Converting from Legacy to Selling Managed Services—Did FireEye Ignore Sales/Marketing Change Management?

Last week cybersecurity leader FireEye released long-anticipated results that fell below market expectations. The market reacted quickly as Fireeye’s stock value fell another 15%, trading in the $15—$18 range (at one time during 2014 the stock traded as high as $80). The company announced layoffs of up to 400 employees as part of a restructuring.

The problem according to FireEye was weakening sales in its Services Division. According to CEO Kevin Mandia who replaced David DeWalt last May (Mandia came into the company when his company Mandiant was acquired by Fireeye in January 2014) “The average duration and size of each incident response engagement was smaller than in years past and as a result, we saw lower services growth than expected.”

Many analysts were skeptical of this explanation. A note from JMP Securities put it bluntly:

“In addition, our checks suggest that turnover at FireEye has increased significantly over the last year and we believe the planned workforce reduction will further hamper morale. While we believe market demand issues may have impacted FireEye, we believe the magnitude of the miss reflects company specific challenges, such as sales execution issues, competitive pressures, and maturation in its core market.”

While we agree that these are all challenges the company faces, we suggest that a more systemic issue may have been in play. In Fall of 2014, FireEye introduced FireEye as a Service, thereby turning overnight from a legacy software company into a managed services company. FaaS was offered with or without complete outsourcing of the monitoring program using FireEye tools to FireEye’s own staff or a qualified FireEye Partner. In May 2016 The Motly Fool identified FaaS as possibly “FireEye Inc.’s most important product”. CEO David DeWalt was quoted:

“[I]n 2015 we built [FaaS] into a $100 million business in less than 18 months, grew it at over 100%, and scaled to hundreds of customers,”

Two days after The Fool published the article DeWalt was replaced by Kevin Mandia as the share price plummeted in the wake of poor results and a slashed sales forecast.

What happened?

We can’t know for sure, but we think there may be some clues in “sales execution issues” and increasing staff turnover. Technology companies often struggle to manage the transition from selling product to selling managed services. To be sure, there are major changes to the revenue model. In FireEye’s case, subscriptions are billed in advance for a year, but the revenue is recognized month-to-month. That’s not the whole story though, making the change to managed services  also forces major changes to the processes by which a company markets, sells, and supports service products. Here are some of the more common areas that must be addressed in order to make the transition to selling managed services successful:

Sales Team Re-alignment—Sales re-alignment is made particularly difficult when the product is offered as licensed software and under a subscription (SaaS) model as is the case with FireEye. We believe that the temptation to split the team into two divisions must be resisted, as these two groups will then invariably cross-call into the same organizations, generating confusion and losing the sale on both sides.

Sales Team Re-training—the need for extensive re-training is often overlooked. The usual result is a Sales Team that focuses on their comfort zone, which is the legacy product. Another issue is the need to develop an aggressive retention effort to keep first and second-year Clients in the program. While this activity may rightly belong to Customer Success (see comments below) often neither group is trained for the mission or compensated for success. A SaaS revenue model depends on long-term relationships for success, so if the SaaS model is perceived as a failure, the natural reaction is to defer back to legacy selling.

Sales Process Revision—Offering a product under a SaaS model presents to the Client as a monthly Operational Expense (OpEx) as opposed to a Capital Expenditure (CapEx). By the very nature of this acquisition, the pool of potential clients spreads considerably, and within each Client there will be more people directly involved in the acquisition, as this may no longer be a C-level issue for many companies. Managing and nurturing this expanded pool of leads can be beyond the capacity of the traditional “Lone-wolf” Sales Executive. A different approach is needed, and this is where many companies have turned to marketing-based programs to qualify leads, and installed Business Development Teams to engage potential Clients far in advance of a potential Client beginning an acquisition process. This radical expansion and revision of the Marketing-Selling process cannot be accomplished piecemeal; it must be approached from the top-down and redesigned to fit a company’s capabilities and the markets it sells into.

Compensation Plan Revision—Sales Professionals respond best when their sales successes are swiftly rewarded with compensation. Without going into detail, it is safe to say that a revenue plan that recognizes revenue monthly over the life of a contract does not generally encourage a large cash rewards at the start of the agreement. Again, if sufficient attention is not paid to adjusting the compensation plan, Sales people will focus on activities that bring the biggest cash reward, i.e. legacy sales. Or they will leave for a better opportunity.

Persona Development and Message Mapping—The people who buy a SaaS product with OpEx funds are often not C-level executives, and very often they are part of an acquisition team that must be sold to as a group. New buyer personas must be developed and mapped to targeted messaging.

Lead Generation Expansion—As mentioned above in the process revision discussion, Lead Generation must be positioned to manage a much broader group of Leads. Often a BDR team is put in place specifically to qualify leads for closing, and often this new team replaces headcount in direct sales as some legacy sales people depart for better opportunity. A whole array of tools has come on the market for acquiring and managing leads, and new processes such as account-based selling are being embraced.

Customer Success Re-alignment—In many companies Customer Success is an extension of the implementation Team. Sales is not their mission, and they assume that the Sales Team is responsible for Customer Retention. It is critical that the Customer Success Team be re-trained and their compensation adjusted to encourage aggressive pursuit of customer renewals.

The real danger in converting a business plan from legacy software licensing to subscription-based SaaS is that none of these activities described above can be neglected, and for the most part they must be completed in unison, an exercise in Sales/Marketing alignment that most companies have never attempted. Engaging in this work after the introduction of the SaaS product, or ignoring parts of the process altogether can lead to flat or declining sales right when an uptick was expected from the new product introduction.