May 20, 2003
Big-time growth with big-time payoff: Blue Ocean's business model makes sense to buyer Intuit
by Bruce Hadley, SoftwareCEO

Blue Ocean Software, founded in 1992, is number 85 on the current Inc. 500 list of America's fastest-growing companies.

In 1997, the Tampa, Fla.-based company had five employees and $1.5 million in sales. Five years later, the headcount had grown 10x to 57, and revenues had grown 20x to $30.4 million. In the first eight-and-a-half months of 2002, the company's revenues were $33 million — a run rate of $46.6 million.

Better yet: In spite of this rapid growth — it works out to about 40% year over year — Blue Ocean made it into Inc.'s top tier for profit margin, which means it did better than 16% every year.

Numbers like these caught more than Inc.'s eye; in September of 2002, Blue Ocean was acquired by Intuit for $170 million — roughly four times revenues.

In its press release about the deal, Intuit said it expects Blue Ocean's first-year revenue contribution to be $45 million to $55 million. By the way, that $170 million was paid in cash, and all 78 Blue Ocean employees were picked up by Intuit.

Blue Ocean founder and CEO Russ Hobbs stayed on through the acquisition, then left after six months. "He's an entrepreneur at heart, says David Weiss, who joined Blue Ocean in March 2002 as chief marketing officer after seven years as VP of marketing at Citrix.

Weiss became Blue Ocean's COO prior to the sale, and is now president and COO of Blue Ocean's new home, Intuit Information Technology Solutions (IITS). "I'm more of a professional manager — more comfortable in a big company."

Okay, this is the kind of story most software CEOs dream about: Rapid growth, year-after-year profitability, and a sweet sellout to a respected industry leader. What's the magic formula? How can you make a buyer like Intuit pay top dollar for your company?

"Have a business growing at an exceptional rate in a market where the potential is very high, and with a model that scalable and profitable," Weiss says.

Simple enough, right?

Hardly.

Still, listening to Weiss is both interesting and instructional. Here are his pointers for software success, based on first-hand experience.

Tip #1: Focus on the critical few.
This mandate — top on Weiss' list — pertains to sales and marketing. "If you don't make your numbers, nothing else matters," he says.

"Sure, you've got issues to deal with all sides of the business — I've got HR, finance, development — and I get 150 emails a day. But, which ones do I read first? I read sales. Everything else in your company will fall in line if you focus on sales and marketing."

Blue Ocean/IITS spent 35% to 40% of revenues on marketing and sales, Weiss says. "It's been pretty much in that range throughout our history," he says, "but if anything it's gone up a little bit. One reason it's high: We actually spend a lot on sales for a phone sales organization."

Tip #2: Increase your close rate with a clear message.
Blue Ocean/IITS converts 40% to 45% of hot leads to sales, Weiss says. One reason for this killer rate: A clear understanding of what Blue Ocean/IITS is selling.

"It's pretty well understood what we do: It's help desk software," Weiss says. "I didn't spend 15 minutes with you explaining what we do. And, that's been the problem with software — it's all techno babble, and it's a hard sell."

Blue Ocean/IITS also sells product training for scheduled classes held at the company's facility in Florida, or they'll send a trainer to the customer's site, assuming the deal the size justifies it.

"We also offer a 'Quick Start' option," Weiss says. "We'll send a consultant out for a day or two to get them up and running — but that is by no means required."

Tip #3: Find your market strength, and swing for the fences.
" There are probably hundreds of vendors in our market, but they divide themselves up pretty nicely," Weiss says. "We target the small and medium-size business; we have some Fortune 500 customers, but we quite honestly get them almost by accident.

"75% of our business is with companies that have 50 to 500 employees. In that market space it's highly fragmented, and we took a very aggressive position."

These smaller-size customers can't spend hundreds of thousands of dollars on help desk software, so they call Blue Ocean/IITS partly because they're attracted to the $495 starting point.

"At $495, most of them don't have much to lose," Weiss says. "We are the value leader."

To emphasize the "out of box experience," Blue Ocean/IITS includes a demo CD of the product in its direct mail. "It's a full working version of the product," Weiss says.

"It's capacity constrained — you can only have a certain number of records in the database, which limits it to 10 nodes — but if you're a 10-person company, you've got a pretty good deal. However, not many 10-person companies buy helpdesk software anyway."

Tip #4: Build an expert sales team.
" Our sales force goes through extensive training," Weiss says. "When the customer calls up, they're getting someone who knows the product inside out."

In fact, most of Blue Ocean/IITS' 14 sales reps are Microsoft Certified System Engineers. "We pay well above the market rate," Weiss says. "These people can make six figures." The sales cycle is 30 to 60 days, and reps are assigned geographic territories.

Outbound calling is limited to qualified, warm leads — and that's a change from Blue Ocean's past. "We didn't do any outbound phone in the early days," Weiss says. "We didn't need to. Nowadays, we follow up on the warm leads; if someone requests info from the Web site, we'll call them."

Although the outbound calling is limited, Blue Ocean/IITS pursues the valid leads relentlessly. "We will chase hot leads until we know they've gone with another product or decided not to implement," Weiss says.

"At that point, we'll move them to 'inactive' status. Then we'll go back through the 50% that didn't close, and see if we can get them hot again." The amount of time before revisiting inactive leads varies, Weiss says: "It depends on other activity, and what's going on in a particular rep's territory."

Blue Ocean/IITS uses resellers in Europe, Latin America, and Southeast Asia. "They drive the product for us," Weiss says. Reseller discounts range from 10% to 35% of the invoiced amount.

Localization is handled by HQ; non-English versions of the product include French, German, Italian, Spanish, and Portuguese.

Tip #5: Do no marketing you can't measure.
The company spends about 15% of revenues on marketing programs, and Weiss estimates that 80% of that goes to direct mail.

Why the singular focus on direct mail? Because Blue Ocean/IITS has a formula that works, Weiss says. "Direct mail has the highest return, and has always been the most measurable and testable," he says. "We know the time periods for response, and the numbers are big enough that we can predict what we'll get in a rollout."

Blue Ocean/IITS campaigns typically get a little under 1% on phone-in response, Weiss says. When Web and e-mail responses are included, the total is a little over 2%.

The Web and e-mail leads aren't as hot as the phone leads: "We have to move the warm leads to hot — but it's still a lead," Weiss says.

Interestingly, Blue Ocean/IITS has done nearly all of its direct mail the old-fashioned way: printed letters, inserts, and snail mail.

"I see us moving more into e-mail," Weiss says. "We were focused on paper because that's how we grew up. We had a machine, and we didn't have to invest a lot to change that. Now that we've grown a bit, we can take some time to test e-mail."

With 80% of the marketing budget going to direct mail, there's not a lot left over for other campaigns, but Weiss is neither complaining nor apologizing.

"We have not done PR," he says. "We do some banner ads and search engine placements, and go to two trade shows per year. It isn't that we're religious about two, but there are a couple trade shows that are help-desk specific."

The bottom line: Weiss doesn't like squishy marketing. "You need to test everything," he says. "Don't assume that even the smallest thing won't have an impact. Build a model, and measure everything against the model. If you have creative change, test it before you go whole hog.

"For example, when we were purchased by Intuit, rather than switch our envelopes to Intuit, we tested two versions for two months: 'Blue Ocean, now a division of Intuit,' and 'Intuit Information Technology Solutions, formerly Blue Ocean';the latter worked the best."

Weiss calls his direct mail copy "pretty straightforward": It's a two-page letter from the founder, or a letter from the head of development, or letter from sales. In the early days, the founder worked best; as we got bigger, the letter from the founder made us sound small — so the letter from the VP sales made us sound bigger." In addition to the letter and demo CD, mailings typically include a product slick.

Of course, the importance of timing in direct mail can't be ignored: "For one campaign, we were testing teaser copy on the outer envelope," Weiss says. "We had queued up a large test where the envelope said, 'Do not bend or X-ray' — because we include a demo CD. Well, that one dropped about two-and-a-half weeks after September 11. That didn't help our response rates."

Given his experience and success, we figured Weiss would be a good one to ask about common mistakes he sees in the software industry. He didn't disappoint us; here are his Top Five software business bungles:

Software industry mistake #1: Running your software company as if it's a totally unique business.
" People tend to run software companies different than they run hard goods companies, and they don't need to be different," Weiss says.

"In the early days, people viewed software as a highly technical product that you can't run like an assembly line. Well, Russ and I tried to run the company more like a manufacturing environment than a software company.

"We pay attention to every expense — margin is a critical item. We try to minimize outages or downtime. How many days do people actually work? That's something we pay close attention to."

The focus on margin leads to some atypical cost containment: Weiss says it's become an in-house joke — which also happens to be true — that for its first 10 years in business, Blue Ocean didn't have its own photocopier; they shared one in a business suite.

Naturally, this leads to some cultural differences with the stereotypical free-wheeling techie haven. "We never had the lounges or ping-pong tables," Weiss says. "People are here with a job to do — they are either on the phone or in their cubicles. Now, the flip side of that is that we don't ask them to take any work home with them."

Software industry mistake #2: Treating software marketing as if it's totally unique endeavor.
Because marketing is his background, Weiss has an especially dim view of the notion that your next great marketing person must come from the software industry.

"If I were looking, I'd try to find someone from a high-volume, direct industry," he says. "That could be publishing, consumer goods, insurance, or a non-profit. I'd look at places like office supplies, catalog companies.

"I'm not opposed to software experience — in fact, the gentleman I hired to replace me came from a software company — but the point is that the business model doesn't necessarily require software operational experience.

Software industry mistake #3: Obsessing about promoting and hiring from within.
" As you grow, you want to give people internally a lot of opportunity," Weiss says. "But you have to balance that with bringing in the absolute best people from the outside. I see most software companies erring toward the former.

"It's a difficult thing to do. Hiring outsiders is going to cause some short-term pain and morale issues, but you have to get the edge — and it will benefit everyone as the company grows."

Software industry mistake #4: Failure to focus.
Weiss is ruthless about this: Your operation must be driven by results. "We have one product, we have one way of selling it, and although we did a lot of testing in our direct mail, we have one primary vehicle, and if we find that one produces better results, we'll drop the one that isn't performing as well."

Related to this mathematical focus, Weiss says, is the all-too-common request for proposal (RFP) that gets tossed over the transom. "We used to get a lot of RFPs," he says. "We'd read them and we could dream, but we knew our odds of winning were small.

"It would take a full-time person to work on and respond to an RFP, which means taking someone off the phone. To us, missing three or four or five days of sales time on the phone — where we know that person was going to do X in sales over those days — well, that was a luxury we could not afford.

"Our 14 sales reps did $40 million last year; you can do the math." Yes, we can: That translates to $2,857,143 in revenue per rep per year. If we assume 260 business days in a year (after weekends, holidays, time off, etc.), that's $10,989 per rep per day.

So, if a rep spends three days on an RFP — and that's light, in our experience — and you've got a 25% chance of winning — a fantasy, in our view, since most RFPs are stacked in advance — that means the RFP has to be worth at least $131,868 to be worth pursuing.

For a company with a $495 product, Weiss is right: It doesn't pencil out.

Software industry mistake #5: Over-investing in technology for technology's sake.
"I think we've got a good product, it's sound, and it solves real problems," Weiss says. "But just because a new technology comes out, that doesn't mean we have to go out and invest in it.

"We didn't jump on .NET, or handhelds, or any of the rest of it. I think people over-invest in fads, and lose track of what the customer wants."

This singular focus on sensible development helps to keep Blue Ocean/IITS R&D costs well below the industry average: the company spends just 5% of revenues on its team of 25 to 26 developers.

"I'd like to say it's rocket science, but it's not," Weiss says. "I used to be one of those folks: I used to focus on the technology, and I used to think, 'If you build it they will come.'

"It's hard to knock — Citrix is a really interesting company, and people came for their unique technology. But this is the opposite approach. In the software industry as a whole, there are fewer and fewer innovations out there."

Weiss says the Blue Ocean innovation came from founder Russ Hobbs: "To Russ' credit, he realized that help desk software was at the point where it was about to be adopted by the masses. Rather than wait for that to happen, Russ said, "That's where I'm going to start.'

"Ultimately, he had the right vision. We hadn't built this massive cost structure in, and we started growing very quickly as help desk software moved beyond the early adopters."

Another example of Blue Ocean's extraordinarily thin expenses: General and administrative costs are just 8% of revenues.

"The way you win in a commodity business is that you don't laden yourself with costs you can't support, and you don't invest in things that won't truly make a difference in your product," Weiss says. "But you do invest in the sales and marketing that will extend your commodity reach."