How ShoreTel Broke M5

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| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

How ShoreTel Broke M5

In February of 2012, PBX maker ShoreTel bought hosted PBX provider, M5 Networks. At the time, M5 had 2000 customers - just two thousand - with an ARPU of $2000. (That's $4 million per month in revenue, $48 mill per year.)

M5 was selling to big organizations like Ziff-Davis and Amnesty. These organizations had IT staff. The IT staff probably managed the LAN, which means that inside the org, the Hosted VoIP service probably worked fine. The IT Staff likely managed the WAN and Internet bandwidth too. That would eliminate much of the technical support noise that Hosted VoIP providers have to handle.

Add to which that the IT staff likely handled many other issues related to the gadget (laptop, tablet, smartphone) issue that didn't filter up to M5. Think about that.

The customers had IT staff to handle more than 70% of the help desk issues. Plus the IT department likely managed the Broadsoft portal to make the minor MAC/D changes.

To make things work for ShoreTel, they renamed M5 ShoreTel Sky and then attacked the market (like pretty much every other VoIP provider on the planet). This means that EVERYONE is a prospect. BOOM!

Model broken.

You went from a targeted approach to prospecting to scatter shot. Not only does this mean that the ARPU would lower, it means that the story would change. The story you pitch to a company with an IT staff is much different than the story you tell to a company without an IT staff. Also, the buyer profile changes.

You know what else changes? How many tech support calls you take!

AMDOCS says that at the least a tech support call costs $10 but typically runs about $30-$40 per call. On a $1000 account, a single support call at $30 isn't going to kill you. But at $500 per month, it will. At less than $500 per month, it's a disaster.

Broadband ISPs know that they end up taking calls about the PC or laptop often. Many ISPs have added a $10 per month tech support fee to the bill to defer the costs of extended support. (It is likely a profit center now.) VoIP Providers know that they end up trouble-shooting the network and the broadband connection. These calls eat up time, personnel, phone lines and margin. They also contribute to brand deterioration (unless your support team can fix every problem).

At 2000 customers, M5 was profitable and not too big. At 20,000 customers, it will be something else entirely. Growing pains will show through. Seth Godin writes, "As an organization succeeds, it gets bigger. As it gets bigger, the average amount of passion and initiative of the organization goes down (more people gets you closer to average, which is another word for mediocre)."

There are ways to handle scale / growth. Automation, policies, procedures and more automation are ways that most tech companies handle growth. Take out the human factor because it is expensive. Less human touch, more policies, cookie cutter, less innovation, less enthusiasm, less everything - except more customers -- not necessarily more profit either. Scale didn't help Windstream or Fairpoint.

Also, what got M5 from zero to 2000 is going to be very different from what gets 2000 to ten thousand. The management skills needed will be different.

With scale, maintaining culture (or vision/mission) is a challenge, if indeed it is even on the CEO's agenda, since being public means that you went from satisfying employees and customers to serving Wall Street.

Final thought: this happened on a small scale. Think about what happens in bigger mergers. Culture, human resources, even customers aren't even in the conversation.



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