Last week’s blog post highlighted the problems legacy ERP vendors have driving upgrades to the cloud. The idea that the best way to sell an ERP upgrade to the cloud is to sell much more than a simple ERP upgrade to the cloud appears to have struck a chord.
There’s some consensus that my thesis is valid for those vendors with a legacy customer base they’re trying to push into the cloud. But what if you’re a cloud-native vendor, hoping to sop up the incredible demand for all things cloud in the enterprise, but you’re a vendor that effectively sells everything but ERP? If, as I posited, selling the ERP upgrade by selling the software that surrounds it is the way forward, what if your product suite has no ERP to surround? What then?
The answer is simple: look for those customers that don’t think they need or want to upgrade the on-premise ERP, and sell them products and an innovation strategy that is either agnostic to or independent of an ERP system, upgraded or not. It’s the old edge innovation story, one that’s been going on long before the cloud captured the hearts and minds of the enterprise. And its potential for success can be gauged in part by those customers that are still sitting on 20th ERP systems or have moved their ERP maintenance contract to a third-party service provider in order to lower ERP operational costs and, at least theoretically, move the savings into the innovation column.
But what if a vendor took the “surround ERP” strategy one step further and made innovation not just a product story, but also a matter of innovation in pricing, product integration, and customer centricity? In other words, what if the vendor makes innovating the enterprise software acquisition process as big a part of the story as the products themselves?
This is the essence of the strategy Zoho is deploying for moving up-market from a solid position in the SME space into the low-end of the enterprise space, that rich swath of customers with annual revenues from a hundred million to a billion dollars. The strategy is pretty ambitious, audaciously so, but there’s a lot about what Zoho has in mind that makes tremendous sense in an era when the number of customers sitting on legacy ERP systems remains an order of magnitude (or more) larger than the number that have migrated to ERP in the cloud. And don’t forget that many of those customers (as in the majority of the Infor customer base, for example) are still running that 20th century code, and by extension running 20th century business processes that are in desperate need of a little modernization.
There are two important underlying characteristics of Zoho that make their strategy pretty enviable, especially for the legacy-cum-cloud vendors mentioned in my previous blog. The first is that the company’s products are pure cloud and always have been, so there’s no old code or customers to migrate. The second is that Zoho is private, owned by its founders, not a private equity firm, and is therefore not beholden to the whims of a fickle and, in my opinion, at times idiotic, public equity market.
The advantages of pure cloud are well known, though in Zoho’s case this is amplified by the sheer breadth of product they bring to market – all developed in house, no acquisitions to assimilate and migrate, another plus relative to the legacy/cloud vendors. This wide range of product – CRM, personal productivity, marketing automation, finance, web commerce, HR, order management, inventory management, warehouse, logistics, collaboration, project management, process automation, analytics, and a few more I’m sure I’ve neglected to mention – is built on the same code line, and is, in theory, largely integrated from the get-go. In reality Zoho has some work to do on getting everything as tightly integrated as it should be, but it’s a relatively solid integration play nonetheless, considering the job M&A-fueled legacy/cloud vendors have in front of them to rationalize their portfolios.
An obvious question is whether Zoho can deliver best of breed functionality across this many products, and the answer is “not necessarily.” But that’s largely beside the point. The majority of users of software products use only a subset of the functionality their products provide, all the more so in a cloud era when upgrades are released at a cadence only a developer could love. Because, let’s be honest, whether you’re using Office 365 or Salesforce or SuccessFactors, chances are the new features coming at you and your fellow users are arriving at a pace that is largely impossible to keep up with.
Feature bloat is, unfortunately, an intended consequence of the cloud, and this has meant that best-of-breed software is in constant danger of breeding so much “innovation” that it becomes a barrier to use. Office 365’s Outlook, for instance, just went through another upgrade, first on my laptop and then on my phone, that actually set me back for a few days as I scrambled to find the features I use every day while trying not to trip over the new ones I have neither time for nor the inclination to learn about.
The breadth of functionality of functionality offered by Zoho allows companies to focus on process innovation along as many “edges” as they would like. This makes a lot of sense for SME and lower large-enterprise companies looking to transform core processes without necessarily blowing up the entire IT infrastructure, and, gasp, upgrading their ERP system. If the innovation requires a new online commerce platform, or new productivity and collaboration processes, or a more up-to-date warehouse, or whatever, Zoho largely has the edge functionality necessary to get started. This will be a welcome relief to companies looking for innovation that doesn’t start with upgrading their ERP systems – which, as we all know, is still the vast majority of companies. (For the record I believe many of these ERP fence-sitters should get the hell off the fence already, but as the business case has been for the most part poorly articulated by the ERP cloud vendors, I don’t blame them for staying put.)
Zoho’s strategy is to produce feature-rich products – I’ll leave it to others to build the feature/functionality tables comparing Zoho to other vendors – that cover a huge swath of known use cases, and then throw an even bigger wrench into the traditional enterprise software market: affordability. Extreme affordability that is, especially for the enterprise customer used to what my friend and colleague Brian Sommer calls “wallet fracking,” almost suspiciously low. How low? The Zoho One suite tops out at $75/user/month for pretty much everything I mentioned above – 40 products in all. You can imagine Zoho execs might find themselves in the somewhat enviable position of having to explain to customers why it doesn’t cost more.
And then there’s the customer-centricity of the entire company – a refreshing change in a market where top executives sincerely, really, honestly talk from the heart about putting the customer first without necessarily revealing that all too often that the real customer is the shareholder, not the buyer of the software. (Think about this definition of customer next time you fly United or Delta, which is unfortunately the model many enterprise software vendors are actually embracing, customer-centricity lip-service to the contrary.)
So while Zoho is hardly the only software company to take the customer-centricity vow, they have two things going for them that makes it possible they could really pull it off. Remember to whom the company is beholden, its founder shareholders, not the Wall Street folks who think in three-month increments and somehow can’t stop categorizing semiconductor and software vendors as “tech” stocks and then punishing enterprise software companies when the chip market softens. This helps Zoho avoid the kind of quarterly sales-quota driven culture that is the ultimate factor in why good companies end up abusing their customers on the way to keeping Wall Street happy.
(Sorry for another parenthetical comment: Infor has been one of the very few enterprise software vendors that is not a public company and has a large legacy customer base to convert to the cloud. The latter characteristic has made it relatively easy for CEO Charles Phillips to thrive in part because as a private company he’s been exempt from what I call the legacy vendors’ paradox: Wall Street wants these vendors to grow like a cloud company and be profitable like an on-premises company. It’s tough sledding, but with Infor suiting up, once again and hopefully for the last time, to do an IPO, that shield will be gone and lots of things will have to change. And don’t forget that a software IPO, any company’s IPO, is never undertaken with the goal of improving the lot of the company’s customers. Indeed, when it comes to most recent software IPOS, the acronym could just as easily stand for Investor Payout as anything else.)
The other reason Zoho has a shot at success is that they’re starting out in the enterprise without a legacy elephant-hunter direct sales culture. There’s no field full of “seasoned” account executives who have to be coerced into buying into a more customer-centric world (and trust me, this is a huge issue in the enterprise sales teams of many of the major vendors moving from on premise to cloud sales models.) And they don’t have a pricing model that’s replete with hidden expenses and gotcha’s that make the final deal look way more disadvantageous to the customer than things looked at the start. Zoho gets to start fresh, and hopefully learn from the mistakes of others.
But none of this means it will be a slam-dunk effort, and there are going to be some challenges along the way. One of course will be a relative lack of experience in the upper reaches of the market, though the company has two separate lines of business, ManageEngine and WebNMS, that already sell to the top shelf. A decent start. But as they move forward into this new market they will definitely need to grow their partner channel – implementation partners and ISV partners that can extend the suite into specific verticals and geographies. And channel management is always a pain, and it’s a particularly onerous problem that’s bedeviling their much larger enterprise software competitors as they move to the cloud. Keeping these partner companies aligned with the values and goals of Zoho will be key. The industry is rife with examples of how the major vendors became overly beholden to a group of partners that have been more dedicated to their own success than that of their mutual customers.
Zoho may also take some heat about their choice to run on their own cloud, eschewing public cloud companies like AWS and Microsoft in favor of a roll-your-own strategy. Taking a different tack isn’t necessarily a bad idea, but it’s a strategy that forces Zoho to swim upstream against a strong current that is trying to drive the nascent cloud customer base into the hands of the public cloud vendors. While the cloud platform market has always looked to me like a race to the bottom, if you look at the billions in profit that AWS rakes in you have to wonder, to steal a modus operandi from Jeff Bezos himself, if there aren’t a few points of fluff in the AWS or Azure model that Zoho could siphon off by owning the data center too. I don’t think there’s any risk in Zoho owning their own data centers from a customer standpoint, but, like the pricing issue, it may raise a few eyebrows along the way.
The other issue is how the company will deal with the growing need for industry-specific functionality and other last mile functionality in the “fit to standard” cloud world. Again, the basics formula is all there, and Zoho’s tools, developers, and ISV partners need to be aligned in a way to incubate last-mile capabilities and products. And again it’s an execution issue more than a strategic one. Indeed, measuring the success of Zoho’s push into the enterprise will be more than anything a matter of measuring how the company deploys its assets in service of its strategy. The advantage of being relatively small is in the agility to turn on a dime, but being small also means that the consultative nature of enterprise sales will mean that resources may be spread thinner than Zoho would like.
While I wouldn’t hit the panic button yet, I think there’s more than a few companies that ought to be paying attention to Zoho in the next year or so. Microsoft because it’s competing on three levels: enterprise software (though Dynamics’ ERP capabilities have no direct match in the Zoho portfolio), productivity, and platform. Infor because those tens of thousand of fence-sitting ERP customers might be content to stay on the fence and innovate with a competitor that isn’t pushing hard for an ERP upgrade. SAP and its B1 and Business By Design products, which target the same market, and Acumatica because there’s a lot of similarities in culture, approach, and target market, though again these vendors’ ERP functionality has no real competition in the Zoho product suite.
In summary, what I see in Zoho is a refreshingly different view on how to align customer needs and product capabilities, and at a minimum that view could and should engender a cultural reassessment across the enterprise software market. And optimally, which I think isn’t farfetched to say the least, Zoho could really make a significant mark in the enterprise software space. As I sit in meetings listening to customers across our industry complaining about their enterprise software vendors, in particular but not exclusively over ERP upgrade strategies, I keep wondering why so many customers have a love/hate relationship with their preferred vendors. Many think it’s just the price of doing business in the complex spaces where enterprise software and the enterprise meet. I’d like to think there’s a better way. And maybe there is.
Awesome post! Thanks for sharing the knowledge and keep up the good work.