How Jim Chirico has Turned Avaya into a Growing Cloud and SaaS Business
Our team of experts from the Revenue Enablement Institute studies how leading organizations are transforming their commercial models to accelerate revenue growth. We profile growth leaders – CXOs – who are at the forefront of defining, enabling, and leading the execution of the 21st Century Commercial Model.
Jim Chirico is CEO of Avaya (NYSE:AVYA) an enterprise communications and collaboration solutions business.
Over the last four years, Chirico has led a business model transformation by making far-reaching changes to the culture, organization, product portfolio and commercial strategy to become a growing cloud and subscription-driven company. The results of this transformation speak for themselves. Since becoming CEO in 2017, Chirico reversed a decade long trend of secular decline in Avaya’s traditional business to create a business model and management system that is growing and winning in a competitive and dynamic marketplace. Avaya’s growth over the past six quarters has exceeded investor revenue expectations and the stock price has more than doubled in the last 12 months.
Jim Chirico shared how he has been able to lead the transformation of Avaya into a growing cloud and SaaS business.
“I’ve been here 14 years, the last four as CEO,” shares Chirico. “If you look back at the history of the company, the business struggled mightily to post quarter on quarter and year over year revenue growth. In fact, before I assumed the CEO role, we had a consistent decline in revenue for somewhere around 11 or 12 straight years. When a company is struggling like that and constantly pushing a boulder up a hill, leaders tend to spend a lot of time rethinking the business and changing direction. We needed to create a culture of growth and an urgency to move quickly on where we focused, on what investments we need to make to grow faster and to find ways to help our team achieve more aggressive growth targets.”
That type of transformation takes leadership from the top according to Chirico. ”We have made concerted efforts to evolve the management system and create a new operating rhythm and growth philosophy for the company. It’s a different bias. It’s a different level of engagement with our customers. It’s a different management motion where we push the team to play offense and dominate the market by putting the organization on the “balls of their feet” instead of laying back on their heels reacting to the market.” To do so, Chirico had to foster a culture of continuous execution and provide continuity and build the teams’ confidence. “We’ve created a winning culture and a highly competitive environment for our people, for customers, for capabilities, that has helped us to attract talent, win thousands of new customers, and innovate in the marketplace.”
“Our backlog now is more than $2 billion of total contract value,” continues Chirico. “We have won over 1,400 new customers for three consecutive quarters. We’ve signed big deals – more than a hundred deals valued over a million dollars for four straight quarters. Maybe we were perceived as the Queen Mary, but we are aggressively turning the ship even though it is a tight squeeze.”
Jim understands transformation takes time and consistent execution. He likes to talk about the transformation in terms of “chapters” which are concrete steps he has taken the organization through over the last four years. The goal is to move Avaya from the back of the pack, to leading the pack, and ultimately dominating the market in the next several years. The chapters focused on communicating and achieving a finite set of corporate objectives and KPIs to show the team they were on track according to Chirico. “The point of the chapters was to focus everyone in the organization on a few core strategic initiatives and key leading and lagging indicators. We had to be very honest about where we were, but also clear on where we were going.”
The top indicators included top line revenue growth, as well as the strategic component of that growth in annual recurring revenues, software and service sales, and profit contribution. “I would rate growth as our top priority because we are in the middle of a business model transformation from an on-premises business to a subscription service right now, and high rates of revenue growth are essential to making that work. Overall top line growth – most specifically annual recurring revenue (ARR) sales growth in our cloud and SaaS business model is our number one strategic pillar. And that is an area we are doing a great job on. We have grown software and services revenue to almost 90% of our total revenue and our recurring revenues are at 66% of total revenue. We are up 400% from a year ago on ARR, which is a real indicator we are becoming a true SaaS company.”
“A second and related strategic pillar is profitability, which stems from growth in a SaaS model,” he continues. “As we continue to execute on the strategy and double up our ARR growth numbers every year it will grow our profitability over time. This allows us to grow but also remain strong from a profitability perspective with EBITA as percent of revenue in the mid 20 percent of revenue range.”
According to Chirico, the first chapter of the transformation was in 2017 when he took over as CEO. At that time, the priority was to “right the ship”. Revenues were in decline and the transition from on-premise hardware to subscription software and services was not moving fast enough. ARR wasn’t even reported or measured.
“We were an on-premises company that needed to restructure to succeed,” Chirico recalls. “We needed to make sure that we preserved the core assets of the company and the core customer base that we had. We were in survival mode. The company was down four to six percent in total revenue, with the services and software component of revenue in the seventy percent range and annual recurring revenue was negligible.”
“Chapter two was 2019-2020 when the story was more around transition by transforming from an on-premises company to one that was a SaaS cloud offering,” continued Chirico. “We knew that we needed to invest in infrastructure, in innovation, and internal transformation to grow our TAM and restore credibility with our shareholders because we were a recently public company. Also, at the time we were working to stop the revenue decline and improve our overall mix of software, services and subscription revenues.”
“The subsequent chapters leading to 2021 and beyond are around driving cloud, relevance, and growth. We are up on revenue 1% annually. Margins remained in the mid-20% range. Recurring revenues are in the mid-sixties and ARR is up 400% from a year ago. We have recently developed our next chapter which sets out our goals to dominate the enterprise as a cloud company and accelerate ARR growth in 2023 and beyond,” says Chirico.
Chirico understands the work of transformation takes time and the team needs to keep focus. “It is not completely turned around, and we still have more work to do,” he points out. “Another key to the chapters is to constantly reinforce with everyone on the team, from the board on down to front line sellers, where we are, whether we are on track, and what’s ahead of us. A big risk is complacency and losing our focus and our edge.”
To generate these results and position Avaya for an even greater growth trajectory, Chirico and his team had to reconfigure all aspects of the commercial model. This includes driving innovation in the product portfolio strategy to expand market opportunity, refocusing commercial operations on growing customer lifetime value, and aligning the commercial architecture with the subscription model.
Chirico regards product innovation as a third key strategic pillar for Avaya as they move into a highly competitive and dynamic cloud and subscription business. “We needed to ensure that we are relevant to all aspects of the market and lead the industry in innovation. We need to provide the full breadth of cloud solutions in the unified communication and contact center markets, whether that is from a private cloud, a public cloud, or a hybrid solution. This is extremely important for us from a growth perspective. We are rounding those solutions out with Contact Center as a Service (CCaaS) cloud solutions, Unified Communications as a Service (UCaaS) solutions, all infused with advanced AI and machine learning, and composable applications that give us the ability to cover the full breadth of the total addressable market (TAM) we have access to. The maturation of AI capability and the trend towards composable enterprise apps has led to a leap forward in innovation and value creation in our industry over the last 18 months. We are investing in AI solutions and composable applications that are helping our clients drive greater efficiencies in their contact center and their collaborative, digital workplace, and improving the overall customer experience through integration and actionable insights.”
This shift in product strategy to cloud solutions and consumption-based services and licenses has expanded Avaya’s market opportunity dramatically by giving the revenue team more flexibility to address opportunities in small business and the mid-market segments in addition to their core in very large enterprises. Chirico has had to adapt his commercial architecture – including his coverage model, segmentation, and channel mix to access and develop those opportunities.
“Traditionally as an on-premises hardware company we had a two-tier distribution model that relied on partners in addition to our field sales,” says Chirico. “As we moved more and more to software, SaaS, and subscription solutions we had to transform our distribution channels to rely more heavily on partners as an extension of our go to market team. We have invested in creating a whole new ecosystem of partners to go after the cloud market while still utilizing many of our existing partners. We have added over 700 new partners to support our cloud business in the last year. While most of those partners are focused on large contact centers at enterprises, which is one of our traditional segments, the nature of cloud offerings has allowed us to shift the focus of some of our partner ecosystem as well as our market segmentation to the mid-market and SMB environment,” he continues. “This opens up a new opportunity for us. We expect to generate 40% of our total revenues from our Cloud, Alliance Partner and Subscription (CAPS) partners this year.”
To better align growth assets with this opportunity, Chirico had to reorganize Avaya’s approach to commercial operations. He views people as Avaya’s biggest growth asset. And to generate the most growth from that asset, he reorganized Avaya’s approach to commercial operations to get sales, marketing, and customer success teams working as one revenue team. This shift to a Revenue Operations structure allowed them to focus on delivering superior value and experiences to their customers and developing the larger market opportunity for SaaS solutions.
”You could say we are a technology company, but what we really are is a people company that develops and delivers innovative technology to our clients,” shares Chirico. ”Out of the company’s roughly 8,000 people, I would say around 65% of the population is customer facing when you wrap in sales and marketing and some of the other customer support functions. I would put our team up against any of the competition because they successfully execute the strategy and have demonstrated a willingness to transform and develop new markets. We are a people company first by far. With that in mind, we have done a lot with the organization over the last several years to not only support our current workforce, but to bring in an augmented capacity that supports our business and each other in critical areas that drive growth.”
“One of the things we did to make our revenue team more successful was to bring in a Chief Revenue Officer (CRO), Stephen Spears, to create a single point of authority over that entire go to market organization on a global scale. Stephen is the accountable party for marketing, sales, delivery, customer success, professional services, and all the channel partners that support our organization. These are hard line reports,” says Chirico.
“We reorganized our go to market organization out of necessity,” he continues. “Prior to Stephen coming on, we had a leadership organization based on geography, or what we call theatres. We had a head of North America, head of Latin America, and head of EMEA and APAC. All those individuals are great guys. And they had a lot of those functional sales, marketing, delivery and customer success roles reporting into them.”
“But as we started to look at it, we realized that to compete on a global basis against the emerging and existing competitors in our markets we had to focus. We are going up against entire companies focusing on cloud sales, or professional services, or sub segments of the cloud sales such as Unified Communications and the Contact Center,” Jim recalls. “We needed a go-to-market approach that would position us as the leader of the pack, not just part of the pack as we had in the past. To accomplish this, we wanted to make sure that we had enough force to go after each of those critical segments with enough expertise to compete and win.”
“Subsequently we brought on a global head of services, an SVP in charge of global channels, and a global head of strategic partnerships who are key to bringing new technologies to market – all reporting to Stephen as our CRO,” recalls Chirico. “And it is working out extremely well. The teams get along quite well, which has really reinforced our core cultural principles of teamwork and trust. It has also made things simpler – because this is a much simpler organization. It may sound complicated, but it is much simpler because there is a single point of accountability, and this makes sure our revenue teams are empowered and in control of their success. It is a matrix environment. The teams still work in the local theatres on a dotted line basis. And the theatres still manage the direct business.”
An important aspect of getting sales, marketing, services, and customer success to work as one revenue team was to align incentives around a common set of strategic growth goals. “Aligning our incentives and KPIs with our overall objectives is extremely important to achieving our growth goals, especially as we move from a product company to a SaaS / cloud company,” says Chirico. ”It is important to make sure that those incentives are driving the right outcomes and behaviors and drive accountability through the process as well. So, for the last four years we have spent a lot of time on incentive management as a senior leadership team. Every month the top 40 executives in the company review our incentives in excruciating detail.”
“We want our entire revenue team aligned around common goals, regardless of whether they are quota carrying, non-quota carrying or leadership,” according to Jim. “Our quota carrying reps are obviously incented by revenue. Here we focus them on driving new cloud revenues and penetrating new markets and hitting profit targets to keep them on strategy. For the non-quota carrying employees in both sales and marketing we have a bonus structure that is built on the same revenue and profit metrics. And I am paid on the same incentives as the employees. My performance incentives are the same performance incentive types, as any level within the organization. We are all in it together. One Revenue team. And I think that level of common purpose is extremely important, and it is a rallying cry for all of us. It is not the brown eyes and the blue eyes, which existed prior.”
Jim Chirico is CEO at Avaya
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