Aneel Bhusri was a top executive and board member at PeopleSoft in 2004 when Larry Ellison’s Oracle made its hostile takeover bid.After they lost a bruising 18-month battle, he and cofounder Dave Duffield quietly left the company and nursed their wounds.
A few months later, they teamed up to start a competitor: Workday.
Like PeopleSoft, the company started by focusing on human resources, although it’s also moving into financial management.
But unlike Oracle, which has been slow to get into cloud-based services, Workday has been based entirely in the cloud from day one.
The company now has more than 250 large enterprise customers — including companies with as many as 200,000 employees — and is on track to double its bookings this year to $300 million. An IPO is possible late next year, Bhusri recently told Bloomberg.
Last week, on the eve of Oracle’s big OpenWorld conference, we caught up with Bhusri, who is also a partner at big VC firm Greylock.
Here’s some of what we talked about:
- The big vendors are vulnerable because they require big expensive upgrades. Workday doesn’t go into startups — it’s selling to big companies that have HR and financial software in place. But companies have to update this software periodically, and the traditional vendors like Oracle and SAP make it hard and expensive to upgrade. That’s when startups like Workday jump in.
- Oracle will survive the cloud transition, but will have to acquire some companies. He thinks NetSuite, which is already majority-owned by Larry Ellison, is a logical candidate.
- SAP is toast. “I think SAP doesn’t really have a play.”
- Don’t underestimate Microsoft. He thinks the company really gets the cloud, and that Windows 8 will easily become the second-biggest category of tablets — simply because they will run Office, while the iPad never will. “If I could get Office on a tablet, I’d throw my laptop away.” He also thinks that Microsoft’s army of .NET developers will move to Azure, the company’s cloud platform.
- Google will make a bigger enterprise play eventually. Bhusri called enterprise Google’s “secret weapon” and noted that he sees a lot of companies considering a switch to Gmail at the same time as they switch to Workday.
Full Q&A is below:
Business Insider: Tell me how you founded Workday.
Aneel Bhusri: We started the company in March of 05. Dave and I are very close friends. Dave had been the founder CEO of PeopleSoft, I had been the head of products and vice chairman at PeopleSoft. We had both actually stepped out of day to day operations until the hostile takeover with Oracle. We came back and had so much fun working together for 5 of 6 months.
During that time, I had spent a little time with (Salesforce CEO) Marc Benioff, and I came to the conclusion that what he was doing was going to have an impact on our space as well. So we started the company, we convinced ourselves we were at the cusp of yet another technology shift.
BI: Tell me about the Oracle takeover. What was that like?
AB: It was an 18-month hostile takeover. At the end of it, the Oracle team didn’t really want Dave or I, so we didn’t stay for the transition. So we both took a couple months off, then got back together in Tahoe in February, said “we had a lot of fun so should we start another one?”
BI: We were hearing a lot about the cloud early this decade, and now it seems like in the last year or two a lot of enterprise cloud companies are getting momentum.
AB: The last 18 months, the cloud has really become mainstream. When I look back, the first few years we were in business we were just building out the first version of the product. Candidly, when you go back to 07 or 08, it was hard to sell cloud. We started out by focusing on large enterprises on day one. Everybody thought cloud was for SMBs (small and mid-size businesses) but we made the leap that it was going to be for large enterprises, that they were going to replace their core systems.
So for the last 18 months, it’s really exploded. We’ve been growing. 2009 we grew (bookings) 50%. 2010 we grew 75%. 2011 we’re going to grow 100%. Our growth’s actually accelerating….Right now we have more demand than we actually know what to do with.
That’s booking. Revenue growth would be faster.
BI: How much are you booking?
AB: Last year we booked $150 million. This year we should double it.
BI: One thing I’ve noticed looking at the books of public cloud companies like Salesforce and NetSuite is that the revenue growth looks good, but the bottom line growth doesn’t match. It seems like there’s a really long ramp-up before you get to profitability.
AB: It’s purely the accounting model. With a licence-based model, you get to account for all the revenue up front because you get all the cash up front. You sell a perpetual licence which means the customer has it for ever. With a subscription model you get maybe a three-year subscription, and you don’t get to recognise it all up front, you have to recognise it ratably. You don’t get all the cash up front, you get some portion of the three-year deal up front and then the customer generally pays over time.
If you converted us to a licence model or you converted Salesforce to a licence model we’d be wildly profitable. It really is just idiosyncrasies of accounting.
BI: What about churn? How low does churn have to be before you make that turnaround happen.
AB: We have almost no churn. One reason for that is we’re selling to large companies. Small companies tend to go out of business, large ones don’t. The second reason is we’re not selling a point solution like talent management or recruiting or expenses, we’re selling HR and accounting systems that customers might change out every 7 to 10 years when technology is out of date. So to date, although we’re young, we’ve had almost no churn. We ask for three year contracts, our average contract is four years because our customer is pushing us to long-term contracts. So we’re very different from any other cloud player out there.
BI: What’s your average customer look like?
AB: For all time, our average customer has about 8,000 employees. If you look at the last 9 months, it’s 15,000 to 50,000. Just with the letter “T” in the last few months, Thomson Reuters, Time Warner, and Toys R Us. Those are full scale human capital management replacements for Thomson Reuters and Time Warner.
BI: When you go in to a big account like that, who are you displacing?
AB: It’s Oracle-PeopleSoft and SAP. Right now, we have about 250 large enterprise customers on human capital management. We’re ramping up on financials, and we’re just beginning to do those replacements too.
BI: What’s driving this accelerated move to the cloud over the last 18 months? Is it economic? A big technological shift?
AB: I think it’s three things. By the model itself, the cloud is cheaper. In 2009 we grew 50%, and you’d be hard pressed to find another company that grew 50%. Sony Pictures is a good example — they chose us because they couldn’t afford to implement SAP. They thought we might be too early, but when they looked at what we had they said “no, they’re not too early.” Now they’re a very happy customer and will tell anybody that will listen it’s half the cost and half the time.
Since then, one things people haven’t paid attention to with the cloud is the pace of innovation. We don’t have four or five versions we’re worrying about. You look at PeopleSoft or SAP customer base, they might be on one of four or five versions going all the way back to the year 2000. With the cloud model, everybody’s on the same instance. When a new version comes out, they all go on the same version. We just keep moving customers forward instead of keeping them on old releases. So the development model looks much more like Google or Facebook than it does like SAP or Oracle.
And in the last 18 months, systems like Workday or Salesforce, which looked like exciting new technologies that were less functional than those systems, now have more functionality. We’re innovating so rapidly we’re blowing by the legacy systems.
So the combination of lower costs, higher rate of innovation, and now the functionality where you can actually turn off those old systems, the combination of those three things is really driving it.
BI: But how do you get customers to throw out these old systems they’ve invested so much in? These aren’t green-field sales to startups.
AB: You have to catch them at the point of an upgrade. They can’t stay on an old version forever, especially with HR and accounting which are driven by statutory rules. So you can’t have a system that’s outdated or HR rules that are outdated, you’ll get in trouble. So they might get a proposal for an upgrade that’s very expensive [seven figures plus]. At that point they look outside. We come in and say we’re half the cost — typically over five years we’re half the cost — we’re a modern look and feel, modern functionality, and we take care of upgrades for you, they’re no longer your problem.
Almost all of the large accounts are facing a big upgrade process.
BI: How do you think consumerization is affecting the move?
AB: We started out with a browser-based solution, and we made a big leap forward around the ease of use — we hired a bunch of consumer Internet developers to really build our UI technologies. The newest big leap is around the iPad. We see a lot of executives carrying around iPads. Generally they don’t get on these enterprise systems, but if you can give them a system that is really built for them — analytics, search, directory, simple transactions — they will use it.
We rolled out our iPad offering just a couple months ago and it’s met with an unbelievable reception. So much so that I think in the next couple years, executives, managers, employees, all of whom use HR systems, they will predominantly use the iPad and systems like that to get to Workday. The power users, accounting and HR people will still use a laptop or desktop, but 90% of the people who are not in the HR or accounting department, they will use tablets.
BI: When you look at all the enterprise vendors with cloud based solutions, everybody is expanding into each other’s turf. You’re adding financials, Salesforce is adding modules all the time. Do you see a shakeout at some point?
AB: We’re still in the early days of the cloud, so there’s still plenty of runway for all of us. A few weeks ago at Dreamforice we announced a big partnership with Salesforce, we embraced Chatter, we embraced Force.com as an extensibility platform. Marc and I are good friends, we have a very good partnership. He owns CRM, and he’s quickly owning the development platform as well.
From day one, we set out to be an ERP replacement, so HR and accounting. Financials is not a new idea, it’s just a new application. For us, that’s a $30 or $40 billion market. That’s enough to keep us busy for a very very long time.
Right now I see no reason why we should compete with each other.
BI: So who’s going to win in this battle?
AB: The people that are trying to replace the core systems that were on premise before. Trying to replaceSiebel, PeopleSoft, SAP, rather than trying to coexist. The people are successful in displacing those systems rather than coexisting are going to be very big companies. That’s what Salesforce is doing, that’s what we’re doing. NetSuite’s trying to do that in the SMB market — we never see them — if we compete with NetSuite, one of us is in the wrong place.
Unless — which I’ve been predicting — Oracle tries to buy NetSuite. Because Fusion is not a true cloud application, Larry already owns 2/3ds of NetSuite, so at some point I think he’ll just buy it.
I think Box is a great company in the collaboration area, I like their CEO a lot.
There’s an identity management company called Okta — full disclosure, I’m on the board of that company. This whole area of identity is really important. If you’ve got five or six cloud apps do you want a different user ID and password for each one? No.
I mentioned Zuora, they’re a very interesting billing company.
BI: It seems like Oracle is still at the centre of a lot of these companies — they have connections to Salesforce and NetSuite. Do you think they’re going to survive this transition?
AB: It’s hard to bet against Oracle. I’d say Fusion is not the answer. They want Fusion to be on premise, in the cloud, and hybrid but there’s no such thing. You’re either all in the cloud or not. If you’re all in the cloud, you build your systems to be grid-aware, you build them to be based on that scalable cloud model, multitenant, all these things. You can’t have it both ways. If you want to have multiple choices, it’s just the old-school hosting model.
Oracle’s going to continue to do very well supplying the cloud providers. There’s a long-tail on these applications. Workday now has 250 large enterprises. There are probably 40,000 enterprises around the globe that are running Oracle, SAP, and PeopleSoft.
My guess is that Oracle will have to make an acquisition.
I think SAP doesn’t really have a play. They are in a much more difficult position.
BI: What about HP? What’s their next move?
AB: You’d have a better idea than I would. To me, what they should be doing is buying the software infrastructure layers around automation, monitoring, and configuration management that drive server sales. So if people want to replicate the Amazon Web Services, then HP provides all the servers and all the software around replicating it. Autonomy doesn’t fit that strategy, but I’m not setting strategy for HP.
BI: What about Microsoft? They seem to be doing both the application layer with Office 365 and Dynamics CRM and ERP, and then Azure is their attempt to do the infrastructure layer.
AB: On the ERP side, we don’t think of them as a competitor. I think of Great Plains as more of an SMB mid-market competitor.
I think people underestimate Microsoft. I think Microsoft is going to come back with a vengeance around Windows Mobile 8 and Windows 8, they’re going to become the number-two player in tablets because of Office integration. I love my iPad. I think Apple rocks. But I still need Office, and that’s the one thing I can’t get on the iPad. If I could get Office on a tablet I’d throw my laptop away.
Some of the Office 365 is pretty slick, and they don’t get the credit for it. I think people will start paying attention to them sooner or later. It’s funny call them a dark horse, but I think Microsoft gets the cloud way better than people give them credit for.
The development platforms are really interesting. There are a whole bunch of .NET developers out there. Where are they going to go? They’re going to go to Azure. The Java developers are going to go to Force or Heroku or Google App Engine. But the .NET guys are not going to jump on to Java platforms.
BI: What’s going on with Google — why aren’t they making a bigger play for enterprise cloud computing?
AB: At the core, they’re a consumer company. They’re very focused, as you see with Google+, more focused on being relevant in social and consumer. I think enterprise is their hidden weapon, though,
it’s growing very rapidly, we’re getting to know the Google Enterprise folks, the products are excellent. Google Docs has to come further to truly be an Office replacement, but Gmail is terrific.
What I’m seeing in sales cycles, as people are going from PeopleSoft or SAP to Workday, they are asking us about Gmail.
I think for them, it’s much more about a sales and marketing push than it is about the technology. Google and Microsoft can build anything they want, they both have amazing engineering organisations. But enterprise people are not good at doing consumer technologies, consumer technologies need to learn how to sell to enterprises. Google’s learning that — they actually hired a couple of the guys out of SAP.
From our perspective, I’d love to have Microsoft and Google both as partners.
In the early days of the cloud, people paid a lot of attention to architecture — multitenancy versus hosted — and yeah it’s got a consumer look and feel versus old enterprise systems. But as the technology evolves with social, with mobile, with open Web services, these new generation of systems look so different from the old generation that the cloud is just the starting point, and the gap is just widening between these legacy systems.
It’s not just about the cloud versus on premise, it’s that the cloud vendors are taking all the consumer internet technologies and bringing them to the enterprise world, and the old guys are not. So I can do an iPad demo for you now that looks just like a native iPad app. It doesn’t look like an enterprise app. It’s an iPad app.
The same technologies you use to build a cloud service — HTML5, open Web services — they happen to be the same technologies you use to build mobile. So for a cloud vendor, getting to mobile is pretty easy. For a legacy vendor like SAP, they spent $5 billion on Sybase, and a year later they still have nothing to show for it. Workday had 5 22-year-old developers building our iPad client.
We both had 5. Five billion, five developers.
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