Successful businesses create an environment where people share best practices to enable others to learn and grow. Enterprise social networking can’t make that happen by itself — but it does provide the most conducive technological means imaginable.

According to David Sacks, CEO of enterprise social networking service Yammer, “eventually, not having a social network in your business will be like not having a phone system or not having email.” Founded in 2008 by Sacks and sometimes considered a direct competitor to Jive Software, Yammer recently received a fifth round of venture funding to the tune of $85 million.

One of the founders of PayPal, where he served as COO, Sacks has several successful entrepreneurial ventures under his belt, including a genealogy site and, randomly enough, the 2005 movie “Thank You for Smoking.” I spoke with Sacks shortly after news of the new Yammer investment was announced. The following is an edited version of our conversation, which ranged from embedding social networking in enterprise apps to the consumerization of IT.

Eric Knorr: Why would VCs plunk down such a large round for an enterprise social networking company?

David Sacks: I think the reason why we got $85 million of investment in this round is that we were the first mover to define this new category of enterprise software, which is actually a very big category. It’s our belief that every company will have its own internal social network. It doesn’t matter what size the company is — we’ve seen adoption from the Fortune 500 all the way to little startups. It doesn’t matter what industry vertical the company is in; we’ve seen adoption across just about every industry vertical. And it’s global, so we have adoption across pretty much every country.

It’s a very large market, and I think that’s what has investors excited. And we’re growing very fast.

Knorr: You were one of the early movers. What hurdles did you have to overcome?

Sacks: We were the first ones to call ourselves an enterprise social network. There was actually a conscious effort on the part of virtually all the companies that are now competing with us to reject the idea of enterprise social networking out of a concern that it would be perceived as a nonbusiness tool. Our view of it is, yes, social networks before Yammer were predominantly used in the consumer space, but that shouldn’t obscure that fact that it’s a communication tool, and there’s nothing inherently consumer about that style of communication — it just hadn’t been applied to the enterprise yet.

We didn’t mind being called “the Facebook for the enterprise.” We actually have a lot of common DNA with Facebook. Our first investor Peter Thiel was Facebook’s first investor. Sean Parker, the founding president, is on our board of directors. So they’ve been involved in Yammer since the beginning. When Facebook was still primarily on college campuses, we were asking ourselves where social networking would go next. We felt that everyone would have a social networking account in their personal lives and we thought Facebook would probably win that battle, so we started thinking about applying it to enterprises.

Knorr: Rather than internal communications, much of the emphasis I hear these days is about using social networking to stay close to the customer.

Sacks: That’s why we added a feature called External Networks. We had over 20,000 external networks created last year. So external networks are definitely taking off. We ultimately think that companies will have multiple social networks: They’ll have a core one for their employees that will be an internal network, but they’ll also create an external network for partners, customers, vendors, suppliers, consultants, their entire ecosystem.

We built our product so that you can create a new external network in about 30 seconds. Deloitte, one of our customers, calls it a 30-second extranet. There’s a simple drop-down menu called My Networks, and you can toggle between them. With one account, you can toggle into potentially dozens of different networks.

Knorr: So the external networks are primarily for B2B purposes? Say, you might establish a social network within a company that’s a customer?

Sacks: Exactly. That’s how a lot of people are using them — for joint ventures with another company or partnerships. We actually created an external network for our customers — the Yammer Customer Network — we have all of our customers participating in it, like a customer forum. But it’s private. You can only get in by invitation.

Knorr: There are so many different ways to collaborate. How have you seen customer behavior evolve and how have you responded?

Sacks: When we first started, Yammer was labeled “enterprise microblogging.” That’s a little bit of a misnomer because we were never micro, we never had a 140-character limit. And we weren’t blogging because it’s not public. It was always a form of social networking, but it really revolved around the feed and profiles.

Over time what we’ve done is add applications around it, so we’ve become a more fully featured platform for enterprise collaboration. Last year we added much better file sharing, file directories, and Yammer Pages, which is our next-generation wiki. You can collaboratively create documents with other people with Yammer. We’ve added Groups; I think Groups is another really big area. The way that people collaborate in companies is in teams, projects, departments, so we’ve invested a lot in making Yammer Groups work as team workspaces.

We’ve spent a lot of time on things that matter for IT that as an end-user you might not see, like being able to integrate with Active Directory or single sign-on. We integrate with SharePoint, so we actually make SharePoint much more social and engaging.

Knorr: Is a significant portion of your customer base doing that?

Sacks: Among the big companies, yeah, because it’s so easy to implement. SharePoint doesn’t have feeds, really. If I want to post a message publicly, I have to go to someone’s profile and I can post a note there, but if they want to reply to me, they have to go to my profile and post a note; there are no threaded conversations. There’s no sense of a feed you can talk into in SharePoint, so we see Yammer as pretty complementary to SharePoint 2010. And it’s very easy to integrate.

We also have a product called Yammer Embed where we give you an embed code on feeds, and you can just copy and paste that into Salesforce or any app that’s HTML-based.

The other thing we’re doing on integration is we’re pulling in community feeds on all these other products. Last year we integrated with SharePoint, Salesforce, Box, NetSuite, about a dozen others — we just added SAP to that list. So what we do is pull activity feeds into and out of all these apps, and now in one scrolling ticker you can see what all of your coworkers are doing in their enterprise apps. It creates this ambient awareness of what’s happening in your organization. It’s similar to what Facebook has done with the ticker on the side where you can see what music your friends are listening to. You can see what records they’re interacting with.

Knorr: What you’re describing raises the security question. How do you handle security policies?

Sacks: First of all, when you buy Yammer, you get administrative rights over the network. You get to moderate and control the content and membership. You can do things like integrate Yammer with your Active Directory so that employees are automatically provisioned when they join your company and they’re automatically deprovisioned when they leave your company. You can do things like single sign-on or IP range restrictions to make sure that employees can only access Yammer through your VPN or through an IP range at work.

You can export data for e-discovery purposes. The way that most people do discovery, they just dump all their company email into some sort of e-discovery silo, where you can process discovery requests against that. Every Yammer message will convert into an email format, so you can dump it into whatever current too you’re using for e-discovery. We don’t really pose any incremental risk over email. Whatever process you use to manage email, you can apply that to Yammer.

Knorr: Do you have user-based authorization?

Sacks: We have a pretty simple privacy model in Yammer, which is, if you want data to be private, post it to a private group. Effectively, every piece of content on Yammer, whether it’s a conversation or a file or a page, always lives in some group. There’s a default group called the all-company group where everyone can see it, but you can post wherever you want. It’s very easy to create private groups where you restrict the membership.

We have two levels of administration, so there’s a superadmin and a more general admin to perform more mundane tasks. We’ve invested a lot of time in making this a tool that is enterprise grade that will be acceptable to IT.

When you think about it, what we’re selling are the IT tools. The reason we are a freemium product is there’s nothing we restrict the end-user from doing. They can get in there and use it. It’s the enterprise tools that people pay for. We have a strong incentive in making these tools as robust as possible.

Knorr: Tell me more about your freemium pricing model and what you think your big revenue opportunities are.

Sacks: We do have a freemium model — it’s free for employees to use Yammer, to try it out. In order to upgrade your network to get the administrative rights, the integration, the advanced security features, the compliances tools — again, a lot of the things that matter to business owners and IT — you have to upgrade to the premier plan. The list price on that is $5 per user per month. If you’re at a large company, we can talk about volume discounts based on how rapidly we think the product will roll out to your user base.

I should also mention that at the high end, we actually have two business packages: a business package that’s for small businesses and an enterprise package for large enterprises. And the difference is in the feature set. The small businesses tend to be more interested in the basic administrative rights, and enterprises want the heavy-duty integration with SharePoint, Active Directory, things like that. So we have two paid plans, plus the free plan.

Knorr: IT departments are often early adopters of new technology. Do you have any examples of how IT has used Yammer?

Sacks: The CTO of Cap Gemini, Andy Mulholland, wrote in a blog post recently about how Yammer had reduced his department’s email load by 40 percent. A lot of those emails were help requests around IT issues. So people were just posting them on Yammer. And with most of them, the answer would just be crowdsourced — they’d get help from all over the company. And then part of it was IT would just check Yammer and get the request there.

We actually have a bunch of IT departments that have seen whatever program they’re using to submit IT help requests have now just moved onto Yammer. Sometimes, it makes them have to move a little bit faster, but also it reduces their overall load because people can get help from a wider range of folks.

Knorr: You started out avoiding the stigma of consumer social networking. Is it a source of satisfaction for you that the consumerization of IT is now the hottest trend?

Sacks: What got me interested in this area is I thought that social networking was going to be this huge revolution, and I really thought it could be used to revolutionize the way we communicate at work. In the process, I really did want to consumerize enterprise software. To me, Yammer stands for two movements: one is the movement to bring social networking to the enterprise. The other more generally is to consumerize enterprise software.

We’re doing that in multiple ways. One is we’re trying to apply a consumer level of usability to enterprise software. We really designed the product thinking about the end-user. We’re taking a lot of principles and UI elements that have worked in the consumer space, and we’re bringing them inside the enterprise as well.

That’s half of consumerization. But the other half is we’re actually giving employees a voice in deciding what tools they use because they can just pull Yammer into their company. They don’t have to wait for it to be installed by somebody. Employees can start using it for free, message with their coworkers, and then they company can decide to endorse it, pay for it, that sort of thing. It’s very similar to what employees are doing with iPads and iPhones. They’re saying this is the tool I want to use; this is the tool that’s going to make me productive. And come on, IT, let’s get with the program.

Source: InfoWorld

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