Beyond ITSM - ServiceNow expects 50% of new business from ‘emerging workflows’ by 2024

By Derek du Preez

September 13, 2021

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ServiceNow CEO Bill McDermott recently said that the company plans to triple its revenues over the next five years, to $15 billion. And instead of acquiring new revenue streams through M&A activity, the workflow vendor is pursuing organic growth - an ambitious strategy, by any measure. 

As diginomica has noted previously, reaching $15 billion in this timeframe isn't a given. But to get a better understanding of ServiceNow's route to this target, Chief Financial Officer Gina Mastantuono gave some interesting details about the company's growth strategy at the recent Deutsche Bank Technology Conference. 

Mastantuono noted that ServiceNow's ‘land and expand' approach with customers is helping it win contracts with a larger ACV over time, as buyers look beyond ITSM and consider where else the Now platform can bring benefits. ServiceNow's core customer base still resides with its ITSM offering, but it has been expanding into other functions in recent years - particularly where workflow intersects with customer/employee engagement. 

Mastantuono also pointed to the fostering of ServiceNow's partner and service integrator community as a key driver of growth, something that was lacking prior to CEO Bill McDermott coming on board. 

The CFO's comments are noteworthy as they point to a future (if successful) where ServiceNow's enterprise-wide platform play becomes a reality for the vendor. Given that workflow touches all corners of the enterprise, there is a solid opportunity there - if it can effectively execute on explaining to companies the significance of workflow redesign. 

Mastantuono noted at the conference that COVID-19 has fuelled a number of trends in the digital enterprise market, which ServiceNow is well positioned to take advantage of. She said: 

The secular tailwinds between digital transformation, cloud computing and workflow have all really intersected at this incredible moment in time that we find ourselves a part of. And ServiceNow is really so well-positioned to take advantage of that opportunity.

This business model is so resilient and predictable. We have such a robust backlog. Our RPO (Remaining Performance Obligation) exiting Q2 was just under $10 billion, at $9.5 billion. We generate 80% of our business from existing customers and they really understand ServiceNow is mission-critical to their operations and their business. And our renewal rates are phenomenal at 97%, 98% depending on the quarter and we don't expect that to change.

Expanding beyond the core

Although the total addressable market for ITSM and asset management is still large, ServiceNow's expansion beyond ITSM is critical to its future growth. It's clear that McDermott sees ServiceNow as an enterprise-wide platform play, and with the company's technology architecture and single data model, that is sensible. With that in mind, Mastantuono noted how ServiceNow is gaining traction with buyers beyond ‘beyond the core' (the core being ITSM). She said: 

These other product and portfolio lines are really growing faster than the core. Our core remains extremely strong as well. But that expanded breadth of our product suite has really allowed us to land larger deals with multiple products and with new customers. And we are also landing new customers, net new customers outside of IT, which is fantastic.

In 2024, we expect about 35% of our new business to come from customer and employee workflows, with creative workflows driving at 20%. So, more than 50% from these emerging workflows, which is just phenomenal. 

ServiceNow is pursuing a ‘land and expand' strategy and Mastantuono said that the company is seeing "great growth" in average customer spend this quarter. At the end of Q2 it had over 1,200 customers paying over $1 million in ACV, which is up 25% year-over-year. That includes 62 customers paying over $10 million in ACV. Mastantuono added: 

The average deal sizes are growing 50% year-over-year. And so we are really seeing that this solution sales approach that delivers full capabilities of our product portfolio is really continuing to drive more multi-product deals. 

Mastantuono said that organizations' investments are focused on app modernisation and operational transformation, which is forcing IT and business functions to work closely together and move as quickly as possible. As such, ServiceNow believes that it's low-code offering will also be a key driver of growth going forward. Mastantuono said: 

[IT and business] are really all focused on driving greater efficiency, being more agile. And there are just not enough developers to build the applications that enterprises need to really transform their business. So you're seeing this low-code trend because there is just this huge unmet need in application delivery. 

And so we see a really powerful partnership emerging between IT and the lines of business around low-code. And as security is becoming more and more important than ever, IT is really looking to get a handle on the app proliferation in their organizations, right? And so that partnership between IT and the business on app development is going to just be more important than ever. 

And so with our Québec launch back in June, we delivered new low-code tools that really help to move that app development out of the developer and really beyond the borders of that engineering organization into the hands of the citizen developers.

Fostering the SI community

Mastantuono also said that ServiceNow will continue to keep an eye on M&A opportunities, but that she expects the company will ‘continue to run the same playbook' of acquiring companies for technology and talent tuck-ins, rather than large-scale acquisitions. The executive team is focused on maintaining the common platform and data model, as it sees this as a competitive advantage. She said: 

We are the only born-in-the-cloud software company to have reached $5 billion in revenue without large-scale M&A, and we're super proud of that. It really helps us when we talk about that one beautiful data architecture model of our platform. 

So obviously, when it comes to large-scale M&A, we're always looking at the best possible opportunities that would bring tremendous value to our customers and shareholders. But it means being very disciplined about valuation. It means being very disciplined on how we think about things.

But it's the systems integrator community that ServiceNow sees as a huge growth driver for it going forward. As noted above, this was something that the vendor had struggled to stimulate prior to Bill McDermott joining the leadership team, but now seems to be gaining traction. Mastantuono said: 

They are critical in driving successful implementations and really helping tailor our product to different industries. And they are absolutely very strong thought partners with us, and they are a meaningful enabler on our path to $15 billion. 

Seven of the top ten global advisory and system integrators have committed to build $1 billion-plus ServiceNow technology practices and managed services offerings over the next 3 years, with the remaining three of the top ten expected to commit to that $1 billion-plus this year. 

My take

Clearly ServiceNow is delivering on its growth promises at this moment in time. The company's recent figures highlight that. But as the company continues to expand beyond its core ITSM function, it needs to find its groove with articulating the ‘opportunity of workflow' to lines of business. Thankfully ServiceNow has a decent record of putting customers front and centre to showcase these use cases, which we've seen at a number of events. But as I've said previously, ServiceNow needs to think about how it can bring best practice to the fore for companies thinking about the intersection of employee+customer experience and the role that workflow plays in that. This means understanding enterprise-wide challenges, as companies think about making work flow more easily through their organizations - having that enterprise-wide conversation with people of influence is critical.