Can PeopleSoft veterans drive on-demand apps?

PeopleSoft's founders are now pushing a SaaS applications platform

PeopleSoft founder Dave Duffield and former vice chairman Aneel Bhusri have a long history of selling on-premise enterprise systems to CIOs. Duffield founded ERP vendor PeopleSoft in 1987; Bhusri joined the company in 1993 and held various senior-level product strategy and marketing positions.

But after Oracle's hostile takeover of PeopleSoft, in January 2005, the two "legacy ERP guys", as Bhusri puts it, switched sides. They set out to build an on-demand platform the sole purpose of which would be to replace companies' existing on-premise HR and ERP systems. Square in their sights were companies like Oracle and its PeopleSoft applications, which Duffield and Bhusri had evangelised for so many years.

In May 2005 they launched Workday, in much the same way that Salesforce.com went after the CRM market. Today, the privately held company offers on-demand HR and financial applications. Duffield and Bhusri argue that their products put an emphasis on user-friendly ERP applications and come with easy-to-integrate regular updates. The company closed out 2007 with 35 companies as customers, each averaging between 5,000 and 10,000 employees.

Ray Wang, a principal analyst at Forrester Research and a former PeopleSoft employee, says Workday's benefits are similar to other software-as-a-service vendors: rapid implementation (days and weeks instead of months and years), subscription pricing (cost per user, per month, versus $100,000 to millions up front); and frequent upgrades (system features and updates delivered every three to six months instead of every two to three years).

"Workday is well positioned in the HCM [human capital management] space, and they are rapidly moving into the financials and supply chain space," Wang says. "Dave's reputation has brought significant interest to the company."

CIO.com senior editor Thomas Wailgum talked with Duffield, who is Workday's CEO, and Bhusri, the company's president, about their transformation from on-premise to on-demand adherents, and why CIOs and other IT executives resist on-demand applications.

How did Workday come together?

Aneel Bhusri: After the hostile takeover, we felt that the next wave of ERP was going to be on-demand. So in May 2005 we started the company.

In looking out at the marketplace and the technologies of on-demand, web services, object-oriented technologies and what had happened with the consumer internet, we saw all these pieces coming together in creating a new application platform. One of most important things for us was that [we had to make sure] we were doing this for the right reasons-not just for nostalgic reasons. We had a great run at PeopleSoft, but there really had to be an opportunity to build the next great applications company.

So we started the company to be unequivocally the replacement platform for HR and ERP systems that had been delivered in an on-premise way. We were under development for about 15 months and brought the initial core HR product to the market in November of 2006. In July of 2007, we introduced our financials product. We've also got our payroll product coming out in May 2008. We're up to about 170 people now-about 80% are from PeopleSoft.

Both of you were very much a part of PeopleSoft, which was and still is in that "on-premise legacy vendor" world you now rail against. Can you explain to CIOs the change of heart?

Bhusri: When Dave and I went back to PeopleSoft in 2004, you could just see that with the current on-premise architecture-even though it had added a web front-end but there was still a client/server architecture-you could just see where it had failed. The big issue was, as customers had customised their systems (which had made it increasingly difficult to upgrade), the cost of upgrades was prohibitive and the value of maintenance as a result was getting to be less and less, they would hit the wall of the architecture. You hear about SAP upgrades of $50 million to $100 million. Well, it wasn't that high at PeopleSoft toward the end, but it wasn't that much better.

If PeopleSoft had survived and Dave and I were still running the company, then we would have launched the on-demand initiative in 2005. That's what we were gearing up to do anyway. That was the set of slides I presented to the PeopleSoft board: that the next version of PeopleSoft needed to be an on-demand version because that's where the market was headed.

Probably my best answer to you is just look at what SAP is doing with its Business ByDesign [on-demand applications]. Now there's a company that doesn't have to go into a new market unless they really believe it's going to be disruptive. And they too have jumped on the on-demand wagon.

Dave Duffield: There's another aspect to this too.

We're very proud of what we achieved at PeopleSoft in developing that high-touch relationship with the customer. From what we understand today, that's been lost by the SAPs and Oracles. The customers don't feel like business partners anymore.

Bhusri: What we have seen that surprised me, and I would consider Dave and me former legacy ERP guys, is the surprising lack of pushback from our customers and, in general, from CIOs with on-demand, at least as it relates to HR and payroll. We're going to learn more about accounting in the next 12 to 18 months.

We were actually prepared to have an on-premise offering if we needed to as something of an appliance. But we haven't been asked for that. That's basically because these CIOs are embracing it, and there's a difference between the new generation of CIO, who definitely buys into it, versus a more technology-centric version of a CIO who's worried about losing control.

In a recent CIO survey on CIOs' ERP strategies, just 9% of respondents said they were using "alternative ERP models," such as SaaS or on-demand solutions. Nearly 54% of them said they probably or definitely would not consider moving to an alternative ERP model. The remaining 35% of CIOs said they would probably or definitely consider trying something different. So, Aneel, your anecdotal evidence surprises me a little.

Bhusri: I think there's a difference when you say "ERP" in that there's a big difference between supply chain and manufacturing ERP systems [and HR and financials]. I don't suspect those are going to be on-demand anytime soon. On the accounting side and the core administrative applications side — HR, payroll, accounting and procurement — I expect all of those are going to be led by on-demand solutions. Your data is not surprising at all, actually. It's kind of where I would expect it to be in the early stages of a market like this.

Are you finding that companies are more reluctant to let someone else handle their sensitive financial data, especially in the regulatory environment we're in today?

Bhusri: I think HR data is similar [to financial data] in terms of the regulatory issues, especially data privacy. It's usually an initial question mark with customers. But when they go through our security and data privacy, and the way we encrypt data, I think most customers walk away saying, "Wow, that's a lot more than we're doing and that's offsite." You know, for most customers their data is at a datacentre, and it's not at their corporate headquarters. So the data is remote anyway. It's an issue that gets raised because it's a sort of a "conventional wisdom" issue, but it goes away very quickly in the sales cycle. I would make the comparison to 1993-1994, when people said the same thing about client/server, saying it wasn't ready for prime time and they were going to stay with their mainframe architectures. You play it forward 10 years, and almost everybody moved.

Duffield: Just look at the biggest on-demand provider, which is ADP. People aren't too concerned about that company. If I were a CFO and I could be shown that there's as much or better data privacy or security with an on-demand provider, and I get a better job of governance and auditability, and it's a lower cost, and I don't have all this infrastructure that I have to deal with, then how can that not be attractive?

So when you're going in and meeting with, say CIOs, CFOs and HR people, what makes you not attractive to them?

Bhusri: Typically what happens is, we first come into a company through the VP of HR or someone else in that organisation. Given how our system looks, in terms of the consumer internet look and feel, the embedded reporting and the analytics that are there, we win the HR team almost immediately. Then it becomes a question of whether the CIO buys into on-demand or not.

If they're not on-demand believers, what are they saying? Where are they pushing back?

Duffield: If they come with a predefined, negative attitude toward on-demand, it doesn't matter what the HR people think. The CIO and IT people are going to get their way. If they come in with an open mind, and just want to be shown that the security is being taken care of, there are no issues with data privacy and that our company is viable, then they're okay.

The IT community is slowly changing. Lucky for us it's not changing too quickly because we couldn't deal with all the new business. But it's changing fast enough to show us that we have an enormous market opportunity here.

What do you make of the rise of cheaper, third-party ERP maintenance and service providers, such as TomorrowNow and Rimini Street, combined with companies like yours, Salesforce.com, NetSuite and others? There's a lot of new competition in the enterprise applications space. Is that a sign of the times that there are more alternatives for companies, or that customers are frustrated and seriously looking for options, or some big improvements in technology?

Bhusri: I think it's all of the above. Technology has changed quite dramatically. If you compare what an SAP, PeopleSoft or Oracle looks like to an eBay or Amazon, it looks like it was built for the Dark Ages. You've also got a new wave of workers coming up that have a expectations of how systems should look and feel, and they feel comfortable with the eBays and Amazons — and not the SAPs, PeopleSofts or Oracles.

There's so much change underfoot in the applications area and I think the best way to look at it is that the same technologies that the consumer internet companies have brought are now being leveraged into the enterprise. And on-demand is the vehicle for doing that. If you look at the Salesforce.com versus Siebel analogy, on the margin now, Siebel sells almost no new application licenses. All the new CRM deployments are Saleforce.com and on-demand. Why is that? Because the systems are much easier to use, much more targeted to users, customers get value out of them almost immediately, and you don't have to worry about complex or expensive first-time implementations or upgrades.

What's the number-one obstacle you face right now?

Bhusri: The number-one thing for us is figuring out if the CIO embraces on-demand or doesn't embrace on-demand. It's that simple.

So what's your message to those CIOs who don't embrace on-demand?

Duffield: We're for real. There will always be the CIO types that want everything controlled internally and aren't comfortable without anything outside their own four walls. When the mentality shifts to "Let's do the best thing we possibly can for our company, both from feature function, service levels and costs", then we become very attractive.

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