Apart from the last couple of years when traveling to the US has been off my agenda, I've attended every Workday analyst meeting since the very beginning. I've been able to make up for those losses through other means. This week, Workday put on the last of its analyst sessions for 2020, this time virtually. It gave me an opportunity to reflect not only on what I've seen over the years but also assess where I think Workday is in the enterprise software maturity cycle.
Others may disagree, but I see a company at an inflection point as it navigates its way from being a scrappy startup that could plow its own furrow without too much adverse critique to one that has to play in the context of a much broader ecosystem. In my view, it's at the beginning of that journey. How it navigates those waters will be interesting to watch. Evidence for that comes in the way Workday assessed its market positioning across a variety of categories and frank admissions about where it needs to do more while acknowledging its on-going strengths. Viewed another way, the session had the flavor of an internal Town Hall with all the admissions you get from the executive team when viewed from the inside.
Unusually for analyst events held this year, the whole session was on the record. That left the discussion wide open for any questions and, to its credit, Workday executives stayed on past the allotted time to ensure all questions were answered. So kudos for that.
As Workday matures, it is inevitable that executives present in a more corporate fashion and so it was that the first 10-15 minutes were devoted to co-CEOs Aneel Bhusri and Chano Fernandez providing a potted history of Workday's market opportunity and how it is faring. Bhusri's segment was interesting because it mapped out how the company has gone from addressing what in 2007 was an estimated $20 billion TAM to one estimated today at $100bn. What does that opportunity look like today? Check this slide:
This is a far cry from the back office HR and finance systems of record Workday was building out in 2007-9. But what of the immediate future and its go to market ambitions? Try this slide:
More important in analysts' minds though is how this is supported by product and here, the company was both clear and intriguing.
Several items popped out for those on the call. I'll list them in no particular order but also include a topic that isn't in any of the slides.
- Cloud and the hyperscalers
- Objectives and Key Results (OKR)
diginomica has long held the view that industry verticals are where enterprise software innovation is most sorely needed. It is a topic we bring up on every vendor call, Workday is focused on services industries and therefore it should not surprise anyone to find that the company is doubling down on healthcare/pharma, education, professional services, and government. This has implications for both Workday's own development and its evolving relationship with partners who can fill white spaces. To my question on this element Pete Schlampp, executive vice president of product development said the company is thinking more about itself as a platform for development. While the company didn't make any specific partner announcements, Schlampp referred to funds transfer pricing in financial services as an example that Workday is building out.
That is something that we're building on top of the planning and prism platform, as a solution that can be deployed without having an extra application on top of it.
Fernandez went on to refer to insurance industry-specific compliance and reporting and IFRS related issues. Right now it seems that Workday is at the early stage of partnering and building out so we will have to wait and see what comes out over the next year. And to that point, Bhusri added that while there are plenty of opportunities to use the advantages of Workday's object model to, for example, build out functionality related to health and wellness, there is a lot to consider, largely because the systems Workday would be looking to replace are old, yet functionally rich.
Having covered workforce and financial planning, Workday talked about other areas where Adaptive might be used and for which the company sees opportunity. Schlampp said:
Sales planning, demand planning, operational planning are all areas that we see as interesting. I think there's a lot of low hanging fruit for us in the sales planning area.
Planning and forecasting are often seen as add on applications, something I've considered odd albeit understandable in the transactional context of a back-office finance or HR application suite. As if to square that circle, Schlampp referred to roundtrip capability in Adaptive for finance so that once the plan is committed, it becomes part of Workday core financials. That's as it should be.
On the call, analyst Mark Smith pointed out there is a battle for which vendor will best serve front line workers in the employee experience space. Adobe with Workfront, Salesforce with Slack, and many others spring to mind. Bhusri said:
Everybody feels like they own employee experience, there's not a vendor that doesn't want to own that. And I think the reality is, no one vendor is going to own it. And we're all going to own different different pieces of it. And when I look at work.com, we actually partner with work.com. For this going back to work piece, we're the underlying HR system that you need to get people back in the office and, and work.com is leveraging the underlying Salesforce architecture for the things that they're good at, which is a really good system for contact tracing, given that it was a contact management system. So I will continue to say I just don't see Salesforce as a competitor, they're probably our best partner. And that'll continue to be the case. For Workday, we have to figure out where we are most valuable, not trying to be the end all experience for everything, but where it matters for an HR or finance or planning use case that we're providing the best user experience possible.
And then I think we should plug into the solutions like Teams and Slack, those are the ones where people are cutting across multiple applications and want an interface that that works seamlessly with their productivity applications, and that's exactly what we're doing. And so I do think that the Teams and Slack world is upon us and and we have to embrace that not fight that because that's where people are getting work done. And so we're doubling down on our teams integration.
There is clearly work to be done but as Workday said, it doesn't have to be a competitor in the space but an integrator to ensure the data workers need can be readily surfaced where work is done. An example here is workforce scheduling where workers can receive notifications in the Slack or Teams channels.
Cloud and the hyperscalers
One of the surprising discussions centered around the cloud as a broad topic.
Brian Sommer asked how the advantage of multi-tenancy Workday put forward early on plays out going forward given that competitors are coming in on the same topic. To my surprise, Aneel Bhusri said that this aspect is no longer part of their sales and marketing push although it is something they discuss in deep technical evaluations. Bhusri tacitly acknowledged that while multi-tenancy is a much-debated topic, potential customers have resisted it, with all the implications around a loss of direct control in those environments. However, he pointed out that the pandemic impacts have made clear just how inflexible older architectures have proven to be. He argues that it is that inflexibility that hampers companies that need to move fast.
I'll give you Best Buy as an example of a company that we had been in conversations for multiple years, but the pandemic was really a forcing function to move to Workday, because they couldn't get the flexibility and agility from those legacy systems.
Bhusri went on to add that in his view, if you're going to be comparing cloud architectures then it's now down to Workday and Oracle and that SAP doesn't show up. He added:
This remains a really big market and if there are two competitors then both of us are going to do well. What does come up in sales cycle is that our customers are global, they want real time. And they also want all the time. And when we do our twice a year updates, we continue to shrink that time down to hours. And we'll get to minutes at some point. You talk to the cloud customers of our competitors and they'll talk about two or three days to a week to go through a conversion. That's awful. You can't be offline for that long. In today's world.
Turning to the place of hyperscalers in Workday's environment, Sayan Chakraborty executive vice president of technology at Workday said that the company today is definitely multi-cloud. Explaining how this works, he said that in common with some other competitors, Workday wants to offer customers a choice in their selection of infrastructure providers but also use hyperscalers where it makes the most sense in the technology stack. He explained in the following terms:
Adaptive is available on Azure, we leverage Google Cloud Platform for deep learning. We have our AWS deployments and Workday's own data centres. The power behind that is a common deployment platform based on Docker containers and Kubernetes. And so we have a standard environment that we deploy in all those cases, that allows us to leverage our capabilities without rebuilding them every time or when we move to a new region. Our belief is that each one of these hyperscalers has particular capabilities that are better, faster, more powerful than the others. We would like to be in a position to take advantage of them without experiencing lockin. And so finding the right abstraction at which to attach to these things. So for instance, being able to haul out deep learning in Workday's platform and replace it with Google's deep learning, which is of course, backed by third and fourth generation silicon. And we want to take advantage of that for our go forward strategy.
Going forward, it will be interesting to see how this plays out. There is plenty of discussion around the cost of running multiple clouds, the best fit for different types of workload, and how that comes together for the long term. Right now, my sense is that Workday reflects the relative immaturity of the ongoing arms race between Google, Microsoft, and AWS but that Workday has the tools and technology to provide customers with the landscapes of their choice, without impacting Workday's price/performance matrix. That's a good place to be and one that is easy enough to explain to prospects.
Objectives and Key Results (OKR)
During the presentation, Jim Bozzini chief operating officer (COO) at Workday pointed out that as the company scaled problems surfaced in how priorities are set. He said:
As the company grew, as the product line grew, it became more and more difficult to connect the dots across the company. We tried a lot of different things. But it seemed like there were always a few things that got in our way. We ended up too focused on outputs. And people were creating laundry lists of things to do and worried about completing the tasks versus focusing on the business values that they could create. We were identifying dependencies, but we weren't necessarily connecting each of the groups together. So sometimes one group's dependency that was one group priority that was dependent on another group wasn't actually connecting all the way through the organization. And lastly, we ended up with trouble identifying our top priorities and being able to connect those throughout the organization. So enter OKR.
The idea is to ensure that strategy is aligned to execution through a mechanism that allows teams to set OKR measures that achieve overall buy in with the focus on outcomes and not outputs. Bozzini explained it this way:
Each quarter, the teams collectively define quantifiable key results. We know that everyone likes to achieve 100%. But we want to empower teams to stretch themselves. So we strive for aspirational targets, we look for the best possible as opposed to expected outcomes.
This approach fits well with concepts that Workfront outlined and where productivity is seen as too narrow a measure for work effectiveness. Critically Workday does not tie compensation to key results because, in its view, elimination of comp to results allows teams and individuals better opportunities to stretch themselves in terms of desired outcomes. Once again, it is good to see how Workday responds to changes in its own internal environment and how that is evidenced in product.
Go to market and pricing
In the Q&A, I asked about the opportunity arising out of lockdowns to adapt the business model such that Workday might improve adoption, Here I was thinking about distinguishing the commodity elements, i.e. horizontal HR and finance processes from those that add value like planning and so on. The answer came in several pieces. Bhusri kicked the ball into play with:
What we've learned during this crisis is you figure out what apps are really critical to a company working through remote work, and HR continues to be super strategic. People are trying to keep track of their employees, you're trying to get a sense of employee sentiment. I think you'll see us do more and more in the way of employee engagement. On the finance side planning, we lead with planning. I got a statistic from one of the top analysts. If you win planning for finance, it's a 60 to 70% chance you're gonna win core accounting when they switch that out, too. And so we've definitely thought about how we enter in differently than we might have before.
Fernandez followed up with an explanation of how Workday believes that elements of its face-to-face interactions are required as part of its differentiated market approach but even so, he acknowledged the forced virtual meetings have not had any unexpected impact. The company would prefer a return to a face to face approach but both Bhusri and Fernandez accept that this may not be the case for the foreseeable future. I can understand this in complex sales scenarios and given that Workday now offers a portfolio, it will be interesting to see how it assembles its story around solving pain points rather than the simpler cloud replacement story that has served it well for over a decade.
On the pricing topic, Fernandez said:
We try to ensure that our pricing is as simple as it can be and is predictable, and it's aligned to value and definitely fair across our customer base and across the value that customers can derive from it. We command no hidden fees. So we deliver incredible levels of substantial innovation for all our products twice a year. And we don't want customers to be hit with any surprises. So we've continued to evaluate our pricing model based on the market dynamics, and the internal factors, such as delivery costs, to make sure that we remain highly competitive and fair.
I was not wholly convinced with the answer although contract simplification is very welcome and something the company worked hard on in the last several years. What I am thinking about centers around the SKUs and bill of materials a prospective customer is faced with addressing as part of the negotiation.
There has been much discussion recently about enterprise software pricing and especially that of software as a service (SaaS.) More recently still, Upper Edge talked extensively about Workday pricing negotiations, arguing that Workday can recognize when the value is delivered as part of the payments schedule that goes alongside SaaS projects.
However, I see problems on both sides. Upper Edge's argument is focused heavily on the TCO element of the software buying process whereas I would prefer to see more focus on value. Hence I would much prefer to see commodity pricing on horizontal elements that are not differentiating across industries. My sense though is that the industry as a whole is not yet prepared to figure out how that method of pricing works in a world where the vendors' public stock price is tied to growth, which in turn, implies either volume or premium pricing.
In my back and forth on this topic, I see real difficulties for both vendors and buyers in distinguishing value among the many elements that make up a software deal. Bhusri is absolutely right when he says that planning is a must-have. In my eyes this has always been the case, as has been the need for solid consolidation/fast close software. Equally, however, I have seen how customers value confidence in transaction recording systems as paramount when that should be a given. Clearly, this debate is set to run, My hope is that as the world works its way through the pandemic and its implications, customers will realize where genuine value is found in software as distinct from the assumptions built up over the last 40 years.
As has become customary, Workday executives were frank and forthright in their answers. That's always welcome and an indication that the culture upon which Workday was founded is not compromised as the company grows.
My abiding thought as we close out 2020 is that Workday is now entering a period of maturity that determines the extent to which it is able to thoroughly dominate the global systems of record that form the backbone for service industry operations.
It will be challenged as it goes deeper into vertical markets and I remain cautious on this point, largely because Workday has always maintained an iron grip on its core code and hasn't been as quick to expose functionality through APIs as I would have liked. Finding the right path where partners make more sense will be as much of a challenge as it is an opportunity. Sticking rigidly to its pervasive object model has clear benefits and advantages and on which the company will not compromise. That's all to the good because, as the executive team repeatedly pointed out, that is what allows Workday to offer differentiated value in the market.
As it expands its solution portfolio, Workday will be challenged to position itself such that the partnerships it enjoys with the likes of Salesforce and others do not act as competitive threats. So far, Workday has proven that it knows how to 'stick to our swim lane,' as Bhusri put it. But the Salesforce's acquisition of Slack is an example of where those partnerships will be tested since Workday is also working closely with Microsoft Teams. Bhusri sees those solutions as complementary today. Will that still be the case come 2022?
One area where I will disagree with Workday is on the topic of return to office. Bhusri says that face to face collaboration is vital for development teams. Is it? There are plenty of examples where that's not viewed as necessary, perhaps the best known of which is Wordpress that has always operated remotely. In talking to other vendors, I don't see demonstrable signs that working from home has had a serious adverse impact on code delivery. But then perhaps Bhusri is openly acknowledging something others choose to avoid as a topic of conversation.