Zoho CEO - economies of scale are illusory; there are better ways of creating customer value

Profile picture for user jreed By Jon Reed June 5, 2019
During a personal chat with Zoho CEO Sridhar Vembu, he shed light on why a fast-growing company like Zoho is still concerned with the downside of economies of scale - and what they are doing differently.
Zoho CEO Sridhar Vembu at Zoholics 2019.
Vembu during our chat at Zoholics 2019.

When I last wrote about my conversations with Zoho CEO Sridhar Vembu, we were focused on Zoho's market outlook in a post-ERP world, including why Zoho is sidestepping the ERP monicker, why they are thinking vertical, and why best-of-breed software is forcing a new era of co-option.

We also discussed the downward pricing pressure on business software, with "free" being the disruptive end point - a potent topic Zoho will flesh out on these pages shortly.

Most of all, Vembu laid out the impact of Zoho's privately owned status, and the freedom it has allowed them:

There is a deeper context: a disconcerting era of late-stage capitalism, where our economic system seems less and less able to pull people across have-not divides. But this predicament at the highest scale also sparks decentralized, community-driven opportunities. During an informal patio conversation, Vembu shared how this big picture informs Zoho's strategy and values.

It may sound odd to express misgivings about capital markets when your own growth is accelerating, but that's the Zoho contrast I want to grapple with. As Vembu told our media/analyst contingent at Zoholics 2019: 

It's a little bit overwhelming when you look out from the stage and you think, "Wow - it's like ten times bigger than five years ago, and it keeps growing like this "... This year, we signed up the largest amount of customers ever.

But that doesn't change Vembu's discomfort with today's financial markets:

I am a capitalist, but what we have today is like a financialist system. It's hyper-financialist, with excessive wealth concentrations.

Vembu is hardly alone in this critique. He points to hedge fund manager Ray Dalio:

Even Ray Dalio talks about it now. That tells you that these things have gone too far - if some of the financial capitalists themselves think the system has gone too far, and it's not fair. And this is one of the richest people in the world saying this, so then it resonates.

After Zoholics, I read up on Dalio's latest comments on MarketWatch:

Capitalism is now working in a way in which people and companies find it profitable to have policies and make technologies that lessen their people costs, which lessens a large percentage of the population's share of society's resources. Those companies and people who are richer have greater buying power, which motivates those who seek profit to shift their resources to produce what the haves want relative to what the have-nots want, which includes fundamentally required things like good care and education for the have-not children. (Hedge-fund billionaire Ray Dalio says capitalism needs urgent reform)

Economies of scale can be illusory

Dalio sees a fork in the road ahead. One path leads to "people of different ideological inclinations [working] together to skillfully re-engineer the system." The other leads to increased global instability and other dystopian consequences.

Obviously, Zoho's mission lies squarely in the camp of lessening those divides. So how do you do that? Vembu says you start by acknowledging that economies of scale aren't utopia:

A lot of these economies of scale are illusory. If you scale up, your cost per unit costs go down. But there's a point at which it saturates. There's a knee of the curve.

After a certain scale, the push for efficiencies reveals a darker side:

Beyond that, [true costs] actually go up because other cultural inefficiencies, organizational bureaucracies -  all of that can increase your inner costs.

We can certainly see that in the tech industry, where the global issues posed by the FANGs (Facebook, Apple, Netflix, Google etc.) have been frequently documented, from fake news proliferation to algorithmic  manipulations of potential voters. We can see other problems with scale in the enterprise software industry, where the largest enterprise software companies with the biggest customer scale are not exactly the leaders when it comes to innovations like consumption-based or all-you-can-eat pricing.

Harnessing tech momentum - without losing cultural values

But even though economies of scale can sour, technology does allow upstarts to punch well above their weight:

Technology also has a way of lowering the knee of the curve... That means that smaller scale operations actually achieve the cost efficiency some larger scale could achieve. A good example would be how printing became mass affordable. What you could only print expensively in a centralized plant, you could probably print at home, where the cost is negligible.

I told Vembu that reminds me of the launch of diginomica, which we could not have bootstrapped the same way fifteen years ago, when admin labor expenses would have been a huge barrier to entry. Vembu:

Now you were able to operate at an efficiency which only a 50 or 500 person organization could have done 20/30 years ago. So the technology has enabled you to achieve those economics at smaller volume.

Zoho has harnessed the same momentum on a much larger scale. But Vembu says you can reach a point of scale, or automation, where there is blowback - and a bit of your humanity is lost:

Very large scales inherently dehumanizes because you are removing the human element. The decision making layer moves farther and farther away from that average person.

This is something I emphasize in Zoho, where you have a small team with a manager... If we remove that personal element, make it all impersonal AI-driven management, you might think the system is objective in a way. But it will be objective in a cruel way.

This approach to "humanizing scale" connects to Zoho University, one of Zoho's best stories. As I wrote:

How many enterprise software companies are actively solving their own talent problem by significantly expanding their base of qualified applicants, as opposed to bidding wars for access to the same demographically-limited pool of elites?

On Zoho University, and why engineers need more than a technical education

At Zoholics 2019, I pressed Zoho University leaders on whether this was just a technical education. I was told that students are rewarded based on how much they help other students solve their problems, and this is all tracked by instructors.

Vembu says that Zoho wants to build a different kind of engineer, one who prizes a meaningful contribution over the "transactional" employment relationship that I call use-use, where the employee and employer each drain each other, before one or the other cuts the cord.

Vembu wants Zoho University to do more than create team players. He hopes to put a dent in that opportunity divide:

I look at organizations also to solve that community building. The people that work for us are a community, and we have to have a degree of connective tissue beyond work... That creates satisfaction because you know that somebody has your back. Someone cares for you.

Which brings us to farming. During a media presentation by Zoho Chief Evangelist Raju Vegesna on "Ten things you didn't know about Zoho," he told us that Zoho has an organic farm. Another benefit of being resolutely privately held - no investor is going to pester you about your organic farmland. Only half-jokingly, I've urged Zoho to create an organic farming vertical. I see the need for such software, and it certainly fits in with their decentralized/purposeful economic vision.

Vembu isn't going that far, at least not yet, but he did say they want to do an urban farming project at Zoho University in Chennai, including a competition for each team - and they will consume what they produce. Planting roots in an often-rootless corporate worklife. That's a good place to leave this. As Vembu says:

A lot of our problems today are we are moving away from our roots in many ways. The roots in our soil. The roots in our culture. The roots in our home lives. Uprooted is the way I describe a lot of humanity now. So unless we grow some attachment, put down some roots, life is not as rich as it can be.