Rearden Commerce: Patrick Grady Unplugged (Part 1)

Rearden Commerce is a company that I've followed for quite some time on Spend Matters. They're a vendor that I believe has a very special and unique value proposition to help companies reduce and monitor personal services spend categories including travel, dining and express shipping. But Rearden is also a vendor that has generated some controversy over the years owing in part to the challenges it has had proving out what I'd describe as an "all or nothing" business model. After a recent Rearden discussion in the blogosphere led me down multiple research paths, I decided that I wanted to get to the bottom of what was going on inside the organization and go straight to the source. Fortunately, Patrick Grady, Rearden Commerce's Founder and CEO, is about as direct as they come and agreed to answer all of the questions I wanted to ask him including those pertaining to growth challenges and opportunities, layoffs and overall company direction. Because of the length of this interview, I will present his responses in a two-part series. Check back tomorrow for Part 2. In the meantime, I'd like to thank Patrick for engaging in such an open and honest dialogue. I wish we had more of it in this sector.

Why did the Rearden model take so long to prove out?

Let me provide some much-needed context here.

We commenced operations in the first quarter of 2000, immediately before the bursting of the Internet Bubble. The ensuing several years, which are commonly referred to as "nuclear winter", were far more difficult on us than any other company that comes to mind. First, we had raised a seed round of only $2 million before the bubble burst as opposed to the war chests of most others. Second, our initial target market was the "Enterprise" and large corporations simply didn't begin buying in any consistent manner from start-ups again until early 2004. Third, more than a simple web application company, we were building out a general-purpose e-commerce and application platform and our own application in parallel. In summary, we had virtually no cash, no customers and enormous technical complexity to contend with from 2000 - 2004.

Additionally, and notably, unlike most business applications which are simply automating a business process and then charging a license fee, Rearden Commerce is a network-effect based business model along the lines of an eBay or Amazon. Thus, we need a critical mass of users to attract a critical mass of suppliers and application developers to not only build a significant and sustainable business but to clearly serve as a more compelling alternative to standalone "stovepipe" applications. This is a zero-sum game. You either reach this tipping point or you don't.

To the extent that it would be prohibitively expensive and time-consuming to do this organically via a direct sales force, it was always our objective to secure large-scale distribution through partners. Accordingly, while Rearden Commerce is a nine-year old company, in many respects there are two Rearden's; one pre-American Express and, the other, post-American Express. Since American Express began to onboard customers in Q4 2006, we've grown from fewer than 20 corporate customers to over 4,000. The validation of American Express has led to scores of other distribution partners including 55 travel agencies, CHASE and PayChex, with many more to come.

Like any network-effect based model, we benefit from increasing returns to scale (users), breadth (content) and usage (transactions). With critical portions of the platform and application in place, it's now a function of driving these levers via partners such as American Express and CHASE that have user populations measured in the tens of millions.

Revenues today are in the tens of millions annually and our key performance indicators vis-à-vis customer acquisition, user populations, usage and transactions are all in line with a hyper-growth network-effect based model.

It's widely understood that comparable attempts at this vision, such as HP's e-Speak or Microsoft's Hailstorm and Passport initiatives, burned through well over $500M without achieving any commercial success. We are very proud of what we've accomplished with $200 million of invested capital. We have thousands of companies and over 2 million subscribers today and are entering the consumer space this year.

With a solid value proposition, what has been the stumbling block to engaging senior procurement and finance executives and getting them excited so far?

I'm not sure we've seen "stumbling blocks" that are unique to Rearden Commerce per se, so let me answer it in a slightly different way. First, like any company selling to the business market, you must tailor product, pricing, packaging and promotional activities to your target market segment. We are addressing the Enterprise, Mid-Market and Small Business segments and they have very different buying criteria.

In the enterprise market, applications are usually purchased in connection with an RFP process that is fundamentally flawed insofar as it places a premium on features over usability and too many constituents are tied to an ever-lengthening list. In most business application areas, vendors reach a state of diminishing returns vis-à-vis features and functionality by year 3 or 4 and then begin to add features that are rarely, if ever, used and thus deliver no value. Everyone is "in on it" as analysts and vendors alike would have little to talk about and/or monetize if they admitted that the problem had been solved and economic buyers would have little job safety if they told their bosses that they had solved the issue.

A terrific contemporary example is in the CRM market where Siebel had hundreds and hundreds of features that no sales rep could ever imagine using (and never did), yet the analysts continued to correlate the ever-growing feature list with "vision" and "ability to execute". Siebel used this analyst air-cover brilliantly against other less feature-rich client/server CRM companies as a competitive advantage.

This paradigm has been entrenched for years but is beginning to evolve as the "consumerization" of business apps, delivered via a SaaS architecture, as it becomes more prevalent due to the evangelical zeal, missionary work and documented success of companies like Companies like Rearden Commerce and are finally getting companies focused more on delivering a world-class user experience to drive adoption than on features that don't move the needle.

In our particular market, this is manifested in a number of obvious ways as feature-rich RFP's for stovepipe procurement application areas (i.e. Flight, Hotel, Car Rental, Sedan, and Shipping etc) have been prevalent with no focus on the employee experience and how it influences usage and therefore consumption of negotiated rates with preferred vendors.

By focusing on this legacy vendor selection process and neglecting the end-user, companies have reached a state of diminishing returns as the employee now spends hours and hours each week trying to manage and coordinate scores of user-names, passwords, applications, business processes, preferred suppliers, calendars and devices in a manual and time-consuming fashion. The Internet and Intranet are terrific at aggregating all of this, but it remains impersonal and not at all intelligent. As a result, adoption rates of these first generation applications are anemic.

We set out to leverage web services to integrate all of this into a single, personalized application that approximates a Personal Internet Assistant. Like a great "analog" assistant, the Rearden Personal Assistant understands a user's identities, preferences and access rights, knows their location and the context of their day and helps to manage their life in a m

uch more personalized and integrated way. This invariably leads to higher adoption, greater savings, a lower total cost of ownership and better business process agility.

Small and midmarket businesses, given their limited resources, are not encumbered by the legacy vendor selection process and place a premium on self-service and usability. Here, not surprisingly, we have very quick sales cycles.

Why has the channel approach to sales yielded solid traction so quickly?

We've partnered with companies that are # 1 or # 2 in their respective markets, have the brand and market permission to migrate their customer bases to us and provide logically adjacent and integrated product capabilities that enhance our value proposition. This formula, coupled with our strong value proposition, has allowed for strong channel success.

How is usage ramping up through the channels and the private label marketplace?

It's largely dependent on the channel provider and where they are vis-à-vis training their sales forces to sell the Rearden Personal Assistant and platform in its entirety.

As I said, it's about increasing-returns and the breadth of content is a key driver. Thus, to the extent a travel agency reseller has only sold the travel application component, there logically won't be any adoption in the other areas of spend. Conversely, to the extent they sell the complete solution, the user has more and more reasons to interact with the application and we see adoption rates increase across all areas. This is basic human-factors interaction principles at work. Our partners have a learning curve and each partner is progressing at different rates. Overall, we are very pleased and our KPIs look good although there is always room for improvement.

Pertaining to the layoffs last fall ... there are a lot of people out there who think Rearden was less than fair in its approach given its cash position (e.g., limited or no severance). What is your perspective on this?

First, let me respectfully but very clearly push back on the assertion that there are "a lot of people out there" who think that we were less than fair. For the record, we laid off approximately 40 full-time, salaried employees out of 412. Additionally, a number of these 40 were underperforming in connection with our regular focal review process and some were unfortunately redundant in connection with recent acquisitions made in the second half of 2008.

Second, life is about expectation-setting and we ask our employees, beginning in the interview process, to acknowledge both the opportunity and risk inherent in joining an entrepreneurial organization that has its sights on something as ambitious as Rearden Commerce. Not everyone is sufficiently self-aware to fully internalize this though. Despite our screening process and the candid discussions about this, we occasionally hire employees who do not fully grok this and have a "big company" mindset. This doesn't make them bad people or incompetent employees. It simply means that they underestimated what's required in working at a company with Rearden's profile.

In November we restructured the company to ensure Rearden Commerce is optimally positioned to achieve our strategic objectives in the current economic climate. We believe that this downturn will be far deeper and more protracted than most others in Silicon Valley and therefore this realignment resulted in the elimination of some jobs.

The decisions in connection with this restructuring were made thoughtfully including consideration for our obligations to our customers, investors and the employees who remain a part of the company. Consistent with our practice since the inception of the company we did not provide cash severance to the employees impacted by this realignment.

We supported the impacted employees by providing 3 months of outplacement services to assist them in the search for a new position. The package includes one on one consultation, professional resume writing and a broad range of additional services based on each individual's needs.

Spend Matters would like to thank Rearden's Patrick Grady for engaging in a candid and open dialogue. Stay tuned for Part 2 of this interview tomorrow.

Jason Busch

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