced investments and failed growth initiatives.

Slack – Who?

In case you aren’t aware, Slack is a hot professional group messaging service that has deployed a gamified product concept and user interface alongside a freemium pricing model to attract 5 million users among small and medium sized businesses, plus a number of large enterprise organizations. This privately-held company is a richly-funded member of the Unicorn club that has built a valuation in excess of $4bn, based on around $540m in venture funding from a dozen or so firms among other investors. CEO Stewart Butterfield founded the company in 2013 along with three co-founders. The four year-old startup currently has around 800 employees, claims an annual revenue run-rate of $200m, and has recently made a series of key hires to establish an enterprise-grade sales force and to beef up its management ranks with veterans of successful companies such as Salesforce, Cisco, LinkedIn, VMware, Palantir, and DropBox.

Competitive Pressure

Microsoft competes in this space with a number of similar types of offerings, from Teams to Skype for Business, to Yammer, and to even its allegedly revitalized legacy product, Sharepoint. Google, which is still to prove that it can service the requirements of enterprise customers besides the advertisers that it works with in its Search-based franchise, has recently launched Hangout Chat, and Facebook has its own offering called Workplace. Like Google, predominantly a high-volume consumer-focused company, Facebook has excellent penetration with small businesses but not so much with enterprise customers. The dark horse here may well be Amazon Web Services (AWS), the division of Amazon that has managed to develop a rapidly growing enterprise business and that I suspect may well get deeper into the Saas business to build on top of its Iaas and Paas infrastructure services.

In a March 10 post, Emil Protalinski, news editor at VentureBeat, proclaimed that Slack is doomed: “Google and Microsoft will inevitably hit Slack exactly where it hurts: paying users. The two tech giants are going after the enterprise… Almost every business either has G Suite or Office 365, whether it’s just to handle email, shared calendars, or the whole array of enterprise apps. As a company, why the hell would you shell out for one of them and Slack?” Protalinski argues: “If Google and Microsoft offer an alternative as part of the subscription you’re already paying for, it’s a no-brainer to either switch from Slack or never bother getting Slack in the first place. .. It doesn’t matter if Slack offers something that Hangouts Chat or Microsoft Teams don’t. Google and Microsoft will iterate like crazy… Unless Slack comes up with some genius business proposition, Google and Microsoft are going to slowly but surely tear the startup apart.” A somber prognosis indeed.

To my mind, there are strong parallels between Slack and DropBox and to a slightly lesser degree, Box. Like Slack, DropBox was conceived as an out-and-out volume operations business whereas Box was born as an enterprise Saas provider. The overlap between Slack and DropBox extends from their related product categories (collaboration, messaging, chat, file-sharing) to their common adversaries (and potential acquirers?), predominantly Microsoft and Google with their respective offerings in all of these categories. On a related note, industry pundits including Sramana Mitra and others have been skeptical of the valuations of Slack (and Dropbox) precisely because of the competition each faces from the giant consumer internet companies and from Microsoft, the crossover consumer/enterprise giant: “As you know, I am not a fan of companies that raise exorbitant amounts of money. $539.95 million in financing to produce $64 million in revenue doesn’t make any sense to me. Investors often kill perfectly good companies by over-financing them. I hope, Slack will avoid that fate.”

Robert Greenhood, a new media and tech advisor, has a view akin to Protalinski’s: “Microsoft under Balmer misread Dropbox and the value of that product category – won’t happen this time around under current CEO Nadella… Slack stands a slim chance of surviving as stand-alone company now that Microsoft and others will compete so quickly… Slack might still be a really great fit for SMB though… Also, perhaps a nice acquisition for its competitor, Atlassian.”

These two sets of observations make the future sound grim for Slack. It’s not easy to see how Slack can perform much better than Dropbox, whose $10bn valuation from its last funding round is constantly being questioned by industry experts. My own guesstimate is that Dropbox’s valuation could drop by at least 20% if the company were to go public today, even though the company claims an annual revenue run rate of $1bn. In large part, the doubts surrounding DropBox are related to the competition the company has long faced from Microsoft, Google, Apple and others. By way of a rough proxy, Box’s valuation a couple of years after its IPO stands around 30% below its IPO-day valuation. Without knowing in detail the market development strategies employed by Dropbox and Box during the past few years, my impression is that they have been unable to avoid the trap of going too broad and shallow, which would prevent them from building a power base among one or other sets of enterprise customers. That said, thus far each has undoubtedly survived despite many pundits’ forecasts that they would succumb to competitive pressure from the giants, or would be acquired by one of them, neither of which has yet occurred.

Can Slack Thrive Against Microsoft, Atlassian and Others?

In order to thrive with enterprise customers against an incumbent like Microsoft in spaces that the latter already leads such as messaging and collaboration, the Slack team must find a way to make their claim of being a differentiated specialist count in the marketplace. Smaller companies usually have little to no chance of beating large generalists on their turf unless (i) they are ruthlessly focused on what they do better, and (ii) they find lucrative customers segments that value the differentiation sufficiently to resist the FUD and incentives to defect offered by the behemoths. If they do these to things well and attain power positions in one or more key customer segments, they stand a chance of defending themselves against incursions from bigger competitors.

By all accounts Butterfield and his colleagues have been very clear about what Slack’s messaging service does much better than anything available from Microsoft, Alphabet, or even Atlassian, a fast-growing provider of tracking, collaboration, and service management tools for business teams. In fact, to date they’ve done an admirable job of (a) reframing a relatively lack-luster messaging/collaboration category into a more dynamic type of offering with easy integration to Twitter, LinkedIn, DropBox, Google Docs, Microsoft Office, and even Uber and other consumer apps, (b) very consciously leveraging their crown jewels to delight their users, in particular these myriad third-party integrations, and (c) controlling the urge to over-sell themselves, to the extent of not even having a CMO or direct sales teams until recently, thus keeping their feet firmly planted on the ground.

Kaj van de Loo, head of engineering & operations at Foresee, a leading Voice-of-Customer software company, describes how his $80m company uses Slack: “We use Slack extensively within Engineering & Operations. For everything from social chatter through real-time collaboration across locations during large events such as deployments, to automate alerting in case of problems. We have integrations to a variety of external systems, from a pong bot that keeps track of our ping pong scores in the SF office to our monitoring systems that monitor our production instances.” The manner in which adoption of Slack has grown at Foresee highlighting the role that its freemium pricing model has played in the spread of Slack throughout the product and operations parts of the organization: “The choice of Slack was largely bottom-up, with individual teams creating their own free accounts. As the value of it became apparent, the paid version became attractive and we moved to that. The key driver was the ability to keep and search large amounts of messages (the free version is very limited).”

However, from van de Loo’s statements it is not totally clear whether Slack’s seductive messaging service will continue to be first choice once Microsoft and others get their act together, although he acknowledges the value of their integrations: “We are not particularly wedded to Slack itself and will look at Microsoft Team once available to us. However, I believe the biggest challenge switching away from Slack will be the integrations. Until Microsoft has a comparable number of integrations and bots it will be hard to replace Slack.”

New Strategy Required to Succeed in the Enterprise

As indicated above, what I believe the new management team needs to do now as it seeks to attract commitments from a larger number of enterprise customers is apply a rigorous focus on building a power base among a targeted set of enterprise customers rather than just build moderate share among many different types of enterprise and government organization – which is the trap that most younger players cannot resist falling into precisely because it serves their Performance goals. Because of Slack’s particular appeal among knowledge-worker teams for flexible, powerful, and easy collaboration on group and individual activities, one possibility might be to focus on organizations whose workflows rely heavily on intensive, time-critical collaboration between project participants and other ad-hoc teams they need to work with, both inside and outside their four walls.

In essence, with enterprise customers Slack must go for depth and density, not breadth and volume. The chosen segment must be big enough to matter, but focused enough to dominate. Merely good segment share will not suffice, because as Microsoft continues to offer its new Teams offering as a free part of Office 365, in essence co-opting group messaging as a feature instead of a free-standing product category, Slack will need to have a fortress to defend. As I mentioned earlier, my sense is that among the more attractive customer segments might be tech, where Slack has already gained impressive early adoption, professional services, project and management consulting, media companies and ad agencies, investment banks, and/or other segments characterized by intensive and time-critical knowledge-sharing and exchange of all types of video and text files as part of their workflows.

This strategy is much easier to define than to execute on with the required discipline. A relatively young company that has managed to generate buzz around its easy-to-use, fun, and highly productive service (it is said to dramatically reduce the drudge and kludginess of conventional collaboration via different email/chat/video-conferencing/file-sharing tools) will inevitably attract customers from every conceivable segment. This is already clear when you hear that existing enterprise customers include organizations as diverse as Capital One, Home Depot, IBM, NASA, and others. When a young company receives the flattering attention of much larger “logos” from multiple different markets, it needs to develop a management model to serve both its target customers and its opportunistic customers without conflating the two.

For the target customers that Slack decides to prioritize, they should deliver a whole offer that effectively nails a painful mission-critical workflow problem. In order to achieve the stickiness that will prevent these customers from defecting to Microsoft when the giant from Redmond tries different tactics to haul customers back into the Microsoft fold, Slack would be advised to prioritize customer success over winning new logos wherever there is tension between the two options. While Enterprise Grid may already have a strong feature set including significant scalability up to 500,000 users, I would be astounded if you told me that Slack already provides all of the security and administration features that enterprise customers will certainly demand, so these need to be built into the whole offer.

Furthermore, since to date Slack has been reluctant to field a direct sales force, I’d be similarly surprised if the company is already fielding not only seasoned account managers but domain experts in how teams can collaborate productively in mission-critical processes and workflows. Microsoft and its VARs and integration partners can certainly provide many of these services even though I believe that they are beatable in many customer situations because of their general reluctance to go deep into fixing enterprise customer’s processes. For example, although Sharepoint has been widely licensed by enterprise organizations, it has been largely ignored by their employees because of its kludginess, and little help has been forthcoming from the vendor side to help accelerate user adoption and engagement. Of course Outlook and Exchange are used by vast numbers of corporate users. Although Slack is designed to provide a form of messaging that is far more lightweight and versatile than Outlook, the latter’s dominance in enterprise organizations cannot be ignored.

Two Distinct Playbooks: Power vs. Performance

In order to execute an effective ‘play to win’ playbook to build dominant share among its target enterprise customers, alongside a successful ‘play to compete’ playbook to win a share of business among enterprise customers and keep the SMB business growing, Butterfield and his team will need to have a clear mental model of what it takes to play for power versus what it takes to win a sufficient number of enterprise deals in order to make the company’s quarterly numbers. In the absence of a suitable model and the appropriate KPIs related to these two playbooks, they will inevitably be drawn into trying to please all comers and thus be drawn into risky open-ground warfare. So how does this “Play for Power and Performance” idea work?

It’s critical to acknowledge that each of these goals – the Power goal and the Performance goal – require a different approach even though at times pursuing Power is perfectly aligned with fulfilling Performance commitments. For example, achieving deep penetration into target enterprise accounts – i.e., not only landing, but expanding adoption – serves both the Power agenda (to secure market leadership) and the Performance agenda (to make the numbers). Problems arise when the company over-reaches in its play for Power – targets too broad a set of prospective customers to have any chance of achieving dominant share, or chases attractive but challenging opportunities outside its sweet spot. The latter normally results in precious field and engineering resources being “dynamically reallocated” in the attempt to close deals that might be unserviceable and eventually stretch the company to breaking point, causing a lot of damage along the way. This is when executives and sales teams deceive themselves that they are playing an effective power game when they are actually undermining their chances of achieving Power – or even making their numbers profitably.

To be clear, this is not an either/or choice: management teams must become “fluent” in pursuing both Power and Performance. In essence:

  • Performance means fulfilling commitments to shareholders including meeting annual growth targets, achieving or exceeding sales quotas, shipping products on time and delivering services on spec and on budget, and achieving successful customer adoption and ongoing engagement. The problems start when so much attention is given to pursuing Performance commitments that there is little management attention or energy left over to focus on building and sustaining real Power in the marketplace. Unfortunately, once revenue commitments are baked into investors’ and customers’ expectations, making plan doesn’t ensure any positive impact on valuation, although failing to do so certainly detracts from current valuation.

  • Power is measured by a company’s ability to achieve market leadership and especially dominance, to sustain significantly faster growth than its closest competitors, and thus multiply (as opposed to merely increasing) its valuation. One example of the “soft power” that accrues as a result of successful Power play is radiating references – positive references from influential customers that draw prospects to the company’s offerings and in turn help to dramatically increase at-bats, reduce sales cycles and increase win ratios. Every management team longs to be in this situation, but relatively few make the right choices consistently enough to achieve them. Achieving Power usually requires that the team knows what initiatives to double-down on and, at the opposite end of the spectrum, what not to do, what to do less of, or what not to do now – and has the collective intestinal fortitude to follow through. Having an intuitive sense of what playing for Power was all about is where Steve Jobs’ legendary genius came to the fore – such as in 2007 when he famously decided to shelve the tablet (later to become the iPad) in favor of getting the iPhone to market with the critical new touchscreen functionality and making a success of that product before taking the tablet down from the shelf in 2009 and getting it ready for market in early 2010.

AWS is another excellent example of a business that knows what it takes to build power and is continuing to do so at a breakneck pace, with cloud infrastructure revenues totaling more than $12bn. and market share that dwarfs that of its closest competitors, Microsoft Azure and Google Cloud. In fact, it’s not a stretch to suggest that AWS has over-performed all growth expectations due to its relentless focus on building a power position in cloud infrastructure and platform software. One crucial factor in AWS’s success is its separateness and relative independence from the Amazon e-commerce business, and its savvy development of enterprise-grade field sales and delivery capabilities. Until quite recently, Microsoft and Google were all over the place with their market development strategies for Azure and Google Cloud Platform, which explains their lack of both power and performance among enterprise customers in relation to AWS’s dominance. Today they appear to be beginning to get their act together and make some headway in terms of growth and share, but still lag far behind AWS.

Whatever terminology you prefer, whether it be “relevance” or “dominance” to signify Power, or “execution” or “making plan” as proxies for Performance, both are vital themes for executives and boards to focus on. In terms of organizational best practices, playing for power normally requires dedicated and specialized resources organized cross-functionally – or at least, able to operate cross-functionally – whereas the traditional functional organization is acceptable for playing for performance.

Back to Slack, although I would love to think that the Slack team will build a defensible power base among one or more visible segments consisting of enterprise customers, I believe that with its predominant volume operations model the company is more likely to continue to cultivate enterprise users from the bottom up, capturing one user or team at a time. So even if Microsoft is able to sign up a lion’s share of enterprise volume discount contracts for one or more of its messaging/collaboration offerings, Slack’s appeal as a highly productive team messaging tool may still capture groups of users in those same organizations. But I have my doubts regarding whether Slack’s current business model and market strategy will enable it to become a successful enterprise player.

That’s my view – what’s yours?