Why does enterprise software keep on getting more expensive? At a time when Amazon is able to deliver computing infrastructure more and more cheaply, business applications too should offer more function for less cost. That's the viewpoint of Sridhar Vembu, co-founder and CEO of business software vendor Zoho, who believes his industry's day of reckoning is imminent. He forecasts:
AWS [Amazon Web Services] is coming to enterprise software.
He supports the assertion with an axiomatic quote from Amazon CEO Jeff Bezos: "Your margin is my opportunity." In other words, enterprise software margins are bloated and Amazon is about to gouge them.
The argument that enterprise software is overpriced isn't a new one from Vembu. He's been railing against the VC-fueled, sales and marketing-led business model of Silicon Valley's enterprise software companies for many years. Four years ago, he told us it was a bubble about to burst. That it hasn't yet come crashing down is an inconvenient happenstance that he counters with another quote, this time from the economist John Maynard Keynes: "Markets can stay irrational longer than you can stay solvent."
Yesterday, he reiterated his views to attendees at Zoho's annual analyst day, held at its headquarters in Pleasanton, California. Enterprise cloud vendors are pouring funds into sales and marketing at "unsustainable" levels, he believes:
The mantra in Silicon Valley is spend the most, raise the most, and conquer a particular market.
This is keeping prices artificially high, he argues, while enterprise buyers are being sold products that integrate poorly and don't deliver on their promises, while prices continue to rise. "All of these practices, they will end," he asserts.
Unique Zoho culture
When that day of reckoning finally comes, Zoho will be left standing because of its unique culture and business model, he believes. The bootstrapped company has been profitable since the start 23 years ago. Today, it employs more than 7,000 people, has offices on five continents, serves several hundred thousand paying business customers, and is growing as fast as other leading enterprise SaaS businesses. A year and half ago, it launched Zoho One, a $35 per user per month bundle of its entire 40+ portfolio of business applications — a price point that proves Zoho is "totally ready for Amazon," says Vembu.
The company's culture also sets it apart from other enterprise software vendors, he argues. Its approach to nurturing and retaining talent is distinctive, leading to low employee attrition and customer churn:
There's no one who's ever said, 'I'm burnt out' in Zoho ... We are competitive without putting our workforce on the treadmill to burn-out.
Zoho University, first established in India and now opening at the company's Austin, Texas, campus, is a program that takes in talented high school graduates and trains them. It accounts for 15% of all Zoho hires and helps protect the company from a growing skills shortage as demographic patterns start to turn against the IT industry.
Vembu cites other well-known brands that are privately held, such as self-assembly furniture store Ikea, grocery chain Trader Joe's and office supplies company Uline. Like Zoho, these companies provide affordable quality and an outstanding customer experience based on a strong company culture, he says — and are thriving despite retail competition from Amazon.
Zoho's vertically integrated model is also a source of competitive strength, he believes. Whereas many SaaS vendors are starting to move their infrastructure to the AWS public cloud, Vembu argues that there are cost savings Zoho can realize from operating its own integrated stack — comparing its approach to the succcess of Apple.
Furthermore, as software becomes cheaper, human qualities become more important. "Treating people well is good for business," says Vembu, because the capabilities only humans can provide are the most valuable to customers.
I don't disagree with Vembu's contention that enterprise software is (often) overpriced and faces deflationary pressures. But Zoho is not alone in providing more cost-effective alternatives — there's a whole new generation of cloud-native enterprise software emerging that challenges the traditional model.
I think a bigger issue is that it's not just a supply-side issue. Enterprises themselves are in the habit of buying expensive, complex applications, and weaning them off that habit isn't as easy as you'd think. For one thing, their existing processes are cumbersome and that means even an easy-to-use product suite like Zoho One will take months or years to roll out across a large global enterprise. That's just the way they work. Maybe when it's rolled out and fully adopted, then the organization can move more quickly. But they start from where they are.
Zoho does have plans to broaden its appeal to large enterprises, but the biggest challenge for cloud application vendors at this end of the market is helping these organizations change their ways. That requires more than a cheaper, more human proposition. How it's delivered is crucial, and that's something Zoho is still working out.