One of the big shifts happening in the enterprise software business is the adoption of the Cloud. This is already the dominant model for the consumer Internet space (e.g. Google, Facebook). The overall myth was that large companies are so concerned about security and privacy of data that they will be reluctant to let go of running these applications in-house. Then about 3 years back, Oracle’s CEO ridiculed the cloud as vapor. But the landscape has surely changed and will change even faster going into 2012. Why do I say that?
Recently SAP bought Success Factors at a very high valuation and many saw that as a desperate move to get into the Cloud. Oracle also bought RightNow in the same vain and there is a strong possibility that Oracle will acquire NetSuite in the next twelve months (NetSuite addresses mostly the SMB market). SalesForce.com (SFDC) has been growing and its valuation has gone quite high. The new entrant Workday (founded by the founders of Peoplesoft) has been doing very well. Someone said it is valued at almost $2B with yearly booking rate of $300M. Not bad for a five year old company. Workday addresses the HR space, but is moving to financial applications as well. It wants to be known as an “ERP Replacement” company, not just an “HR Company”.
Most of Workday customers are the large enterprises such as Tyco, AIG, Flextronics, etc. These customers are replacing legacy applications from SAP and Oracle with Workday’s SaaS suite offered through the Cloud. The advantages are obvious for the customers – same version always, new functions added more frequently, vendor takes care of upgrades, less cost paid to SI’s. The traditional applications typically require a 5 to 6 times expense (over product license cost) on consultants (SI’s) who keep customizing the apps. Workday claims their customers have a 90% reduction on SI cost, which is a big deal.
The challenge for the enterprise Cloud vendors is the revenue model, where they do not get the hefty license dollars up front. Hence their investment (both capex and opex) is quite high. For example, Workday has taken investment of $250M to date, counting the last round. But if they can sustain like SFDC, then there is a thriving growth business. By the way, Google has a growing enterprise business and currently brings $1B revenue which is not bad at all. They clearly are focused to make this part grow faster in future.
This is not good news for legacy enterprise application companies like SAP and Oracle. They have to re-invent (or acquisitions like Success Factors and RightNow) quickly to catch up with this shift to the Cloud by large enterprises. Oracle is more likely to ride this bandwagon sooner than SAP. As per the SI’s, they need to re-invent also to at least keep their current clients happy. That means they have to shift from “customization” of code to more reconfiguration of business processes.