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Slack’s Outages Cost $8.2M in Service Credits, Erodes Customer Trust

What were the key numbers for Slack in Q2? How healthy is its core business offering? By most measures, Slack has come out of the gates strong with revenues for the quarter and annual guidance both ahead of analyst estimates:

  • $145 million in revenues at a 58% YoY growth rate.
  • Full-year guidance on revenue is between $603-610 million, which is a 51% growth rate.
  • Key Customers are measured as $100,000 ACV threshold:
    • Added 75 paying customers at this level in Q2.
    • 645 Key Customers in April; now 720 at the end of Q2, 75% YoY growth in this customer segment.
    • Pre-IPO in April = 95,000 paying customers, 65 of Fortune 500.
    • Q2 2019 Slack surpassed 100,000 paying customers, 37% YoY growth.
    • Slack’s R&D expenses were $55 million at 38% of revenues in the quarter.
    • Slack’s operating loss was $56 million in the quarter.

These are substantial numbers, but all is not well in Slack-land. Slack paid $8.2 million in credits tied to service disruptions in Q2 due to multiple outages in the quarter, with one major outage in July 2019. This type of SLA challenge has negative impacts on the customer base, including:

  • Erosion of trust in the large enterprise space around service reliability, especially when trying to displace another product like Microsoft Teams.
  • No root-cause analysis presented to the public, so can this happen again?
  • Prospective customers should go through the due diligence process from a feature/functionality perspective, but more importantly, talk to Slack about this outage.
  • What will Slack do beyond an SLA credit to reassure customers on a go-forward basis?

Uptime for the quarter was 99.9%, falling short of the stated goal of four-nines (99.99%) uptime; the service credit payout was a result of a “generous credit payout multiplier…contracts dating from when we were a very young company,” per Allen Shim, Slack’s chief financial officer. These terms have now been tightened up per Slack's CEO…so as a customer, Slack isn't contractually providing a better SLA; it is instead reducing your compensation when it fails to deliver the SLA!

In fairness to Slack, a four-nines uptime SLA is an exceptional goal that exceeds the SLAs offered by Microsoft and Salesforce, which both stand at three 9s. Additionally, Slack proactively provides service credits to customers as outages occur, which is unique in the industry of cloud software providers (even though it shouldn’t be).

Folks, listen to your vendors, as they are telling you what to expect in terms of service and cost. Less (service) and more (cost) in this case.

Slack’s CFO states its focus is growing its existing paying customer base (land and expand) and targeting large enterprise customers. It wants to compete with Cisco (Webex) and Microsoft (Teams) and is investing in partnerships like Atlassian, Salesforce, and Zoom to do just that.

Interestingly, Microsoft Teams’ daily active users (DAU) metric now exceeds 13 million. This makes Teams the leader in this vital metric as Slack currently reports 10 million DAU.

Image source: Microsoft

What Do End Users Think?

The Verge states it correctly, "Slack's challenge is getting people to pay for its service, and Microsoft's is getting people to love using its service. Slack now has more than 88,000 paid customers, but it still has more than 500,000 organizations using its free plan."

The Slack vs. Teams battle may result in a duopoly in the team collaboration space. Once an organization chooses a path, it will likely be locked in for the long term. Slack currently offers over 1,800 application integrations with more on the way, and Teams is already seamlessly integrated with Office 365 and is likely to build a robust integration eco-system of its own.

Once a team collaboration application is tied into the enterprise data and application eco-system, it becomes highly disruptive and costly to displace. What's the lesson here?

Perform your due diligence and pick right, before you engage in a paid version of either vendors’ wares.

Source: SoftwareReviews Team Collaboration Data Quadrant, Accessed September 7, 2019

Source: SoftwareReviews Team Collaboration Emotional Footprint, Accessed September 7, 2019

It’s clear that Slack is the preferred option by the end-user community, and it is also the leader in Team Collaboration category. Co-founder, CEO, and board chairman Daniel Butterfield noted that Slack users are connected to the application 9 hours a day with active use of 90 minutes a day. Furthermore, a Slack survey informs us that 83% of Slack users report increased productivity and 95% stating a lower use of email when using Slack.

I think it's safe to say that Slack has won the hearts and minds of many end users; now it needs to convince prospective customers to open their checkbooks and pay for Slack even though they have a "free" option in Teams already bundled with their O365 subscription.

Key Takeaways

Slack has emerged as the "People's Choice" in the team collaboration space. However, the company is small at a projected $610M in annual revenue and bleeding money as expenses rise. Slack could be an acquisition target even though it just debuted as a publicly-traded company.

This space has the potential to quickly become a two-horse race between Slack and Microsoft Teams, resulting in a duopoly of sorts. While there is undoubtedly enough business to go around for both companies, Slack will have to differentiate continuously (e.g. Shared Channels) against a market behemoth in Microsoft known for slaying the competition with mediocre products but powerful technology eco-system disruption abilities (browser wars anyone?).

Slack's SLA stumble should not be discounted or ignored by potential enterprise customers. This type of tool demands unerring availability by the end users. When a team collaboration app goes down, productivity goes down resulting in massive costs to the customer.

Slack is a visionary. In Slack’s earning transcript, Daniel Butterfield outlines a compelling use case in the near future:

“So if you imagine someone pushes a button inside of Workday to approve an offer going out, that notification comes into Slack, and someone can press the button to generate the offer letter stored in Box and sent out via DocuSign. Instead of building end square integration, a customer ends up building end integrations or even better, using the existing integrations in Slack to tie those things together.”

Recommendations

  1. IT leaders can ill afford for shadow IT to drive the team collaboration decision. Slack starts with a freemium model that fosters native, small team adoption…at first. Once teams get hooked on the product, the pressure to move to the paid service offering and then land-and-expand is often too much to ignore, resulting in another SaaS subscription.
  2. Scrutinize Slack's SLA terms. While currently the SLA uptime level of 99.99% is admirable, if the platform scaling is too much to handle, these levels could be adjusted downward. Ensure that Slack continues to offer service credit multipliers that are proactively paid to the customer as this is likely to change in the future.
  3. Don’t be lazy; you have one chance to pick right. Yes, many enterprise customers are choosing the paid version of Slack even though they have O365 and Teams available. Ensure you make it a choice that stems from proper due diligence and that the solution selection is mindful, purposeful, and meets your long term goals. Note that Slack’s stated goal is to become 1-2% of the IT budget!

Bottom Line

Slack is the real deal, and it is growing at an impressive rate. IT leaders need to pro-actively evaluate team collaboration solutions to define a structured and clear path forward for their organization as opposed to having the end-user tail wagging the proverbial dog. To be clear, Slack's end-user communities are getting work done in real-time within Slack, and that alone may be enough to win the day.


Want to Know More?

SoftwareReviews: Team Collaboration

SoftwareReviews: Slack

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