Workday - a new kid on the block!

Introduction

Workday is the leader in enterprise-class, software-as-a-service (SaaS) solutions for managing global businesses, combining a lower cost of ownership with an innovative approach to business applications. Founded by PeopleSoft veterans Aneel Bhusri and  Dave Duffield, Workday delivers unified Human Capital Management, Payroll, and Financial Management solutions designed for today's organizations and the way people work. Delivered in the cloud leveraging a modern technology platform, Workday offers a fresh alternative to legacy ERP. More than 280 customers, spanning medium-sized organizations to Fortune 500 businesses, have selected Workday.

Workday was started in 2005 by Aneel Bhusri and Dave Duffield.  Based on an interview with Aneel Bhusri, CEO of Workday, he suggested that Workday could be an even larger enterprise than their prior baby – PeopleSoft.  The difference is that Workday, unlike PeopleSoft, is based off of cloud computing.  HR, Payroll and accounting which are the main genres of Workday, when combined together is approximately a $50 billion dollar software market. 

When looking at any new or upcoming company, we need to go back to our Economics 101 lecture, and see how easy or difficult is it for new players to enter the market.  When it comes to HR and payroll software services, it is very hard for new players to enter the market.  Enterprise companies such as Workday, require a hefty amount of capital to get the enterprise off the ground mainly due to the expertise and time involved.  Moreover, for a large customer to accept the proposal to adapt the new software, the software service should be extendible to all parts of the company. 

For example, if a company has presence is over 50 countries, then the software service for HR and payroll should be able to gather, store and compute salaries, benefits, taxes, etc. for employees in all the 50 countries.  This in itself is a massive undertaking and requires a lot of man hours and expertise in understanding taxes, HR regulations and other relevant laws and it is imperative to convert these requirements into a working software service which Workday has been able to achieve.

But before we go any further in disucussing Workday, lets delve a bit into what cloud computing really is!

Cloud Computing

In the IT space, this terminology is becoming increasingly popular.  So without further ado let’s get into the crux of the matter.  In the “early ages” one would buy a disk and install the software on their machine and then work on that machine to get the desired results.  Let’s go with a simple example of Microsoft Word – software being used to write this article.  Earlier you would go to a store, buy a box which has the disk which you will take home and install Microsoft Word on your computer.  Well those days are gone!

Now you can log on to the Microsoft website, you can open Microsoft word on their website, work on your document and store your document on Microsoft’s server.  So instead of running the software on your own machine, now you can run Word “in the cloud”.  So the software runs remotely instead of locally.  The information is stored on one the servers that are called “general purpose” servers.  Some companies only offer general purpose servers which are kept in a large warehouse, and these companies rent out their server space to users.  For example, Amazon uses these general purpose servers for its purposes.

Now that we know the bare basics of the cloud computing, we can look at who benefits from using this type of infrastructure.  It is used to solve enterprise-class problems, especially for companies that have millions of customers and thousands of employees where data management and computations involved are very intensive.  So is cloud computing cost effective?

The answer for cost depends on factors such as economies of scale, economies of scope etc.  To elaborate on this lets take an example of a company that has a 1000 customers.  So to manage this the company implements an enterprise solution – let’s call it plan “A”.  Then the company grows to 50,000 customers, where it’s still using “A” but due to a larger load “A” starts to slow down.  Now the company has grown to 500,000 customers.  At this point “A” is no longer a valid option because it’s not strong enough to handle 

the work load so the company has to switch to a better system, let’s call it “B”.

The company will now not only have to invest in the new service provided but there would also be costs associated in transferring the entire company and all its customers from “A” to “B”.  The other option this company could have opted for was to get “cloud computing” and for simplicity sake, let’s call it “C”.  Cloud computing could have been put into use from the very beginning when the company was only working with 1000 customers.  But as the company grew, instead of changing its entire system, it could have just added more space to its servers.  So to make sense of it all, the following equation can potentially be true:

Cost [A] + Cost [B] + Cost [Migrating system from A to B] > Cost [C].

How can this be tied into the real world?

In the genre that Workday has entered, there are two rivals who are always looking for opportunities to pip each other.  The reference here is of course towards PeopleSoft Oracle and SAP.  Both of them have been in this “line of business” and are always in neck to neck competition with each other.  What is important to note, which has been mentioned earlier, is that PeopleSoft was developed by the same guys who have now started Workday.

In December of 2004 when Oracle completed the acquisition of PeopleSoft, it made Oracle the second largest seller of business applications software behind SAP AG.  Looks like six years later, Oracle is still lagging behind SAP in terms of its market position in this genre.  However, recently Oracle has gone on the offense by acquiring firms such as Sun Microsystems and more recently Rightnow CX, which is a cloud-based customers’ service experience suite.

This gulping of new assets by Oracle has caused SAP to acquire SuccessFactors which is a software-as-a-service (SaaS) firm.  The time gap between Oracle’s and SAP’s acquisitions was a mere 6 weeks.  It is true that Oracle has been able to get much better bargains than SAP since Oracle paid less than half for Rightnow compared to what SAP had to pay for SucessFactors’ acquisition.

Now SuccessFactors is arguably the best software-as-a-service (SaaS) company that deals with HR services and rivals companies such as CornerStone On Demand, which is considered a leader with a strong ability to execute, and, Taleo which is in the same quadrant (refer to Gartner’s quadrants) as both SuccessFactors and CornerStone, but is lagging in both its leadership and its ability to execute to both SuccessFactors and CornerStone.

Each of the companies listed above provide services that enhance management decisions especially in terms of attracting, retaining or hiring human resources, along with other enterprise requirements.  Now if we look at PeopleSoft and SAP as the only entities in this genre, we will be able to tie this back to our formula which consisted of “A”, “B” and “C”.  To put things in the right perspective, both PeopleSoft and SAP are in the “A” and “B” categories.  Their competition is based on what services they provide to their customers but falls short of reaching the capabilities of “C”.  We will delve into this last point little later.

As an ERP vendor, PeopleSoft provides variety of software applications such as Customer Relationship Management (CRM), Higher Education, Human Resource Management System, Supply Chain Management, Project Management and Materials management and others.

SAP means System Application and Products. By employing SAP, a centralized database is created for all the applications that are currently used in an organization. All work in the functional department of the organization is handled in a versatile manner by this application.  SAP provides Business Information Warehouse, Advanced Planner and Optimizer, Supply Chain Management, Human Resource Managed System, Product Lifecycle Management, SAP knowledge Warehouse, Supplier Relationship Management and Customer Relationship Management.

We have established that both PeopleSoft and SAP are ERP (Enterprise Resource Planning) software applications.  So the bottom line for both these giants is the same.  But SAP provides far more applications and products than PeopleSoft.  Also one can safely say that PeopleSoft, is a definite asset to Oracle, but it has not yet been able to compete with SAP on all ERP applications.  Is it because Oracle has not been able to develop its PeopleSoft brand or is that that PeopleSoft is not adaptable to changes and additions is a debate for another time.

Where does Workday fit in?

Now the one firm we don’t see in any of the four quadrants is Workday.  One of the most important elements of any start-up or existing company is its management.  To give you a proper perspective, private equity (PE) firms look at the experience of the management before valuing the company, even though the management is not a tangible asset of the firm.  So based solely on that logic one can dare to think that there is a high probability that Workday would be able to make its name at least in the mid-market category if not the large-cap market.

Workday’s growth is exponential which is currently trending at 90% a year on average based on the past six years.  One also has to look at the type of customers that Workday has been able to get to better judge that growth.  As of now, Workday has customers such as Lenovo, GMAC Insurance, AAA and Sony Pictures just to name a few.  It is also interesting to see that RightNow, which is Oracle’s recent acquisition, is one of Workday’s clients.  What this means is that Oracle might be expanding and trying to compete with SAP, however, as of now it is not in direct competition with Workday and is in fact partially dependent on Workday’s enterprise software service.

Since Workday is the new kid on the block it has to offer some differentiation from its competitors.  It has been using three main selling points to counter competition – cost, usability and pace of innovation.  Over a 5 year period Workday consistently comes to about half the cost of SAP and PeopleSoft Oracle in any application across the board.  Moreover, Workday looks like a consumer internet application and therefore it does not require as much training as is needed for using software from its competitors.  Most importantly, due to Workday’s cloud model it is able to come up with a new update every four months, which makes Workday more adaptable to the needs of its customers.

PeopleSoft is easier to use and train people on than SAP.  Moreover, SAP is costlier as compared to PeopleSoft.  So even though SAP provides more functionality but it’s neither easy to use, nor flexible or cheap as compared to PeopleSoft.  So going back to our “A”, “B” and “C” example, we can put PeopleSoft in the “A” category which is great for smaller enterprises and has lesser options.  SAP would go into the “B” category, which can handle more volume and has more applications to ensure it can better match the customer’s needs.  Finally Workday would be “C”, where if the company starts off with Workday’s solutions, it would not need to change any applications and would be able to expand and or contract simultaneously with the customer’s requirements.

It is also important to note that SAP, Oracle and Workday provide analytics as well which allow their customers to better forecast their human resources needs for the future.  Business Intelligence, which is something that SAP is lagging behind Oracle, allows customers to compare labor cost by unit, by market, by role and over a period of time.  It also allows customers to forecast future salaries in the countries they operate in and also allows customers to forecast minimum wage in different regions around the world.  BI is also an excellent tool that allows management to forecast employee turnover which can be a definite asset for the management if it wants to input strategies to retain valuable employees. 

One should also note that it is not that just a few types of companies that require this type of software, rather every type of industry needs this type of enterprise software that Workday is offering.  Business Intelligence is a very vast field, so we will delve into this topic more in forth coming articles so you can link different analysis.

What’s in it for me?

After all is read and understood, the question lies – what’s in this article for you?

Coming to the bottom line, Workday is planning on coming out with its Initial Public Offering (IPO) sometime this year.  The IPO is expected to come out in the middle of 2012.  Now you can start to think like a potential investor and how this specific stock might help or hurt your portfolio if you decide to own it.

You can go through the entire process of analyzing this firm by looking at its financial statements and by looking at various key ratios that you are habitual to.  But among other things, you must also try to find out how satisfied are Workday’s customers?  What are the future moves of the management?  How long have the customers signed contracts for with Workday?  What is the size of the average client of Workday?  Including, but not limited to, are there any potential buyers of Workday in the future and if so, can you expect to get a premium by the acquirer?

Workday is the new kid on the block for all practical purposes but the question lies; does this kid have what it takes to compete with the big boys?