Deal Radar 2009: Apptio

Founded in 2007, Apptio is a provider of on-demand IT cost transparency solutions. It provides IT financial management (ITFM) software that helps CIOs run the business of IT. Apptio’s software provides greater visibility into the full cost to deliver IT Services, helps companies optimize their costs, improves productivity by automating key IT financial management processes and helps communicate the value of IT across business stakeholders. There are five distinct product modules focused on the fundamental IT financial processes: IT service costing, bill of IT, budgeting and forecasting, IT benchmarking, and service quality management.

Apptio was founded by Sunny Gupta, president and CEO, Kurt Shintaffer, CFO, and Paul McLachlan, Chief Architect. A serial entrepreneur, Gupta has 17 years of experience in enterprise software. He started his own services consultancy firm, Vigor, which he eventually sold to Rational Software. At Rational, he helped build the company into a billion-dollar business before it was acquired by IBM. Next, Gupta joined Performant and took on multiple leadership roles as the company grew and was eventually acquired by Mercury Interactive, where he headed one of the product divisions. Gupta left Mercury and started iConclude, pioneering the IT runbook automation market. Within two years, he drove iConclude’s acquisition by Opsware for approximately $70 million. During his tenure as EVP Products at Opsware, the company was sold to HP for over $1.6 billion.

Prior to co-founding Apptio, Shintaffer was in charge of corporate finance, legal, accounting, and other functions at iConclude and was instrumental in the successful sale of iConclude to Opsware in 2007. Prior to that, he was VP of finance at Pacific Edge Software, where he led fundraising efforts that secured over $40 million in venture equity and debt financing and culminated in the sale of the company to Serena Software. McLachlan spent a decade building performance and troubleshooting tools for Java and .NET, first at Compuware/NuMega and later at Mercury Interactive and HP. At Mercury, McLachlan and his team of 20 were able to grow the product’s revenue six times to over $40 million a year.

The Bellevue, Washington-based company has raised a total of $21 million since inception: a $7 million Series A in November 2007 from Greylock Partners and Madrona Venture Group, with seed investors Shasta Ventures, Marc Andreessen, and Ben Horowitz; and a $14 million Series B in August 2009 from venture investors including the Andreessen-Horowitz Fund, Shasta Ventures, and previous investors from the Series A. This Series B round was oversubscribed and will bring the company to profitability.

The concept behind Apptio was born out of meetings between Gupta and several Fortune 500 CIOs during which these CIOs voiced a need for systems to manage and track where IT was spending money, calculate the total cost of delivering an IT service, reduce spending over time, and provide transparency on the cost and performance of IT. Apptio’s ITFM software helps calculate the unit cost of IT services, including all of the unit cost drivers, so that CIOs can make more informed decisions on how to reduce the cost per service. Apptio focuses on helping IT companies realize where their IT money is being spent and how they can optimize this money.

The cost of IT has been increasing constantly, and in light of the recent recession, companies are scrutinizing every dollar spent on IT to justify the return on their investment to the business. Since the late 1990s, companies have moved from the ‘owned’ structure of IT in the past to shared services that helped gain significant cost and operating efficiencies. Also, the recent consumerization of IT and the wide availability of products and services via outsourcing, SaaS, and cloud services has made CIOs look at alternatives to in-house IT. As companies begin to outsource more and adopt cloud services into their portfolios, they will need to manage the cost and performance of both internal and external services. As the role of IT as a service provider to business is changing, CIOs need to manage the supply chain of IT services, make decisions about whether to outsource or build within, reduce operating costs, and so forth.

Unfortunately, most IT shops don’t know how much it costs to maintain any given IT service, and IT departments don’t know exactly how to control their costs, making it necessary for the services of companies such as Apptio in today’s business world. Nearly 95% of companies use spreadsheets to manage IT costs, but this approach is manual, prone to inaccuracies, and extremely time-intensive. Other companies have built tools to control IT costs through business intelligence or corporate financial management systems, but this may not the correct solution because these systems are not designed for IT’s specific needs.

There are also a few vendors from the ITSM space, but they are leveraging existing platforms without addressing the core needs of ITFM such as activity-based accounting, flexible and sophisticated allocation modeling, and data analytics capabilities. Apptio’s competitors include big names such as HP and BMC Software. In 2008, Apptio was first to market in this new ‘IT financial management’ software category when it saw an opportunity to help CIOs understand all their costs, analyze key cost drivers, perform budgeting and forecasting, track performance, and provide chargeback or allocation policies.

A Forrester Group study estimates that the ITFM market will reach $800 million by 2012. Based on this and research of similar IT management software and their respective market sizes, price and growth opportunities, its own selling prices, and market penetration internationally and locally, Apptio believes the ITFM market conservatively represents a $1 billion opportunity. Apptio’s software is targeted at Global 2000 companies that represent several industries, including financial services, health care, technology, retail, manufacturing, bio sciences, and hosted service providers. Within this group of companies, Apptio has seen the strongest traction in financial services, health care, and technology verticals since these companies typically have larger IT budgets (5% to 7% of revenue) and are looking for ways to better align their IT services with a business-competitive advantage. Not segment specific, ITFM is appropriate for any company that spends over $50 million on IT and uses a shared services model or is struggling with cost management and allocation, and could use better financial management systems.

Apptio’s customer roster spans over 35 companies including Alaska Airlines, Cisco Systems, Starbucks, HomeStreet Bank, BNP Paribas, Saint Luke’s Health System, and Blue Cross Blue Shield of Kansas. Apptio’s software is delivered as a service, and the company’s business model is based on a yearly subscription.

Gupta says that his team is “currently laser-focused on delivering best-in-class IT financial management products to the world’s enterprise IT organizations. With a billion-dollar market opportunity, this provides enough headroom for $100 million in sales in a very short period of time. We’re not looking to sell to a larger vendor any time soon, as we believe this space represents a huge opportunity and we have the right team and tools in place to have a large market share of it.”

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This segment is a part in the series : Deal Radar 2009