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ServiceNow: Tech's ultimate second act

Facing 50, Fred Luddy lost his job and his fortune. But in applying the lessons of his failures, he made ServiceNow the most innovative company in America—and himself a late-career billionaire


g_106987_fred_luddy_280x210.jpgFred Luddy at his beachfront home in Del Mar, California. Success has meant more time to spend with his 10-year-old son and to work on his next project: Making US health care more affordable and efficient
Image: Ethan Pines for Forbes

Vegas being Vegas, fans have crammed the Venetian Hotel for selfies with a greying celebrity working his way through the scrum: Fred Luddy, the 63-year-old founder of ServiceNow, America’s hottest IT-services company. Neither Wayne Newton nor Celine Dion, Siegfried nor Roy, has anything on Luddy in Sin City this day, at least among the 18,000 customers, vendors and employees in town for Knowledge, ServiceNow’s annual developers’ conference.

“When all of these people are happy to see you, honestly you feel like a rock star,” says the sparkly-eyed Luddy, having booked extra time between appearances to grip-and-grin with the adoring hordes. “It’s kind of an undeserved feeling, because they were the inspiration. You folks had all of the ideas. I just wrote them down and thought about them.”

Forgive Luddy such indulgences. Fourteen years ago, he was pretty much broke, having seen a $35 million personal fortune vanish overnight in the midst of accounting fraud at his previous company. Thirteen years ago he was a one-man shop, tinkering with ServiceNow’s core product from his home. Even after the vindication of an IPO six years ago, the company was worth a modest $2 billion.

These days ServiceNow, of Santa Clara, California, maintains a $30 billion market cap, has 6,000-plus employees—and is ranked 1,640 on the Global 2000 list. Its more than 4,000 customers include 850 of the Global 2000. Last year it had revenues of $1.93 billion, and growth is expected to be more than 30 percent this year. More than 500 companies spend at least $1 million annually on Ser­vice­Now’s products.

What are they getting? A simple, flexible workflow that allows employees to easily manage their requests from IT. Much as Salesforce enables a company to manage its external clients by keeping a record of all contacts and interactions (and, increasingly, by telling sales reps what their next step should be), Ser­vice­Now promises an internal system to meet the needs of employees, beating out legacy IT service-management software players like BMC Software, Hewlett Packard Enterprise, Cherwell Software and CA Technologies to claim half of that market.

The special sauce—the thing that gives Service­Now the fat ‘innovation premium’ that drives our ranking—comes from two product traits with the potential to scale: Simplicity and customisability. ServiceNow’s IT tools don’t require the IT department to set them up. Once running, they offer a single collection centre for requests, data points and checklists, all of which can in turn be analysed by algorithms to predict needs, flag concerns and measure efficiency. Even in a business where renewal rates are commonly at least 90 percent, Ser­vice­Now stands out at 98 percent. “They have cemented themselves as the number one IT partner for the biggest companies in the world, and they don’t get fired,” says Alex Zukin, an analyst at Piper Jaffray. All those traits point to a future beyond just IT services.

But Luddy’s triumph also comes from innovation in management: Specifically, the rare founder trait of knowing when it’s time to step aside and let someone else run your baby. Luddy transitioned from CEO to chief product officer in 2011. “Fred has been a wonderful counsellor, coach, friend, as well as someone who chal­lenges us to constantly improve our user experience, constantly make sure our products are easier and easier to use,” says the current CEO, John Donahoe, who previously served as CEO of eBay.

Ego restraint pays, at least on our list, as Service­Now came out ahead of Facebook, Tesla and a slew of other founder-centric tech giants launched in the same time period. In lieu of brashness, Luddy pushes wisdom, having started ServiceNow at the ripe old age (by tech standards) of 50. Okay, 49 years and 346 days, beating his big birthday by two weeks. “I couldn’t wait,” he says, “because there was something psychologically that said I couldn’t start a company at 50.” If anything, Luddy’s saga proves that sentiment wrong, with an innovation ingredient that’s often undervalued in Silicon Valley: Experience.

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The roots of ServiceNow’s ­spectacular rise can be found in the ashes of an IT software-management company called Peregrine Systems, which at one point was valued at more than $4 billion. Over 13 years, Luddy, the CTO, provided the company’s engine, but it turned out that the growth came from more specious sources. Peregrine employed several fraudulent methods to inflate its revenue numbers and stock price over a two-year period. In 2002, this former high-flier suddenly filed for bankruptcy, and several top executives, including the CEO, went to prison. Luddy wasn’t charged with any wrongdoing, but his $35 million stake vanished overnight.

“I really hated my job,” Luddy says, with the perspective that time and a billion dollars will give you. “Losing that money was absolutely the best thing that could have happened.” Rather than mope, Luddy decided to take what he hated—IT departments too difficult for the common worker to deal with—and try to make back that lost money and then some. Soon after Luddy’s fortune ­evaporated, he hunkered down in his San Diego home and started work on the product that would become ­ServiceNow.

[qt]I couldn’t wait, because there was something psychologically that said I couldn’t start a company at 50.”[/qt]
Such can-do optimism was a product of New Castle, Indiana, a medium-size Rust Belt town near Indianapolis. His father was an accountant; his mother, a Catholic-­school teacher. The young Luddy was, by his own account, an indifferent student, but he was ­fascinated by machines and took apart everything he could get his hands on. At 17, while working as a gofer at American Standard, he saw an HP computer being installed in the office and begged to use it. With the help of programming guides (and the scarcity, in New Castle in 1972, of anyone with any coding knowledge), Luddy got himself hired as a programmer there ten days later.

His first insight into the power of software to make people’s lives better came soon after. He wrote an order-entry program so the company clerk didn’t have to keep typing up folding-door order forms with the same information all day. “There is no better experience,” he says, remembering that moment, “than giving someone a piece of technology that lets them do something they never thought they could do.”

After dropping out of Indiana University (he spent all his time programming instead of going to class), he headed to Silicon Valley and the Amdahl Corp, an early competitor to IBM in the high-end mainframe-computer market.

Even as Peregrine was imploding, Luddy hit on a revolutionary idea he had learned from three decades of programming: As the company’s name suggests, he’d deliver office services over the internet on a subscription basis (monthly, per customer), updated easily without requiring customers to manually download software from disks on different operating systems. As this was 2003, Luddy proved to be a software-as-a-service pioneer, pushing a user-friendly interface designed for the average office worker. Luddy’s younger brother Rob (who had also worked at Peregrine) came on board in 2005 as the company’s first sales representative, and they took the product to market.

The market’s response: “Meh.”

“We had this really great, simple platform for creating workflows, and we would go to people and say, ‘Hey, you can do all these things with this,’ and they just weren’t interested,” recalls Luddy, who at one point sold a car to make payroll. “So we went back and said, ‘Okay, we say this is this great tool for doing things like IT-support management, so why don’t we back that up and make an IT-support product?’” This time the market bit.

In July 2005, ServiceNow raised its first funds, a $2.5 million Series A round led by JMI Equity (followed by another two rounds, of $11 million total, over the next few years). The company sold its first contract to WagerWorks, an offshore gambling site, in the fall of 2005. Growth proved slow—a few million in revenue during those first years, using a few dozen employees—but very steady.

By the time Sequoia Capital led the firm’s $41.4 million Series D in late 2009, managing partner Doug Leone says he had never seen such positive reviews from customers. Ser­vice­Now’s revenue was doubling annually, and the company became cash-flow positive, expanding deals with customers like Deutsche Bank, Intel and McDonald’s and reaching 100 employees.

It was at this point that Luddy put his ego aside and decided to replace himself. He knew product. He needed a CEO who knew growth. Leone took Luddy on a host of interviews. In the Dutchman Frank Slootman, a non-coddling, no-nonsense executive who had taken Data Domain public before selling it to EMC, Leone saw “a match made in heaven”.

Slootman focussed on building out the sales team and tailoring the product to larger, higher-paying customers like Johnson & Johnson. “Frank took us from a very large startup,” Luddy says, “and he made us into a very large, well-oiled machine, implementing processes and procedures and really scaling out the organisation in a way I never could have.”

A crossroads came in late 2011, when VMware offered $2.5 billion for the company, according to Leone. Luddy wanted to sell—he thought ServiceNow’s product map could thrive within VMware, and the sale would mean financial security—as did much of the board. But Sequoia saw that as “giving the company away”, in Leone’s words. “We thought ServiceNow had a great product-market fit, a great leadership team,” he adds. “They’re also in a winner-take-all market—you cannot name the number two company to Salesforce.”

Leone saw an easy path to $10 billion and put his money where his mouth was, offering to buy out anyone at the VMware price. Ultimately, no one bit.

At first it was a tough road. For three or four months, Sequoia was not exactly the best friend of the management team, says Leone. But then slowly, the company saw more and more traction in the marketplace. The company went public in June 2012, but it still wasn’t any better off than if it had sold to VMware.

Armed with cash from the offering, as well as the ability to issue new shares, Slootman began buying companies to acquire new underlying technology and—much like Salesforce, Microsoft and just about every major technology player—to invest in artificial intelligence. ServiceNow began growing even faster. It had essentially become a one-stop shop for CIOs, centralising and automating many common IT help-desk tasks like tracking incidents, recovering passwords, requesting equipment, setting up new user accounts, troubleshooting and managing IT systems and responses through simply designed service portals.

By 2016, revenues hit $1.39 billion and the market cap $12.34 billion. But just as Leone had predicted that the company would get to $10 billion, the ServiceNow team saw they could become much, much bigger. Why just service IT departments? Ser­vice­Now’s software and reputation meant it could branch out into other areas, from customer service to human resources.

And Luddy had set the tone. Just as Luddy didn’t think he could help the company grow past its early stages, Slootman realised that moving deeper into other areas like human resources and security meant ServiceNow needed a different CEO.

Last year the company hired former eBay chief John Donahoe, with Luddy kicking himself upstairs from chief product officer to chairman.


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John Donahoe most certainly doesn’t have an IT background: Before eBay, where he paid particular attention to PayPal, he was the CEO of the consulting giant Bain. But he has a grander vision of the same eureka moment that Luddy had 15 years ago: The need to make complex processes elegant and simple. “Millennials say, ‘Why can I reset my PayPal password in 20 seconds, but to reset my work email takes 20 minutes and a phone call?’” Donahoe says. “Consumers want one seamless experience, and employees are the same way.”

So Donahoe is taking ServiceNow’s networked, easy-to-use IT support system to every corner of an enterprise. Internally called ‘emerging products’, these services help connect every department—from human resources and security to customer service, marketing, legal, finance and facilities—to one shared online database where an organisation can analyse and take action on information.

The goal: Quintuple sales to $10 billion by becoming the always-on engine behind an employee’s work life, from the moment he or she is hired. ServiceNow last year launched a mobile app that handles the complete journey from employees’ onboarding through their day-to-day work, relocation, leaves of absence and off-boarding. In a ­single app employees can find information like where your desk is, who your co-workers are and maps of the office; send questions to their staff coordinator; and address payroll questions and IT issues. In Donahoe’s view, getting a new desk phone installed should be just as easy as hailing an Uber or chatting on Snapchat.

“This is not technology in service of ­technology,” Donahoe says. “We want to enhance the quality of the lives of people at work, whether you’re an IT help-desk professional or an end user.” That’s not just providing a pretty interface. “They call it employee experience, but to me it’s productivity,” says Josh Bersin, who runs an eponymous consultancy within Deloitte. “I don’t want an enjoyable experience to renew my 401(k). I just want to do it in one click.”

In pivoting, Luddy and Donahoe are competing with a more agile group, which includes Salesforce, Microsoft, IBM and Workday. ServiceNow’s sole advantage: The ability to upsell, leveraging its IT-service dominance to layer on related products. Donahoe boosted sales and marketing costs more than 30 percent last year.

The spending has generated results. Ser­vice­Now projects about $2.4 billion in 2018 subscription revenue, and while the majority of that will still come from growth in the IT side, the “emerging” categories are ­expected to make up at least a third of new annual contract value this year, up from less than 20 percent at the beginning of last year. The ­opportunity presented by these offshoot verticals, ­estimated at $34 billion by Credit ­Suisse analyst Brad Zelnick, is even larger than the overall cloud-based IT market, which is about $27 billion.

The next step across all these areas: Use algorithms to take all these requests, data points and checklists and predict needs, flag concerns and measure efficiency. Rather than just streamline service, the company wants to improve automation and analytics through AI. Many innovations come from third-party app builders. (Clients have built about 35,000 custom apps, for example, to track security incidents like shoplifting and broken windows in a retail store, or to track the status of endangered animals in a park.) And much of the growth is expected to come from AI. Last January, ServiceNow spent $15 million to acquire DXContinuum, which is used throughout ServiceNow’s cloud platform to help customers build predictive models that make it easier to categorise incoming requests. In May, Ser­vice­Now bought the AI startup Parlo for its technology in natural-language understanding, which the company plans to inject into its core platform to help customers build intelligent business apps, complete with easy-to-create service catalogues, notifications and assignment tools.

None of this means Luddy has let his company lose its roots. His no-frills practicality still manifests itself at Ser­vice­Now’s Santa Clara headquarters, which are tidy and sunny but whose manicured trees and outdoor fountains are modest compared to the exaggerated play areas and flashy design of the campuses of Facebook and Apple. When asked to pick a lunch spot recently in his San Diego hometown, the billionaire chose Rudy’s Taco Shop, which reminds its customers that shirts and shoes must be worn inside. Luddy, who now finds more time for tennis and his 10-year-old son, was wearing jeans and sneakers. “The last six years have been like this beautiful dream,” he says later at his beach house, basking in the afternoon sun. “I give a lot of hugs, but I don’t let anyone pinch me.”