Q&A: Palo Alto Networks CEO On Sales Force Reorganization, Overtaking Check Point, And The Future Of Network Security

Looking Foward

It's been a busy year for Palo Alto Networks. Big changes to the Santa Clara, Calif.-based company's strategy include a new set of products to redefine its security portfolio and a massive sales force reorganization following some challenges with sales execution earlier this year. In an interview with CRN, CEO Mark McLaughlin said these changes have positioned Palo Alto Networks for the future, and the security vendor will once again look to redefine the next generation of security. McLaughlin said he sees the network security market entering its third generation, one that will change the consumption model of security for customers and partners. He said Palo Alto Networks looks to lead that revolution. But, what does that next generation look like? Take a look at McLaughlin's vision for the future of security, how the security vendor is adapting its own model, and what it all means for partners.

What were the highlights for Palo Alto Networks over the past six months?

For us, we are excited about being the leaders in what we consider evolutions in security. … One of the things we were talking about at our Sales Kickoff event with our team and our partners was we have been very fortunate in that relatively short period of time to have grown as big as we are and at rates that far exceed the growth of the market. One little thing that we found interesting – we don't really go out and talk about this externally because it doesn't really matter a lot at the end of the day – is that in the fourth quarter that we just reported that was the first quarter in history where we are bigger than Check Point [Software Technologies] now in revenue. We have been much bigger than them in sales for quite some time, but in revenue had been a lagging indicator the way the deferred model works. But, it's now a nice little thing to say that we have overtaken Check Point in half the time of their existence. Something is going on there. … And, how can it be the case that Cisco just put up a $553 million quarter and we put up a $509 million quarter and we are growing nine times faster. How can that happen? That really is about these evolutions in security that are super important. They really mean that things change very quickly and you have to try and be in front of them and lead them. That's what we have been doing.

What changes are you seeing in the network security market?

We think there have been three of them in the last 10 to 12 years. The first one, which we are very familiar with because we invented it, was at the network level about being able to marry together platformwise best-of-breed attack interdiction capabilities natively in a platform – actually with a single pass engine where everything happens once. Getting automation and orchestration and the leverage from that. As a result of that, we dramatically changed the network security industry by subsuming into that platform things that used to be entire industries. … The second evolution we started a little over three years ago by saying you need that prevention and that automation and orchestration and leverage, but you need it wherever the data is – not just at the network. You need it at the endpoint and IoT and you need it in the cloud and third-party SaaS applications. … The second evolution was all about consistency of security wherever the data is.

What do you see as the future of the network security market, then? What's the next evolution?

[Those past two evolutions] lead to the third evolution … which is how do you marry together all the innovation that has to happen in security with a consumption model that works? ... We are no longer able to consume that innovation in any way that makes sense. For the most part, all of those vendors doing the innovation at the smaller companies are really good and they're doing interesting stuff. … But, the customers say they want to lessen the complexity, they want better ROI and vendor consolidation. … The third evolution for us, which we kicked off, is to say that all has to change .... Put an open API across the top of it and tell all the customers, vendors, competitors [they can use the data and build on top of the Application Framework]. … And, then we're in the enforcement position to enforce answers. … This is an alternate route to market [for startups]. Or, if you are a Palo Alto Networks customer, just turn on the application. … In these evolutions in security, they move quickly and are very important. No single company can innovate everything in security. We have known that for a long time. That's why we're driving the platform the way we're driving it, which is how do you marry innovation with consumption, which is very important. That resonates very well with our customer base and our sales team and the partner community as well because these are increasingly strategic things that you can do for customers. These are models that work for customers. You can see it in the size and you can see it in the growth numbers. Then, our partner community, I think they're continually excited to work with us.

Talk about the sales force reorganization you went through a few months ago – how is that progressing?

I get asked a lot what are the big challenges and what keeps you awake at night. For the six years I've been privileged to be on the Palo Alto Networks team, I've given the same answer: execution at scale. Scale for us has changed radically over the past six years, yet the velocity of growth is still extraordinarily high. … It just gets harder and harder and harder to make sure you are doing all the execution things right because you are in uncharted territory [of growth and scale]. … When we came into 2017, we did a number of things in our sales force that actually turned out to not be great. The easiest way to describe it is a misalignment of the teams and the customer relationships. … In the midyear we said this isn't working ... so we have to fix it. … Those changes, if I had to summarize them all, are about better alignment to the partner community and better alignment to the customer base. … We made a number of those changes, which seem to be working very well. The feedback from our team and customers and the partners – I just got a very strong dose of it at the Sales Kickoff, where we had almost 1,000 folks from the partner community in the room with us – was all positive. We did the right things and it seems to be paying off if you look at our Q3 and Q4 results.

What specifically were some of the changes you made to the sales force structure?

One of the things was when you are growing and if you are fortunate enough to be growing very quickly, one of the things you need to do is you have to split territories. That's a natural thing that everybody does and will keep doing it. We over-rotated in 2017 as we came in because we were growing so fast. If you are trying to quickly re-establish relationships through multiple splits, that can be painful. One of the things we said was we will keep splitting territories, but we need to slow the velocity down.

The second thing was taking some of the customer base and having the relationship being driven from the inside as opposed to the outside. If you are already a Palo Alto Networks customer at a certain size, could we work with you in a lower-cost model through our inside team versus our outside team? The answer to that is sometimes yes and sometimes no. It is very dependent on the customer. We fixed a lot of that and said we won't do as much of that and we will realign those relationships to the outside and to the partner community.

Those are some examples of things that we said none of those are bad, but if you over-rotate them as we did you can get some results that we saw. … A lot of that seems to be fixed now if you look at the numbers and the lifetime value. … We want to be correctly aligned with the customers and partners to make sure we can keep that going.

Talk about the LightCyber acquisition – how is that integrating into the Palo Alto Networks portfolio?

[Our third evolution of security philosophy] is exactly one of the reasons why we bought LightCyber a little while ago. It's one of the very few acquisitions that we have done. We tend to build things ourselves because if you build it yourself it actually works together and you get automation and orchestration. You can actually get leverage, as opposed to some competitors who are on the acquisition-cobbled-together path. That, as a side note, has never worked in security historically.

We bought LightCyber because they have a great network analytics capability, but also because we wanted to prove this [new philosophy]. LightCyber is one of those very cool companies – of the 1,400 at RSA – that tried to get customers to use their capabilities, which they were doing, but required you to deploy hardware in order to use its capabilities. What we did with LightCyber is we took the algorithm out of the hardware and we enabled all other Palo Alto Networks form factors with that capability. Now, if you want to use network analytics capabilities from LightCyber and you're a Palo Alto Networks customer, wherever you have deployed from Palo Alto Networks … you just turn on the LightCyber application and you don’t have to deploy anything new to use it.

How do you see the competitive landscape changing in the network security world?

It's been very obvious in the last couple of years that some of the largest folks in the distribution community, who have historically had longtime relationships with Check Point and Cisco and were continually just renewing things for customers, when you look at our size now being bigger than Check Point and how close we are to Cisco, almost all of them have said. 'I'm on the wrong horse. Palo Alto is clearly taking market share at very high rates and at scale. We really need to invest heavily with Palo Alto Networks.' We've been privileged to have that occur more and more and more with our partner community.

Do you see the competition looking to adopt this same model of security?

Hopefully with all humility, but as the leader in those evolutions we have seen the competition say, 'We have to have something like that.' That is fine. That is very natural. But, I like the fact that Palo Alto Networks is in the position that almost in its entirety everything that has been discussed about security over the last couple of years and into the future is defined by Palo Alto Networks. If we say better and better prevention is possible – not 100 percent – but you have to be prevention oriented. It used to be everyone talked about detection and incident response. Nobody talks about that anymore. We were the ones who said the way you do that is with platforms that have orchestration and automation and those things need to be native with one another. And everybody said the platform. We're the ones who said you have to have consistency across the endpoint, and the cloud, and the network and you saw DNA and Umbrella and Maverick and all these other marketing terms come to play. Now, with the third evolution, I don't know what people are going to say but I assume they will say, 'We have to have one of those too.' That's natural and just competitive in any market. I like our position in that because I think we're right that all of things people are talking about what Palo Alto Networks says has to be talked about with customers.

Are you worried about the competition if they also jump into creating Application Frameworks for their security platforms?

The difference is how do you do it. We are very comfortable with architecturally we literally started from scratch, it isn't legacy capabilities, we pretty much built everything so they actually work together. The customer base continues to grow at an extraordinarily fast rate and lifetime value continues to grow at extraordinarily fast rates. The reason for that is this stuff actually works together natively and delivers supremely better prevention and we will be on the bleeding edge of that all the time. … [Customers] continually buy more of it.

The main competitive response that we have seen over time, if you just look at our size and our growth rates and other people that we would be displacing, is price. Pretty much all the competition is doing pretty unnatural things from a price perspective to not have Palo Alto Networks take that customer from them. It's becoming an increasingly price-sensitive market. We have been able to drive value for a long time as a leader and we continue to be able to do that. But, the noise level is high on marketing and the price discounting for others is very high. We have to work our way through those things, of course, with the leadership, value, and the things that really matter for customers. We have been pretty successful with that.

How do you see the security partner model evolving? How to they need to change to succeed in security moving forward?

[What] the competitors and this industry will realize over time is the folks who can truly operate at the operating platform level … that group is very small today and will get smaller over time, partly because of the security piece and partly because of the stability piece. … I think what is going to happen, and you can already see it in the market, is that companies who even have a valid claim to that at all is less than five in the world and will probably get smaller over time. What then is going to happen with the third evolution, if it is done right and successfully, is that you won't have 1,400 vendors at RSA. You will have 3,000. Instead of customers lamenting that as how do they figure that out, they may be happier with that because in order to utilize those capabilities you will utilize them as applications and just turn it on. … I want to be the partner who can do all that. I'm not just the networking person. I'm not just the cloud person. I'm not just the endpoint person. I can do all of that and understand it and how they work together. In addition to that, I want to be the partner who can help the customer work through all the other vendors who will be consumed through these platforms.

What is the opportunity for partners going forward to work with Palo Alto Networks?

With the partner community some will have a chance to really shine through all of this. … The partners who I think are really understanding what is going on with these evolutions will be the ones who increasingly customers will turn to and say these are the digital transformations in the customer base … and this is what it means. It doesn't mean getting the next, fastest firewall. … It means literally the transformation of how do I get the best innovation and consume that innovation in a way that provides me increasingly better security and leverage over time, as opposed to increasingly more complexity over time. … Customers are increasingly going to look for partners who can say this is a data problem, so you either can help me solve my data problem securitywise or not, but if all you can do for me is sell me whatever the next hot endpoint thing is, that is going to be increasingly less valuable for customers.

What can partners expect from Palo Alto Networks between now and the end of the year?

A few things really for partners. … The first is that from the minute we opened our doors we have been a partner-focused company where we truly value partners. We consider them as part of the business and part of the team. … We will always be very partner-focused. That is one thing that is not changing. The second thing is that partners who are continuing to succeed at extraordinarily high rates with Palo Alto Networks. Over 25 percent of the partners at the Sales Kickoff grew over 100 percent year over year. The ones who are succeeding are the ones who are embracing these evolutions. … The third thing, I think one of the things that a lot of partners don't realize because we've grown so quickly in such a short amount of time is actually how big Palo Alto Networks is. I think most people don't realize that we're bigger than Check Point and we're 90 percent the size of Cisco and growing nine times as fast. … I think it's very hard to ignore that at this point just given the size and velocity of the growth. We're excited. The level of intensity and pizazz coming out of the Sales Kickoff was very high and I think people are very optimistic about what we've done.