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The Race for the Cloud

 

With a successful IPO under its belt, cloud HCM vendor Workday appears to be in a better position to challenge large rivals like SAP and Oracle, even though it's still far from profitable.

Tuesday, October 23, 2012
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If anyone could possibly have had any doubts that the cloud is poised to become the dominant mode for human capital management software delivery, those doubts have surely been erased by Workday's red-hot debut as a publicly traded company.

On the day of Workday's Initial Public Offering a week ago, the Pleasanton, Calif.-based cloud vendor's stock zoomed from an opening price of $28 per share to nearly $49 per share at the end of the first day. The price is currently hovering at around $55 per share.

This strong performance is just a sign of things to come, according to Aneel Bhusry, Workday's co-founder, chairman and co-CEO, who told the New York Times last week that Workday's IPO puts it in a better position to challenge its much-larger competitors, which are in the process of moving more of their software to the cloud. "Oracle's products are a mishmash" of different kinds of software, he said. "It's the same for SAP."

Workday's rise, he told the Times, "is the start of a 20-year cycle. The incumbents are not prepared."

Folia Grace would probably beg to differ. Grace, vice president of product marketing for SAP, says the Germany-based enterprise-resource planning vendor "has been investing in the cloud longer than Workday has been in business." (Representatives from Oracle were unavailable for comment.)

SAP's $3.4 billion acquisition of cloud vendor SuccessFactors last year represents only a part of the company's commitment to innovating in the cloud, she says. SAP has committed to releasing four new versions of its software per year via the cloud and is investing heavily in building up SuccessFactor's Employee Central core HR offering.

"I think you're going to see SAP market its cloud solutions more loudly and proudly," she says. "I think there's a misperception that SAP is behind or hasn't made an investment in the cloud. The opposite is true, but we do need to work on telling that story." 

SAP is also in a much stronger position than Workday because of its global sales network, which Workday currently lacks, she says. In addition, SAP has a network of resellers who can help mid-market companies acquire and deploy SAP products relatively cheaply, she adds. 

Workday is getting lots of visibility not only because of its strong IPO but the history of antagonism between Workday co-founder Dave Duffield and Oracle CEO Larry Ellison (who acquired PeopleSoft, which Duffield founded, in a hostile takeover) -- a storyline that the media loves to talk about, says Grace.

"The attention being paid to Workday is just further confirmation that the market understands that Software-as-a-Service is a viable trend," says Grace.

Framingham, Mass.-based research firm IDC forecasts that the Software-as-a-Service market will grow from $23 billion in 2011 to $67 billion in 2016. Workday is far from profitable at the moment, however: although revenue grew by 118 percent during the first six months of this year to $119.5 million, the company's operating loss was $46 million during that same period, according to nasdaq.com.

Nevertheless, Workday's skyrocketing stock price was not a surprise, says Paul Hamerman, an analyst at Cambridge, Mass.-based Forrester Research.

"The company has the right business model at the right time, it's had sustained growth of 100 percent for the past five years, and the market has been valuing SaaS companies at very high levels -- look at what SAP paid to acquire SuccessFactors,"  he says.

"The fact is, many organizations are simply tired of the expense and hassle of on-premise software," says Hamerman.

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Consultant Naomi Bloom, who has served as an adviser to Workday and a number of other SaaS vendors, says she was "stunned" by the rapid climb in Workday's stock price, although she says most had expected its IPO to be successful.

Bloom, managing partner of Fort Myers, Fla.-based Bloom & Wallace, says she expects Workday to use some of the $675 million it earned from its IPO to continue building out the functionality in its HR and finance software and hire a global sales-and-support team.

"They need 'feet on the street' in countries where they don't yet have them, and that takes a lot of money," she says. "There has been some speculation that they'll use the money for acquisitions -- that's certainly not beyond the realm of possibility."

Although other SaaS vendors, such as SumTotal and SilkRoad technology, have indicated they plan to go public soon as well, Bloom says it's unlikely they'll garner the same level of excitement as Workday.

"They don't have the same upside potential," she says. "The talent-suite vendors came into being because the ERPs, the core HRMS vendors, didn't do a good job in talent management. Now that you have options like Workday -- why would I want a talent suite to layer on to different things if I'm going to change to something that obviates the need for a talent suite?" 

As for SAP and Oracle, Bloom says, "they say they're not worried, but they are, and they should be."

Those companies simply can't move as quickly to the cloud because they have so many customers that are unable or unwilling to commit to the model, she says, which means they'll need to continue investing in on-premise software in addition to the cloud.

"Each of these reputable vendors is moving heaven and earth to make money, and that means holding on to the revenue streams they've got even as they go after new ones, and so that means they have to praise on-premise, praise hybrid and praise customers who want to just move at their own pace," says Bloom.  

 

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