This is the first in a two-part interview series with Mark Garrett, the legendary ex-CFO of Adobe. Under his guidance as Executive Vice President and CFO, Adobe completed the fastest transition to a cloud-based subscription in the software industry. A “people’s CFO” with an MBA in organizational behavior from Marist College, Mark is just as comfortable talking about numbers as he is about leading and developing teams. In this first section, we’ll get an inside look at the Adobe transition story, and next week we’ll hear Mark’s thoughts on the role of the modern CFO.
So Mark, lots of people have heard the Adobe subscription story. It’s one of the most popular chapters in my book. Can you give us an inside scoop, something folks haven’t heard before?
Well, I’m not sure how much attention this point gets, but the whole story started with the great recession. The 2008 recession really hit us hard. It shed light on a few challenges with our existing perpetual revenue model: slow growth in creative professionals around the world, expensive entry price to our offering, customers skipping versions, two-year product upgrade cycles, piracy, and no recurring revenue. As you know, in a software company when revenue drops in a recession, it just flows right down through the P&L, and as a result we had to do layoffs. It was awful and Shantanu (Shantanu Narayen, CEO of Adobe) and I looked at each other and we said: you know what, we should never have across the board layoffs again. This is just bad management. It’s bad on us.
So I started to look around at SaaS companies, and keep in mind in 2008 there was not a lot to look at. But I definitely noticed that Salesforce managed to sustain their revenues fairly well, all things considering. Theirs held up, while our revenue was down 20% to 25% overnight. It was brutal.
That’s a really powerful point. You should never have to do general layoffs. Talking with my SaaS counterparts about the COVID-19 crisis, we’re really grateful for the stability that this model is giving us right now.
Right. So it started with that premise, to drive recurring — no more mass layoffs. And when we investigated a subscription model, the more benefits we found. On the product side, for example, it could help us solve a lot of problems. Lots of customers were skipping versions and refusing to upgrade for years at a time, so we were spending a lot of money on R&D and not getting the benefits. The product itself was expensive, so it was difficult to bring more people in the door, and we had a lot of piracy.
On the investor side, we noticed a lot of people trading on the mystery and selling on the history of our product releases. By that I mean investors would buy us on the new product announcement, then sell us six months later on the sales numbers. So the stock was just going up and down, up and down — I did a regression analysis and saw that we were basically stuck at 40 bucks.
I just checked Yahoo! Finance and Adobe is at $457 now.
Right. Back then the company was profitable, but we were only growing in the single digits. We just weren’t that exciting as a business. So we had one of those famous exec offsites. And we said, look, this model is in big trouble and it’s a cliche, but let’s not waste a good recession. Let’s figure out what we want to do. Now’s the time to do it, because the world’s a mess. And we can kind of do it a little bit more under the covers. And you know, if the stock goes down, the stock goes down. But we’ve got to change this model because three to five years from now, we’re going to be in big trouble if we don’t do anything.
So did you decide to go all-in on subscriptions, or did you do some experimenting first?
The latter. We did an experiment in Australia. And all we did is we offered the box as a rental. So we said, you know, what if instead of laying out $2,500 for Creative Suite, we charged you around $80 a month? And what we found was fascinating. Forty percent of the people that chose to subscribe were brand new to Adobe. And that was the icing on the cake. Because then we realized we can bring in a whole new user base.
So the Australian experiment was a success. But you decided not to just lease the box. Why not?
Because it was really just a leasing model, and with leases people just generally do the math to figure out whether it makes more sense to buy or lease. Instead, we wanted a really compelling new product experience for the customer in a pure subscription offer. But in order to do that, the product had to change pretty drastically, right? I mean, we were still selling boxes. So the product team did a phenomenal job of coming up with a true cloud-based offering where you could sync across devices, you could store data in the cloud, you could share with other people, you could collaborate. It was completely differentiated. And we thought it had enough value that people would pay for the subscription.
But this is obviously a huge lift — a huge investment, a huge reorganization, a complete re-imagining of your product and value prop. It’s not surprising that it takes a while. The subscription product came out in 2012, right?
Yes, but we kept the old version for a while. So you could still buy perpetual, but we said, here’s this new Creative Cloud offering that’s got all these great attributes to it. We priced it in a way that we thought would attract people. We didn’t want to penalize people, especially the people that were not skipping versions. And you know, it started slowly, but eventually the subscription ramped, and people saw the value, they saw the product attributes that were more compelling. And we started growing this subscriber base. In the end it took us about three years to convert $2 billion in perpetual sales to $2 billion in ARR.
It’s an amazing story. Nine out of ten CFOs wouldn’t have had the courage to pull it off. What gave you the confidence to do it?
Well, it all starts with the ability to recognize a problem. You know, if you think about Blockbuster, they never recognized they had a problem with Netflix coming along. When you recognize you have a problem, you get alignment. In 2008, we had the whole executive team lined up. Second, you need to experiment. After all, that’s a really fun part of the job. Australia was a huge lesson for us. And third, you need to stick to your convictions and be transparent. There were a lot of customer protests at first. We could have easily slid back to perpetual sales. We had to show all five of our core constituencies — investors, customers, employees, partners and the board — why this was a better way to go. And we had to push them a little bit. And in order to do that, we had to over-communicate like crazy.
Great. And on that note, next week we’ll broaden the scope a little to hear your thoughts on what makes a modern CFO successful.
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