The rise of SaaS and Workday, Workday's current runway for growth, AI as friend or foe for software, and software's disaster quarter
An overview of Workday & thoughts on the software space
The rise of Workday and SaaS
Workday is one among a number of disruptive SaaS companies which followed in the footsteps of SalesForce to disrupt the traditional on-premise business software market. SaaS has a number of advantages, with the most important ones being that it is asset light, i.e. you can run it from the cloud without having to deploy in-house infrastructure, making it also easy to upgrade to new versions of the software. Traditional on-premise software was typically heavily customized by system integrators, making it a nightmare to deploy and move to newer versions. For example, companies which were in the process of implementing SAP or another ERP (Enterprise Resource Planning) system were notorious for having to announce earnings misses due to bloating costs.
As from the 2000s, waves of companies were founded with the aim of simplifying business software, and which only gathered momentum during the subsequent decades. Workday’s founders had deep expertise in how to accomplish this. David Duffield had already disrupted the mainframe market during the ‘90s by moving HCM (Human Capital Management or Human Resources / HR) software to a client-server on-premise based model. Client-server had numerous advantages vs the mainframe model, most importantly horizontal scalability and a decoupling of applications, allowing one set of servers to take care of the core software and other servers to handle the databasing. Mainframes on the other hand basically unify all computing resources on a single server, allowing only for vertical scaling in one central location where you have to install a more powerful server.
Duffield’s software company PeopleSoft was highly successful and was eventually sold to consolidator Oracle in 2005 for more than $10 billion. However, as Duffield correctly identified that software architectures were transitioning again, this time to the cloud, he founded together with his Vice Chair at PeopleSoft, Aneel Bhusri, Workday later in the same year. The goal of Workday was to build an HCM software in the cloud, something which it has been extremely successful at. The company grew firstly in the mid-market and gradually worked its way up to larger and larger accounts, also known as the enterprise market, the Coca Colas and Exons of the world. As most of US firms are service types companies, around 80% of them or so, Workday decided to integrate a Financials module within their core platform, basically allowing their clients to run their core business of people and financials from the same software. So an enterprise combining this with SalesForce has an extremely powerful cloud based solution to run customer relationships, human workforce and financials on.
This is Workday’s founder Aneel Bhusri in 2015 on the company’s strategy:
“We started with a clean sheet of paper trying to build a unified HR and Financials product. Oracle has an HR cloud and a talent cloud, one is Fusion and one is Taleo, just right there, you've got 2 user interfaces and 2 technologies. So their story is maybe slightly better than SAP, but it's still far from a great product that has happy customers. If you do surveys, you'll find that our customers are much happier than both.
And we're now on our 21st update of Workday, we've been at it for 7.5 years. So it's a product that is now well tested and it's really coming into its stride as a true legacy replacement solution. We also have a broad product line: accounting, cash and assets, billing and revenue recognition, projects, professional services automation, and inventory. So we have a complete financial solution for the non-manufacturing industry which in North America is the bulk of the market, probably 75% to 80% of the market.
For a non-manufacturing company, the incremental implementation cost is not as high. It's still a big implementation because you're turning off your legacy financial systems, but the big benefit if you look at a non-manufacturing company, their number one cost is inevitably people. And so if you want to understand what you're getting in terms of payback on your people, why not have the HR and finance system be one and the same, and why not do analytics on pay-for-performance?
We replaced SAP HR now over 100 times. We thought when we started the company that we'd be a natural for PeopleSoft customers, but we replaced almost as many large HR implementations that were SAP-based. And I just think it was an afterthought for SAP, it only became important to them because of Workday and that's when they bought SuccessFactors.
Upgrades for legacy systems are more expensive than implementations of a cloud system because they're so heavily customized. Every 5 years, if you're a Fortune 500 company, spending $30 million to $50 million to upgrade to the latest version of the legacy system, there had to be a better way. Which is why the cloud comes in, and we now take care of those upgrades for the customer. That is the bulk of where the cost savings come from, probably around 50% of cost savings. We probably develop 3 or 4x faster at Workday than we did at PeopleSoft and when a new version comes out, well, we moved a couple of weeks ago all 700 customers and all of their unique configurations in 6 hours. That's unheard of in the enterprise world.
We took customer service to a new level at Workday, we were great at customer service at PeopleSoft, but it's a different world. We'd hand them a software package, wish them luck, give them a card for a Deloitte or IBM services person and we'll see you at the user conference. In the SaaS model, we own the end-to-end delivery and it forces you to be closer to your customers. And that's a huge opportunity for cloud companies to differentiate themselves versus on-premise companies.
We have two formidable competitors in SAP and Oracle, but their strength today is mostly on distribution and less on product. Basically, we're in a race over the next 5 years to build out our distribution channels while they try to catch up on products. Whoever has the products plus the distribution channels first, they'll own this market.
Currently, they're very aggressive on price, in some cases, they'll give it away for free to keep an account. But that's nothing new, that's been the case for the last 4-5 years since they woke up to the threat of the cloud. In particular, SAP has great CEO relationships and so they'll go to those CEOs and say ‘hey, we've got something kind of like Workday's’. And most CEOs of Fortune 500 companies don't know the difference between the different cloud vendors. Bill McDermott in particular, he will go in at the CEO level and that will saw us out. So we might do really well with HR and IT, but we have to get very good at reaching CEOs, make investments in marketing that raises our awareness where we can actually get to the CEOs.
If I were SAP or Oracle, I'd actually give us HR and not let us get an inch into the world of ERP with Financials. And they've frankly done the opposite, it's kind of a head-scratcher to me, but the Financials world for cloud systems is pretty open for us. We're competing against legacy systems, not against other cloud systems. And I think the history of cloud computing versus legacy is pretty clear on who wins, if it's cloud versus legacy, cloud's going to win.”
For premium subscribers, we’ll take an in-depth look at:
Workday’s current runway for growth
The company’s current competitive position and the overall competitive landscape
An analysis of the weak guide post Q1 and the subsequent sell off in the shares
Thoughts on software’s disaster quarter in general
A discussion of the risks and opportunities coming from AI for Workday
A financial analysis of the company
Thoughts on valuation and whether the shares should be a good investment
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