Sridhar Vembu
(Credit: Zoho)
Vembu's analysis is based on a comparison of revenue per employee and profit per employee metrics. "The gap in revenue per employee between Google and SAP and Salesforce.com, for instance, indicates that Google would more likely be more interested in what eBay does or in monetizing YouTube than in Zoho or Salesforce.com's barely profitable business. Companies invest in what generates the best return on investment," Vembu explained to me.
(Credit:
Zoho)
In an e-mail explaining his financial analysis, Vembu wrote:
We simply don't believe Google has the rational business incentive to go deep into the business/IT software category. The lower revenue and profit per employee figures would be tolerable if there were huge growth opportunities there; but when very successful companies like Adobe and Intuit pull in revenues well shy of a Yahoo, when even the enterprise software leader SAP is the same size of Google (Google makes more in profit per employee than SAP makes in revenue per employee), it is fairly clear this market is not going to make a material contribution to Google's growth and profitability objectives. So what is Google's plan here? It is fairly obvious they are in it to put Microsoft on the defensive on its home turf, so that Microsoft's offensive capability in the internet is diminished. It is also perfectly clear why Microsoft wants to be an Internet player--as Google has shown, it is a higher margin business even than its monopoly-profit core business.
"Google's margins are a once in a lifetime occurrence, and Google will move in that high-growth direction--that's why Microsoft is so desperate about search. It has a higher growth rate. We are more worried about Microsoft than Google. Microsoft will address the Internet, but pulling down Office margins is a challenge for them. No company peacefully accepts a lowering of margins," Vembu said. "Our intention is to help erode Microsoft's profit margin, coming in from below." Zoho has built a more comprehensive suite of cloud-based apps than Google or Microsoft, and most of them are currently free to users.
Vembu cites the cost of sales and support as a drag on revenue per employee and profit per employee. "If salesforce is a proxy, it would be difficult for Google to justify the investment. More costs are associated with support than in R&D, even with on-demand software. The moment you have paying customers, the expectations are different, and Google is finding that out with recent Gmail problems," Vembu said. In addition, he noted that selling into small- and medium-size businesses is difficult, but the margin is higher than for large enterprise accounts. Adobe Systems and Intuit, for example, have more revenue per employee than Oracle or SAP.
Zoho's revenue per employee is mostly nonexistent given most of the Zoho suite is currently free and not-ad supported. Vembu estimates Zoho's revenue per employee will be in the $200,000 to $250,000 range when the revenue spigot is fully turned on at some undetermined point.
While Zoho behaves like a scrappy start-up, it is well-funded by India-based parent company AdventNet, which develops enterprise IT management software. AdventNet has 900 employees and is profitable, according to Vembu. "One of the privileges we enjoy as a private company is to not disclose revenue/profit numbers, which lets us do the kind of analysis on competitors they can't do on us," he joked.
The problem with Vembu's logic is that Google has an enormous pool of cash to invest in improving the economics of business and consumer productivity software suites. And, part of being a software company is having multiple and adjacent revenue and user data streams. Microsoft is a highly profitable software company with many adjacent divisions. Google Apps won't be as profitable as search, but it will be profitable and ties users into the Google platform and monetization engine.
If Google can attract consumers with its apps, gaining entry into small- and medium-size business won't be a huge profit-sucking sinkhole of sales and marketing. The search giant claims that more than 500,000 businesses and schools have signed up for the free and $50 per-user-per-year Google Apps. According to Dave Girouard, head of Google's enterprise division, the Google suite has about 10 million active users. Google can afford to invest in building the the market for Google Apps, and Microsoft will be forced to alter the economics of its Office business as cheap and capable cloud-based suites, with offline capabilities, gain traction.
What does that mean for Zoho? Run faster and hope that Google and Microsoft move slowly.
Zoho users with a Google username and password will be able to log directly into Zoho applications, according to Sridhar Vembu, founder and CEO of AdventNet, parent company of Zoho.
"Users won't need a separate Zoho account," he told me at the Web 2.0 Expo in San Francisco. The Google sign-on integration should be finished within two weeks, he said.
Vembu was impressed by Google's cooperation and willingness to work with a competitor. Zoho and Google Docs are both trying to replace Microsoft Office. Google has been willing to contribute code, such as OpenSocial, to the larger community.
Making it more convenient for Google users to work with Zoho applications indicates that Google is open to or supportive of technologies such as OpenID, or that it doesn't view Zoho as a threat. It's most likely a bit of both, and overall, it's good for their mutual users.
On the heels of Salesforce.com integrating with Google Apps, Zoho on Wednesday announced enhancements to its Zoho CRM Enterprise Edition, adding role-based security administration, SSL support, integration with Zoho's spreadsheet, custom fields, and other features.
The cost of the Zoho CRM Enterprise Edition is $25 per user per month, with the first three users free of charge. The Zoho CRM Professional Edition is $12 per user per month.
In a blog post this week, Sridhar Vembu, CEO of Zoho parent company AdventNet, took issue with Salesforce's business model, noting that his competitor spends nearly eight times as much on sales and marketing as it does on research and development.
"Sounds to me (like) a textbook definition of 'business model bloat.' If you are a customer of Salesforce, it makes you feel really happy that the company spends (eight times as much) on selling to you as (it does on) writing the code, right?," he wrote. He added that the Salesforce business model is "an evolutionary dead end" and cited the "silent popularity of Zoho CRM."
At this point, the Salesforce business model has generated nearly $1 billion in annual revenue and 41,000 customers. The operating margin isn't great, but the company has established itself as an industry force with a generous stock price.
At some point, Salesforce's cost of sale should decrease, and the Google alliance will legitimize the on-demand services of both companies. Zoho's development prowess and low cost, and the "silent popularity" of Zoho CRM, has not resulted in a business model breakthrough so far.
At one point, Salesforce was in talks to acquire Zoho, which Vembu recounted in his blog post. He said the two cultures would not mesh and claimed that Salesforce CEO Marc Benioff said Zoho could be part of his company's AppExchange, if it didn't pull the plug on Zoho CRM altogether.
Zoho has built an impressive set of cloud-based applications at a rapid pace. Following the enhancements to Zoho CRM, Zoho Sheet is slated to gain support for macros and pivot tables.
Word-of-mouth marketing isn't enough when you are competing with giant and innovative companies such as Google and Salesforce. But Zoho's small team is not lacking in focus, talent or desire.
Webware's Rafe Needleman and I interviewed Vembu in this video about how Zoho plans to compete against Microsoft and Google in the office suite space.
Following is a Zoho video about the new enterprise CRM functionality:
While Google receives lots of attention for its suite of Web applications, and Microsoft waits on the sidelines, Zoho continues to add new components to its Web suite.
The latest addition to the suite, which already includes modules for everything from documents and spreadsheets to CRM and wikis, is Zoho People, a human resource management application.
Zoho People, currently in beta, includes the usual HR functions for administrators and employees, with modules for organization, recruitment, forms, and checklists (work flow). In addition, Zoho Creator has been integrated within Zoho People, allowing users to customize the application.
Zoho People joins Zoho CRM, Zoho Meeting, Zoho Projects, and Zoho DB as part of the Zoho business applications suite.
Zoho is targeting businesses with more than 50 employees for the new product. Pricing is expected to be around $50 per month for administrators and $50 per year for employees, according to Raju Vegesna of Zoho.
Zoho could bump up against more established software-as-a-service HR offerings from well funded companies such as Workday, Taleo, NetSuite, SuccessFactors, and others.
But Zoho is likely to focus more on smaller businesses with its comprehensive set of browser-based productivity and business applications and viral marketing approach. In fact, Zoho is most concerned about setting itself apart from Google, which lacks the business applications. Google, as well as Microsoft, will be watching Zoho closely to see if it gains any traction with customers. If so, either one would be a candidate to acquire the Zoho, which is a subsidiary India-based of AdventNet.
See also a video about Zoho People, Zoli Erdos' post on Zoho People, and Larry Dignan's take.
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