Service-now Finds Hard Economic Times Are Good for Business

2/10/09

A private software company that arose following the implosion of San Diego’s scandal-ridden Peregrine Systems says its business is booming despite the recession, because its innovative model for offering Software as a Service can help customers shave their IT costs.

Service-now.com was founded in 2003 to meet the same business needs served by Peregrine, which was once one of San Diego’s hottest technology companies. Service-now’s software, like Peregrine’s, helps big companies keep track of their assets, such as computers, software licenses and other IT resources. Privately held Service-now also offers a set of applications that helps IT organizations operate more efficiently by automating processes and helps system administrators manage their help desk operations.

But where Peregrine’s enterprise software had to be installed on a customer’s computer network, Service-now runs the software on its own network, and serves its customers’ needs by offering its Software as a Service. Chief Executive Fred Luddy says recurring revenue is now approaching $20 million per year, and he expects the company to start booking a profit by May or June. “This economy has played very well into our hands,” the Service-now CEO told me. “When things are going well the status quo is seldom questioned.”

By moving to the Web and doing away with management fees, Service-now is able to undercut competitors like BMC and Hewlett-Packard by 20 percent or more, Luddy says. In the current economic climate, those savings have opened doors for Service-now at big companies that might not have shown much interest six months ago, such as a British energy company where Luddy paid a visit recently.

Service-now’s Software-as-a-Service (SaaS) model makes enterprise software less of a sales and maintenance business and more like a utility. Customers pay a subscription fee, sometimes a year in advance. From a revenue perspective, the SaaS business “is relatively the same as being in the phone business,” Luddy says. Since its founding four years ago, Service-now has recruited about 235 corporate clients, including Qualcomm, UBS AG, Deutsche Bank, Royal Bank of Scotland, Hyatt, Starwood Resorts, the National Basketball Association, CBS, Juniper Networks, Cisco Systems, Staples, and General Electric.

Peregrine, where Luddy served as chief technical officer, was forced into Chapter 11 bankruptcy after a corporate accounting scandal erupted in 2002. The company reorganized and was acquired three years later by Hewlett-Packard, which consolidated Peregrine’s products with its OpenView software business. Federal prosecutors in San Diego eventually charged 18 Peregrine executives and business partners with systematically overstating revenues for nearly three years at the public company; 14 have pleaded guilty; the government dismissed charges against three and one is awaiting trial. (An  authoritative blog on the case is here.)

Luddy walked away with a large list of clients that he now counts as Service-now subscribers. About a quarter of the company’s clients are overseas and Luddy says Service-now.com is being accessed in 70 countries around the globe. Luddy also lined up $7.5 million in capital from JMI Equity, a private investment firm established in San Diego by John Moores, who was Peregrine Systems’ biggest investor and longtime chairman.

Service-now.com was able to get things up and running quickly and cheaply, Luddy says. The company is sitting on about $5.5 million in cash, he says.

Service-now spent a year testing its software before it started charging for it. “We sit shoulder-to-shoulder to our customers,” Luddy says. Service-now also made use of several open source software programs, such as a graphing program called JFreeChart and iText, which generates PDF files. “This probably saved 25 years off our development cycle,” Luddy says.

The latest release of Service-now’s software offers mobile access from a Blackberry or an iPhone or any Windows Mobile device. Service-now updates its software three times a year, and users can start trying out the software on the Web in a matter of minutes. As Luddy put it, “We tend to be more like Apple, and our competitors more like Microsoft.”

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