Zoho Day: The long shadow of Amazon – Enterprise Irregulars

When I visit a vendor after a couple of years I measure how they have changed along 4 vectors – product growth, geographic expansion, change in customer base (going after larger or smaller customers) and vertical capability expansion. At Zoho Day last week, I picked up another vector – the Amazon vector. More about that later.

You knew it would be a different couple of days because CEO Sridhar Vembu was not hobnobbing, unlike many of peers, in Davos. He was greeting us in jeans and untucked shirt.

Product Vector

The product portfolio continues to grow at a remarkable rate. Raju Vegesna presented under NDA an update on the upcoming Commerce offering. On each planned feature he spent maybe 30 seconds on would take 10 minutes in other vendor briefings. As Sridhar said “The cloud app development has become objectively easier. I mean we’ve been in the software business for 32 years, so I know. There are a lot of infrastructure pieces that have been figured out more and more and more. And it is becoming easier and easier and easier. I saw a figure for 30,000+ VC funded cloud startups in the world now. In December, it’s even harder to pin down because it’s global and there are integrators everywhere.”

The image below shows some of Zoho applications. It does not include coverage of two sister companies, ManageEngine which focuses on IT Management and WebNMS which started off with a network management focus and now has an IoT, smart city infrastructure focus. The latter two also shows in Zoho’s comfort in running its own data centers which it claims are more efficient than procuring from hyperscale providers like Google. The registered user growth has averaged 37% over the last 5 years, and is now over 40 million worldwide.

Couple of analysts said Zoho seems to only deliver “minimum viable product” – if that’s good enough for its customer base what’s wrong with that? Besides, it reflects an agility as Zoho can bundle a variety of services it has been growing over the last decade. The prime weak areas, to me, today are in HCM and in Asset Management.

Geography Vector

Zoho is experiencing strong growth across most major economies and has 7 data centers to mirror them, and shows up at over 170 trade shows around the world. It is unafraid, unlike so many US cloud vendors who are reluctant to expand globally. Indeed, only 42% of total revenues now comes from the US (down from 53% in 2012). Sridhar said “We opened Amsterdam, Singapore, Dubai, Mexico, and Australia last year and some more are coming this year.” It wasn’t just talk. He had flown many of the employees for the couple of days. I met several from Pleasanton (the HQ) and Austin (fast growing US campus), from Chennai (still the development hub) and Delhi in India, from Utrecht in Holland, Kanazawa in Japan and New Zealand.

Customer Size vector

Zoho keeps moving up market in terms of customer size – to the extent it can do so without a direct sales, and SI ecosystem model. Two customer executives presented at the event. Julie Doris leads Customer Service at Rain for Rent (drainage pumps, water tanks and services for farming, fracking and other markets). Tarun Raisoni is co-founder and CEO of Rahi Systems (solutions for data centers and corporate campuses). Both are private but Rain has over $500 b in revenues and Rahi has over $150 b. Neither is a CIO but both were impressively knowledgeable of product features and relentlessly focused on value from software. As Julie said “I don’t let Gartner Magic Quadrant placement influence my decisions too much”. Tarun, in response to a question, said “we have not done an ROI analysis – yet”. Honestly, at Zoho’s price points, he may not need to. Certainly, those two customers are a far cry from the Small Office, Home Office (SOHO) segment that ZOHO was originally named after. Zoho is grappling with whether it needs a Toyota/Lexus type branding fork.

Vertical vector

The one area they have not grown is around verticals. I later had a one on one conversation with Sridhar about “white spaces” to consider. The big difference – when I talk to other software CEOs they either tell me they don’t have bandwidth to verticalize, or others are content with the few features they do have. They appear convinced these features can satisfy the need for vertical operational “books of record” like insurance claims processing or clinical systems. My concern with Sridhar is he will rush off and commit to multiple industries. He is completely unafraid!

Amazon vector

There is a fifth vector that Zoho has also been executing along. It’s the Amazon vector. The Zoho team is preparing for the day when Amazon decides to become an enterprise software, not just an infrastructure, player. The Bezos motto of “your margin is my opportunity” puts the margin rich software industry at risk. Software margins remain very high but the industry is not efficient. Sridhar:

You can see that the enterprise cloud vendors are even more sales and marketing intensive than traditional information software companies and those were already quite sales and marketing intensive to begin with. This is something that is unexpected because, if you look at the whole SaaS cloud revolution, it was supposed to deliver us from this exact problem: focus more on software and not so much on the facility of it. 50% of their revenue is spent on sales and marketing; 50% is now considered just normal. And 70% is not uncommon at all now.

We are spending tens of millions of dollars in cloud infrastructure, all of these storage servers. We know how the costs have come down. In fact, something like those are not even possible if not for this development.

Yet, ask yourself, why is it that somehow enterprise software prices only go up? Why don’t all these prices keep coming down? There are also substantial … software in all of these. I mean look at networking. That is mostly software now. Somehow, all of those industries are subject to one kind of economics. But when you come to enterprise software, the economics seems to change.

An example of that thinking comes from Zoho One , the bundle priced at $30 a month an employee, or $75 a month on per-user basis. It was launched in 2017 with 35 applications, it now has over 40. And from the presentations we heard more apps will join the bundle. A dollar a day per employee is a compelling value proposition, when the functionality keeps growing exponentially.

I have known Sridhar for nearly 15 years, and this awakening did not happen overnight. In 2006, he wrote a guest column for this blog which explained his pov:

“Personal computers made computing ubiquitous in the developed world. Mobile revolution has swept the globe, with hundreds of millions in developing countries making their first phone call in the last decade….Yet, in the world of corporate IT, the low-cost revolution is very much unfinished business….most of what enterprises pay for software goes towards funding the marketing budgets of vendors. This seems like an universal law that is applicable regardless of whether the vendors have open source or proprietary models, and even extends to on-demand business models.”

He has long avoided the VC funded model, following instead the cash flow funded growth at companies he admires like Microsoft. He says the prevailing wisdom in Silicon Valley is “Just raise the most, spend the most, and just conquer a particular market segment.” He has studied Ikea and Trader’s Joe, not just in how they have thrived even as Amazon decimates other retailers. “They provide a human-provided customer experience. Right? If you go to Trader Joe’s, people are smiling. You can tell it’s a fun place to shop.” He has also looked into how they have stayed private or adapted unique structures like Ikea’s and preserved their DNA. His philosophy:

“We’ll stay true to ourselves. Stay hungry. Stay foolish. But we can only stay hungry and stay foolish if we are staying private. If you go public, a lot of those things just go out the window.”

He has a unique recruiting model which again goes against the grain of the industry and yet generates unbelievable employee loyalty. As I wrote in 2016

“Average tenure of employee is 10 years. 146 out of 150 managers have never worked anywhere else. Most executives we met wear several hats. None of their business cards have titles. They waste very little time in team meetings. 20% of their engineers do not have degrees. Focus on promise more than formal education helps Zoho recruit in India against the giant outsourcing firms where the majority of his development is done. “

Besides preparing for the Amazon onslaught, Zoho has adopted some of its business practices. The more I heard of Zoho One and the growing apps coverage for the same price, I thought of how Amazon Prime has grown in coverage. It started off a free 2 day shipping, then added free movies and since then countless new features. AWS delivered 60+ price cuts in its first decade – almost as if they were listening to Sridhar.

Amazon may never enter enterprise software, but Zoho wants to be ready. Sridhar is too modest to say Zoho is disrupting the industry, but in my eyes, he already has. He has given me another vector to measure software vendors against.

(Cross-posted @ Deal Architect)

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