RedHat spending $20 Million to Manage Subscription Billing

August 6, 2008

by Tien Tzuo


I recently attended the Pacific Crest 10th Annual Technology Leadership Forum in Vail, Colorado, a fantastic event where you can hear the CEO and CFO’s of so many companies discuss the state of the technology industry.


One session stuck with me – the one with Charlie Peters, the CFO of RedHat, a subscription-based open source technology provider. Charlie Peters is a pretty impressive guy. When asked about his operating expense, Charlie revealed the following interesting fact (highlights are mine):


You should keep in mind that we have one major project that we’re working on this — we’re spending about
$2 million a quarter
on some systems work. And it’s all the systems on the customer facing side of the business that go from the time you take a lead, to develop a quote, to entitle an invoice and then collect customer data around in all those entitlements and all the way through renewals. We have 10-20 systems there that need to be integrated, that were designed for a [much smaller] company … and we’re heading to a billion and beyond.


(You can find the full transcript of Charlie’s Q&A session online).


Basically, RedHat is spending $2 Million per quarter on their quote-to-cash systems. Charlie further says:


[this is] going to take us two years, two-and-a-half years on a systems — internally we’re calling it transformation, but you could call it system refresh, system scaling, whatever you want to call it, which is involving a lot of time and effort, but I think it’s going to have a good payback.


At $2 million a quarter for 8-10 quarters, this means that RedHat will spend approximately $16 to $20 million to create the operational systems that they need to scale to a billion dollar company. Not their SFA or accounting system, but the operational system in between that today is spread across 10 individual applications.


This may seem shocking to some, but this is very, very similar to what we found from our Salesforce and WebEx days, and what we wrote about in our July 22nd post, “Oh the Pain.” Charlie, we feel your pain. Subscriptions businesses are hard; the quote-to-cash process in a subscription business is very different, and the fact is that there aren’t a lot of systems out there that are designed just for their needs. Hence the $20 million price tag.


I think we’re going to go ahead and call Charlie. The train may have left the station there, but it can’t hurt. And if you’re looking to become the next RedHat, or the next Salesforce, or the next Netflix, give us a call. Hopefully we can save you millions of dollars (and a lot of pain).