ISG Software Research Analyst Perspectives

ServiceNow is a global software provider that has developed a cloud computing platform that helps organizations manage digital workflows for enterprise operations. The provider uses its annual Knowledge user conference to educate customers and showcase product announcements. Ventana Research had the opportunity to attend the Knowledge 2024 event and provides this analyst perspective to summarize what transpired. ServiceNow has evolved beyond its traditional audience, beyond IT service management (ITSM) and IT operations management (ITOM), to include workflow optimization for other enterprise departments. The company noted that its net-new average contract value (NNACV) from ITSM is no longer the largest contributor to revenue. ServiceNow offers its Now Platform as modules for customer service management (CSM), enterprise asset management, field service management, HR service delivery (HRSD), ITSM, ITOM, IT asset management, security operations, strategic portfolio management, telecommunications service management and workplace service delivery, among others. At Knowledge 2024, it demonstrated its expansion into enterprise architecture and collaborative work management, which is part of its strategic portfolio management offering. ServiceNow also presented advancements in procurement and finance that help improve supply chain efficiency. ServiceNow also has a module called Creator intended for the developer community. Creator offers a low-code interface that makes writing cloud applications within the Now Platform more accessible to knowledge workers that understand the workflow intent while not requiring deep programming experience. With the diversification of modules and revenue beyond IT services, ServiceNow aims to become the “platform of platforms.” Consolidating various processes, data and tools across line of business to a single environment can enable cross-team collaboration and sharing best practices. What challenges might it encounter in achieving this goal? It has only one product configuration. Versions of the software with a narrower set of functionalities are not offered, putting it out of reach for smaller enterprises looking to improve workflow management. This is a sizeable market opportunity for ServiceNow; however, it would require a different price point and a subset of current features. Similarly, organizations that adopt the software platform and do not assign the resources to integrate and maintain the software may experience buyers’ remorse and low satisfaction. Even so, ServiceNow touts a customer renewal rate exceeding 98%. Several product and partner announcements were issued during the Knowledge 2024 event. Two of note highlight the maturity of the Now Platform database technologies and the integration of generative AI (GenAI) capabilities beyond a simple chatbot interface. Database technology enables applications like the Now Platform to quickly access information from across the organization. ServiceNow has utilized a configuration management database (CMDB) to store and manage information in an IT environment for many years. The software provider announced the release of RaptorDB, combining relational PostgreSQL and columnar database capabilities. RaptorDB enables ServiceNow to integrate with external systems and scale the data. While the full potential of the announcement remains to be seen, ServiceNow had JP Morgan on stage sharing its challenges with consolidating more than 500 onboarding steps and how automating the workflow with ServiceNow has improved efficiency and usability. The example demonstrates the sheer size of workflows that can be automated and optimized. Now Assist is the GenAI chatbot interface available in the ITSM, CSM, HRSD and Creator products, utilizing training data from a ServiceNow domain-specific large language model (LLM). A lack of expertise in AI skills was cited as the most significant challenge for enterprise adoption of AI technologies by 44% of participants according to the ISG Market Lens AI Study. ServiceNow applies a low-code/no-code approach to the Now Platform to reduce the need for specialized skills, and the chatbot interface of Now Assist is familiar to users of enterprise communication and collaboration tools. At the Knowledge 2024 event, ServiceNow announced a partnership with Microsoft’s Teams Copilot to hand off tasks between the two GenAI environments. User queries are initiated through either chat interface, and the context of the query determines when the other tool should be invoked. Microsoft shared that more than 90% of enterprise users start their day in Teams, suggesting that the partnership will be a convenient addition for users of both software. However, the financial feasibility of paying for Now Assist usage (LLM calls) as well as Teams Copilot licenses could slow the adoption of GenAI tools from multiple software providers. General availability of English language training is expected during the second half of 2024, with additional languages and interactions planned through 2025. ServiceNow is finding success with customers who have onboarded to the platform. It has few competitors that offer its breadth of capability for workflow management. The provider has also excelled at retaining enterprise customers. The third, and less often discussed, component is new customer acquisition. The end-to-end customer journey can be described in three parts analogous to commercial air travel: Climbing to altitude; the experience at cruising altitude; and the descent to the destination. The strategies and messaging for each part of the journey are unique. Growing the customer base for ServiceNow relies on making the platform relevant to functions outside of ITSM. In recent financial quarters, ServiceNow cites more than 50% of NNACV are for Now Platform modules other than ITSM. Expanding the total addressable market into line of business activities is where the greatest growth for ServiceNow customers will occur. The selling process that ServiceNow and other software providers face is often met with turbulence. There are objections to be overcome as well as aligning the software platform with value creation for the enterprise. One of the challenges that ServiceNow must confront in addressing new market segments is the “all or nothing” product approach it takes—the Now Platform is the only offering. If the enterprise is solely looking to address intelligent automation, for example, it may only identify value in the robotic process automation (RPA), intelligent document processing (IDP) and conversational automation elements of the platform. As an integrated platform, there is risk of enterprises paying for functionality they will not use. This can create procurement frustration. Upon reaching a safe cruising altitude, commercial pilots announce that it is safe to move about the cabin. The experience is positive and efficient. This stage of the customer journey is signified by ServiceNow customers building workflows and experiencing the benefits of the technology. Ventana Research asserts that by 2026, over two-thirds of enterprises will standardize on a single digital platform for workflow automation and will deploy intelligent automation technologies to eliminate redundant manual work. The Knowledge conference typifies the spoils of having a diverse range of business customers. For every announcement made, an existing customer is brought on stage to explain how these new capabilities aid the enterprise. And with new releases of the Now Platform every six months, ServiceNow keeps the experience fresh while addressing additional types of workflows. Now Assist, the GenAI-powered chatbot, brings data closer to the workforce and offers a glimpse of future use cases. ServiceNow strives to keep customers on this segment of the journey for as long as possible. The end of the journey for ServiceNow customers is equivalent to migration away from or abandonment of investments in the Now Platform. ServiceNow reports that it has a 98%+ renewal rate for the platform, which suggests a high level of customer satisfaction. While adoption by the entire addressable market or 100% renewal rates are unlikely to ever be achieved, enterprise change and the resulting commercial agreements will always be a customer retention factor. Some enterprises question the value received for the investment in software platforms when ROI is not happening or not occurring fast enough. The messaging from ServiceNow needs to address flights at multiple altitudes. CEO Bill McDermott communicates the company’s momentum message with the longest-term horizon, such as, “We just passed $10 billion and have a plan to pass through $20 billion.” A different message is necessary for the installed base of enterprises. It must convey to customers how ServiceNow will deepen the value and commitment to the growth of the platform. And additional messaging must get enterprises to consider the ServiceNow platform. Since the Now Platform is the entire product portfolio, prospective customers must determine if there is a Swiss Army Knife debate—will we pay for functionality that we may never use? This is a real concern for software providers moving prospective organizations through the sales funnel. ServiceNow is in an interesting position of market adoption, and the software provider controls its own destiny: It lacks direct competition. Other software providers offering workflow management do not offer the same breadth of capabilities and may be considered a stepping stone for organizations not yet ready for a ServiceNow relationship. It has a sizeable installed base for the Now Platform that addresses several industries. Furthermore, the software provider has diversified beyond serving only ITSM needs and experienced revenue growth from customer support, security operations and other enterprise teams. Revenues have surpassed the $10 billion mark, and the company has its sights set on $20 billion. Business execution is key to maintaining this position and delivering on the latest announcements. ServiceNow must also establish the value of GenAI in the minds of its customers. The Knowledge 2024 user conference theme of put AI to work embodies the next chapter for the company. Regards, Jeff Orr

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