You’ve got to love a company that brags at its user conference that its motto is Learn, Laugh, Share, Connect. Don’t hear that too often. What you also don’t see very often is the other characteristic that makes the company in question, Kinaxis, unique: it’s a highly profitable, cloud-only company. And when I say profitable, I mean profitable, as in a net profit margin of 16% of its $23.8 million in revenue last quarter.
For comparison, Netsuite’s net profit last quarter was -19% on $192 million in revenue, Workday reported a -24% profit on $282 million, and Salesforce.com pulled in a whopping -52% profit on $1.364 billion in revenue.
It’s no wonder that Kinaxis’ stock is up 230% since its IPO in June, 2014. By comparison, Salesforce.com, whose market cap has always defied logic, is up 50% during the same period, Oracle is at negative 5%, and SAP, Netsuite, and Workday are all just barely in positive territory over the same timeframe.
Of course, Kinaxis is by far the smaller of these companies, and it boasts a mere 100 customers, give or take a couple. But that’s actually even more impressive – it means a healthy average deal size and lots of upsell to existing customers. And, as Kinaxis implements the majority of its deals, that means it captures both the services and subscription sides of the business as well.
What’s the secret behind this rare, profitable cloud company? In part, at 30 years old Kinaxis is positively venerable when compared to the rest of the cloud keiretsu: Salesforce, Workday, and Netsuite. Its existence and success is also due to a perception gap that SAP – and competitors – have left in the market when it comes to supply chain planning. SAP’s supply chain planning offering, APO, is one of those products that customers use more because they have to than because they want to. And the fact that most prospective APO customers aren’t just SAP ERP customers has meant that using SAP’s APO, which is regarded in the market as an SAP-specific product, is seen, rightly or wrongly, as placing unacceptable limits on a company’s planning capabilities. As a result, the vast majority of Kinaxis customers have SAP ERP somewhere under the hood, but no APO.
Kinaxis’ Rapid Response, on the other hand, excels at playing Switzerland in the complex, almost Byzantine world of multiple ERPs and insanely complicated bills of materials, manufacturing, distribution, and delivery models that characterize the real world manufacturing company of today. And its user-friendliness is the stuff of legend among its customers. I met several users – as in the supply chain planners and business owners, not the IT folks — at Kinaxis’ recent Kinexions user conference who told me that their only fear was that the “SAP mafia”, in the words of one of them, would succeed in jettisoning Kinaxis Rapid Response in favor of APO.
Why? Because the internal SAP gang can, not because it’s necessarily the best choice for the company.
Speaking of Kinexions, these guys throw a helluva conference. Funny, witty, irreverent: it’s hard to resist Kinaxis’ regular habit of breaking the stodgy, tired user conference mold and actually making the relatively dry topic of supply chain genuinely entertaining. Year in and year out.
This is just one proof point among many that Kinaxis gets “people” in some very important ways. The company culture of Learn, Laugh, Share, Connect also allows Kinaxis to look at the coming “digital transformation” imperative from the one perspective that really matters: people. I’ve been tracking the clarion call for digital transformation in recent months, and the one thing that’s clear in my mind is that technology transformation is secondary to the need for people and process transformation.
This people and process transformation exists at all ends of the digital transformation continuum: customers and their buying habits need to transform as much as employees, partners, and their business processes need to transform. And the transformation of those processes has its own peculiar twist – transforming business processes doesn’t mean improving what’s already there as much as it means creating net new processes that bridge the silos of non-communication and the process roadblocks that are baked into the DNA of too many companies. If you’re being disrupted from the outside by an Amazon-like threat, tweaking the dial a couple of notches isn’t going to necessarily keep your company from losing its shirt.
What’s interesting about Kinaxis and the whole digital transformation imperative is that its decades of laboring in the salt mines of supply chain planning give it an important leg up when it comes to transforming companies. One of the classic rookie mistakes made by companies trying to grapple with transformation is to think of this as a customer-centric problem first and foremost. Too many companies think that if they only had the customer buying experience-equivalent of Amazon One-Click or the Uber app their transformation would be solved.
The reality is that One-Click or the Uber app would be a laughingstock if there hadn’t been an equally transformative change in the underlying supply chain: Amazon’s warehouse management and delivery models, and Uber’s creation of a completely new class of rolling stock for people transportation – the private car owner – were what really made their respective transformations possible.
So, while erstwhile Kinaxis competitors like Anaplan have begun to the crack the code on planning as an enterprise-wide, business user-oriented function – and they’ve done a helluva good job at it – the lack of a solid history at the core of a core business process like supply chain makes it harder to imagine how a win for Anaplan in, say, its new HR/talent management side of the business would translate quickly to upselling opportunities across the enterprise. Down the road there’s a good chance, but not until the beachhead is well-established.
By contrast, Kinaxis’ case for moving from supply chain planning to adjacencies like talent management or asset management, among many others, looks pretty solid. Judging from my conversations with Kinaxis’ customers, the customers are already well on their way in these adjacencies as well. Some have already been doing so, using Kinaxis for a wide variety of non-SCM functions.
This upsell capability is essential for Kinaxis — and having the vp of supply chain in your corner is no small advantage. Again, to give Anaplan credit, they launched their own supply chain capability earlier this year, in addition to human capital management. They’ll be able to count on having some of these heavyweight vps on their corner too – and it shouldn’t take decades either. But it’s clear that Kinaxis has a head start in this upsell opportunity around digital transformation.
Meanwhile, Anaplan has a plan to conquer enterprise-wide planning with an app store approach, something Kinaxis has been considering as well. Building an app store, along with positioning a company as a platform vendor, are two of the most cherished new recipes in the enterprise software success cookbook. And while I see the reasoning behind the latter strategy in many cases – a platform is really an open API approach that makes it easy for partners to add value, customize, and pursue niche opportunities in ways that wouldn’t be cost effective or possible for the platform vendor – I’m not so sure about the app store approach for relatively small vendors.
First of all, it’s expensive as hell to do it right: a vendor needs to build a huge portfolio of free apps so that its app store doesn’t look like a south Florida grocery store the day before a hurricane is going to clobber everything in sight. And the app store vendor has to provide huge incentives – as in direct payments to partners that want to build new apps, access to a massive customer base, and an evangelical approach to developer recruitment, or the app store shelves will continue to look like a barren wasteland. And, preferably, you need all three – just ask Windows Phone, which tried the recruitment incentive, even paying for top apps to be ported to Windows Phone, but with no customer base in the US to speak, their app store went hurricane and never recovered.
The app store vendor also has to certify the apps its partners make without creating a painful and costly barrier to market. And these aren’t necessarily the lightweight apps that the archetypical Apple Store sells for a couple of bucks each. Imagine, those of you who know something about the flaming hoops Apple makes its developers go through to be App Store certified, what it would be like building a mission critical app for the enterprise, instead of the next Candy Crush or mobile parking app, and then getting it properly certified: an enterprise app worth its salt is going to have to touch lots of sensitive systems and data, and there’s no better way to nuke your brand than to have some third party product wipe out a customer’s data or send it off to cyber-crime land for further processing. Getting into the Apple Store will be a piece of strudel by comparison.
And then there’s the commercial side of an app store: don’t underestimate how complex the backend of Apple’s App Store is. Now think of that complexity in an enterprise – payments, authentication, privacy, security, currencies, licenses, sale team compensation – it’s no small feat to pull all that together in a single, seamless, easy to use, One Click-like experience. Talk about digital transformation…..
Don’t get me wrong, there’s definitely a big partner play for these Kinaxis and Anaplan, and in fact the biggest partner play for both may come from smaller, boutique specialty firms than large, highly matrixed, global SIs. But what will be needed, at least when it comes to being on the leading edge of digital transformation, is more of a consultative approach that starts, not with the question “what do you want to transform today”, but more with the statement “let’s workshop the unique opportunities and challenges for your business and then create some new business processes around them.” It’s not as scalable as an app store, but it’s also more in line with the real problem of “unknown unknowns” that is stalking the enterprise landscape and for which digital transformation seems to be the best, if overly broad, way to focus execs and business users on building transformative solutions.
While it’s easy to applaud Kinaxis’ profitability, it’s a relatively small company, and the question of whether it can grow according to the imperatives of the publicly traded enterprise software market remains to be seen. The fact that is quoted on the Toronto stock exchange, far from the bubble mentality being fostered by the above-mentioned members of the cloud keiretsu, many of which are, according to the New York Times, starting to looking a little bubbly, may be its saving grace. But Toronto or not, Kinaxis now has a lot to prove to the next wave of shareholders who are looking for their 230% pop too.
The fact that people are seen as an explicit part of the process of enterprise success is a major reason why I think Kinaxis may have a chance at reaching that goal. Learn, Laugh, Share Connect – and profits. Call me old school, but I’m not sure that it gets better than that.
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