How a Cancelled Project at StorageTek Led to Zoho CRM

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I have never shared this story in public before, but I wanted to do this after reading Hank Williams’ post (via Hacker News) on race in Silicon Valley. My post is not about race, but it is somewhat related, as you will see below.

First a bit of history. In 2003, our company’s only business was network management software. Our main product at that time was Web NMS, which continues to be a successful and profitable division for us to this day, but at that time, it was the only product line we had. Zoho was not yet born, in fact, we had not even conceived of the name yet. Web NMS had many large equipment vendors as customers, and among them was StorageTek, a multi-billion dollar back-up & recovery products company, which was later acquired by Sun. After a comprehensive evaluation over several months, StorageTek chose our Web NMS product to build remote monitoring capability into their storage equipment, and they also wanted us to set up a team to customize the Web NMS so it could talk to their equipment and provide the specialized reports needed. This project began in 2003, and it was going smoothly. We had a team of about 10 engineers working on this project. We had reached a stage of trial deployment in a few customer sites.

That was when they had a big management change at StorageTek. The Vice President in charge of this project was replaced with a new person. One of the first things the new VP noted was that Web NMS came from an Indian company. Just on that basis, he instructed his purchasing people to terminate the contract immediately and award the contract to another company. The purchasing person, who shared the reason behind the termination with us, felt it was a massive waste of resources, but he was overruled. In fact, because the termination was for no fault on our side, they paid for all the deliverables, even though they were not going to use any of them.

It was sometime in August 2003 that we were notified of the contract termination. It was abrupt – as I remember it, it was on a Thursday we were notified, and they told us we should just stop the project right-away and yes, we could throw away the code. Our team, which was working hard on this project, was devastated. I assembled our team and told them to take the Friday off, and come back fresh Monday. I promised there would be an interesting new challenge awaiting them Monday.

During that year, two threads were running in my mind: how to diversify the company from its dependence on a few large customers like StorageTek, where sales cycles were very long, and decision making was often very political, something we got a perfect demonstration of. Second, I was also thinking about the emerging software-as-a-service market. We were customers of Salesforce, and while I liked their product delivery model, I felt the product itself was massively overpriced. As I analyzed Salesforce, I felt their high price was due to theirĀ business model bloat i.e overspending massively on sales and marketing. As a software engineer, I felt we could build a better product and as an entrepreneur, I felt we could cut the bloat in the business model and offer the product at a more affordable price. From my perspective, all this had the added merit that we would target small and mid-sized customers first, which would let us avoid the long sales cycles and the politics. That was just a thought, an idea, without yet a plan of action.

When StorageTek terminated our contract, that thought just crystallized. On Monday morning, I called a meeting and told our team “You are now our on-demand CRM team.” The engineers were incredulous. One of the lead engineers let out “Sridhar, we know nothing about software-as-a-service or about CRM” – I said “Well, you will know soon!”

Today, Zoho CRM is the fastest growing part of the Zoho suite, it is nicely profitable, and it is starting to give Salesforce a run for their money. Zoho CRM also paved the way to our emergence as one of the most comprehensive suite of business applications in the cloud. I guess we should thank StorageTek.

Back to StorageTek – the company they selected to replace us collected a few million dollars and never really delivered on that project. The ultimate irony was that they called us a couple of years later to help them with this project again; needless to add, we declined.

The Product Business is Like the Movie Business

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I read the cover story in Forbes on the success of Dropbox, which is set to do about $240 million in sales in 2011, with only 70 employees. As Forbes points out, that is about 3x the revenue per employee of Google, which is no slouch in the revenue per employee department itself. First, congratulations, Dropbox! This is the type of breathtaking number that makes the ordinarily successful companies like, well, Zoho, to wonder “What are we doing wrong?”

In our 15 year history in Zoho Corporation – which is bigger than the Zoho product suite itself – we have shipped over 70 products, of which we would say about 30 have been successful in the sense of being nicely profitable. Yet, even with that group of 30 products, we have seen the 10x effect: a set of two products that have taken approximately the same amount of effort to build, by similarly situated teams, yet one of them does 10x the sales of the other, with both of them being profitable. Of course the 10-bagger is much more profitable but the key point is that both of them could be counted as successful in the sense of being profitable. We have even seen 100x difference for approximately the same effort, but in our case, that is the difference between doing only $100K a year in sales vs $10 million a year, and I would not count that as 100x because the $100K product either grows up or we would eventually discontinue it because it is not profitable.

Dropbox is a logical extension of this phenomenon, where a product does 100x the sales, without taking much more by way of engineering effort than a profitable 1x product. And then the grand daddy of them all – Google search, which in its heyday reached $1 billion in sales, on not much more than the effort of a single engineering team – the headcount gets added later to diversify the company but the original search was a small team. I believe there has only been one Google search so far, so the ordinarily successful (ahem!) shouldn’t feel too bad.

Y Combinator, which has funded over 300 companies so far, is a perfect illustration. All these teams are similarly situated, with similar founder profiles and they all get similar initial funding, and they spend similar initial effort. If we consider only the universe of profitable YC companies, my guess is that so far there is only one 100-bagger i.e Dropbox, in the YC portfolio. Based on Zoho experience, I would estimate YC has about ten 10-baggers, and about fifty one-baggers (i.e just about profitable).

Welcome to the product business, which looks very much like the movie business!

If you have a smart enemy and a dumb friend …

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… dump the friend and embrace the enemy. 

Several years ago, we had many rounds of meetings with Yahoo on ways to cooperate. It was very clear that Yahoo had lousy leadership. On the other hand, I was quite impressed by the Google leadership I met. 

What did we end up doing at Zoho? We never pursued a Yahoo partnership, and we made our peace with Google. Yahoo just demonstrated, yet again, that we made a wise choice. Dumb friends are more dangerous than smart enemies.

Apple’s Revenue History

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Apple’s revenue now is at a run rate of over $100 billion dollars, a good deal higher than that of Microsoft. Apple’s profits also well exceed Microsoft’s profits. Yet, Apple has only about 50% of the headcount of Microsoft. These things were utterly unthinkable just 5 years ago. One way to visualize this is to imagine Yahoo overtaking Google in the search market and in terms of overall revenue & profits (Google does about 6 times the revenue of Yahoo), and multiply that difficulty by 10-fold, because Yahoo actually still makes money, but Apple was losing a lot of money when Steve Jobs came back in 1996.

I assumed that Apple grew steadily from when Jobs came back. I was wrong. Here is the revenue trajectory of Apple all the way going back to 1981. Focus on the years after 1997.

http://en.wikipedia.org/wiki/History_of_Apple_Inc.#Financial_history

Notice the crisis in 96-97-98 when he came back – that was a stomach churning drop in revenue, which explains why he came back. But notice that 5 years after he came back, in 2002, Apple still had less revenue than in 1997 (in fact, it was less than they had as far back as1989!). During those 5 years between 1997-2002, revenue first went up, and then went down again during the recession in 2001-2. Even worse, Apple was again losing money in 2001, a full 4 years after he came back. Why is that relevant? Any normal person would have found it very hard to keep the spirit and motivation up at that time. Apple’s greatest years were ahead of them, but only one person would have possibly believed it – Steve Jobs. No one else, in 2002, would have believed Apple’s best days were ahead. From only 2005, did Apple really achieve that big burst of growth, and within just 6 years Apple has overtaken Microsoft.

Also notice the extreme variation in growth. Even after the iPod arrived, Apple’s growth rates has dipped as low as 14% and has gone as high as 68% (until 2011, when it scaled new highs). In the 2009 bust, Apple dipped to only 14% year-over-year growth. Yet, in 2011, driven by the boom in iPad, Apple is exceeding 80% growth without meaningfully adding any headcount. This is the track record Jobs has piled up. I don’t know it will ever be equalled in this industry again.

iCloud: It is Everything Microsoft Wanted to Be

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At first they ignored the iPod, and it looked plausible
Then they laughed at the iPhone, and it looked ignorant
Then they dismissed the iPad, and it looked ridiculous
Finally, the iCloud arrived
And the board woke up.

(OK, that last line was pure fiction).

It is a testimony to how far Microsoft’s stock has fallen – no I don’t mean just their stock price here – that no one seems to remember Ray Ozzie’s Software-plus-Services marketing slogan anymore. I was reminded of that when I watched Steve Jobs announce the iCloud and how that spells the end of the PC. I must say he didn’t just say the end of the PC – he helpfully added “the Mac” too, but he is just being polite and everyone knows what he has in mind. Of course, we at Zoho don’t have to tell you that the era of billions of cloud connected devices suits us very well, thank you. It is everything we have been working on for the past 6 years. 

With Apple training us in our capacity as consumers to expect our data to be just there in every device we work on, we as business users will expect the same convenience from all our apps. We are accelerating our R&D at Zoho to deliver that ubiquitous access, everywhere, in every device, through the web and through native apps when necessary. It is telling that the one platform where we are not planning any native apps is the same one that gave meaning to the words “software platform”.

The iCloud should be Microsoft’s dream, except that Steve Jobs has turned that into their nightmare. 
Some time ago, it used to be that Microsoft’s entry on a particular space validated it. But it was not Office365 that “validated” the cloud. Rather, it is Apple’s iCloud announcement what finally brought the cloud to the mainstream public. Of course, it took Apple to take a mouthful of a marketing phrase such as Software-plus-Services and turn it into something small, tight and cool.

How a company with so many strategic assets would manage to piss their seemingly insurmountable advantage away in a decade should be a business school case study. Hopefully Stanford Business School would award Ballmer his long unfinished MBA for showing us how it’s done. 

WSJ: “India Graduates Millions But Too Few Are Fit to Hire” – Yes, But …..

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Wall Street Journal has a story India Graduates Millions But Too Few Are Fit to Hire. It reports the travails of the customer support firm 24/7 Customer:

 India projects an image of a nation churning out hundreds of thousands of students every year who are well educated, a looming threat to the better-paid middle-class workers of the West. Their abilities in math have been cited by President Barack Obama as a reason why the U.S. is facing competitive challenges.

Yet 24/7 Customer’s experience tells a very different story. Its increasing difficulty finding competent employees in India has forced the company to expand its search to the Philippines and Nicaragua. Most of its 8,000 employees are now based outside of India.

In the nation that made offshoring a household word, 24/7 finds itself so short of talent that it is having to offshore.

“With India’s population size, it should be so much easier to find employees,” says S. Nagarajan, founder of the company. “Instead, we’re scouring every nook and cranny.”

This issue is very familiar to us at Zoho, and I have blogged about this in How We Recruit: On Formal Credentials vs Experienced Based Education. Unlike most companies, we do not start out with the assumption that all of the colleges actually impart an education. That may sound overly harsh or pessimistic, but actually assuming that colleges do not impart an education is liberating, because then you keep your expectations very very low. You learn to devise recruitment and training systems that are tailored for this reality, rather than rely on the paper credentials doled out by various educational institutions. The path to profit in business is to a solve a problem, and I look at educating employees through experience as one of the entrepreneurial challenges to be faced head on, particularly in the context of a developing country like India.

More broadly, even in countries with a highly sophisticated and developed educational infrastructure like the US, much of the real education in highly skilled jobs, particularly in high technology, actually happen on the job. I remember my own experience as a freshly-minted PhD in Electrical Engineering from Princeton, being humbled by how much I had to learn on the job in Qualcomm before I became productive. Much of that learning came from people who were much less credentialed than I was, people who had the benefit of years of experience to guide me. I learned an important lesson on that first job that has stayed with me: never to value someone just based on their impressive paper qualifications. I believe I am not the first to discover this lesson on the job. If that is the case, why do companies rely on a college degree to such an extent in the US?

Ultimately, an impressive college credential from a good college serves to a prospective employer as an extended IQ test, a sort of legal signaling device. In the US, colleges are allowed to base their recruitment on SAT scores (essentially an IQ test), but employers could get in legal trouble if they were to conduct any such tests. So knowing that a college is rigorous in its admission standards is a way to signal prospective employers that the graduates from that college are already vetted. I believe that college credentials as a requirement for most jobs would vanish, if employers were allowed to perform the tests that colleges routinely require of their students.

In a country like India, where so many of the colleges are new, no such signaling mechanism operates right now. So a college degree is essentially worthless as a signaling device, as so many employers in India are finding out. Such being the case, why even rely on the college degree? Why don’t employers take the matter into their own hands, and start imparting training as part of their recruitment effort? Those questions are what led us to create our own training program, which we call Zoho University, to come into being. Today, over 10% of our employees have come from this program, and we expect this ratio to go up to 30% in the next few years, as we expand our program.

So I agree with the thrust of the WSJ article that most graduates coming out of India’s colleges (aka degree mills) are not fit to hire, but I contend that it is the employers that can and should solve the problem. Expecting anything else is a misreading of the actual ground reality of how education and skills are actually acquired. 

Getting Out of The “Inevitable Monopoly” Mindset

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Microsoft announced their business cloud offering Office365 yesterday. In keeping with Microsoft’s installed software offerings, it has 3 components: Microsoft Office, Exchange and Sharepoint. The natural question is how does it impact Zoho? What do we think of this at Zoho?

I believe Microsoft’s offering will be successful. Microsoft is a formidable competitor, and when they focus, they tend to get things right. They have been lukewarm about the cloud in the past, but that strategic ambiguity is firmly in the past – with Office365, they are making that loud and clear.
From our perspective, Microsoft getting serious about the cloud brings both opportunities and challenges. I will first outline the short to medium term effects. The obvious first effect is that the entire cloud ecosystem benefits due to Microsoft’s arrival. This is the well known “anchor tenant” effect in shopping malls, where every store benefits from the increased traffic brought by the anchor tenant. Microsoft has signaled that the cloud is the future of all software, including their crown jewels. The future is here and now. It is a rising tide and that clearly benefits Zoho. We don’t have to sell why the cloud is better for apps that were traditionally thought of as firmly wedded to the desktop, we just have to articulate why our cloud offering is better.
On the challenges, clearly Microsoft is going to have a formidable presence, due to its sheer installed base, and the incumbency advantage Microsoft enjoys at its installed base. Again, the challenge for us it to clearly articulate why we offer a better value proposition. In a nutshell, we bring a sharp focus, a comprehensive product strategy and vision that integrates traditional document oriented apps with database oriented business apps, opening new avenues for business productivity and finally, we bring better pricing. As a nimble company that has no corporate ego, we will integrate our offering with Microsoft wherever possible, just as we do with Google Apps today. Google has been exemplary in their openness, and we hope that Microsoft will be as open in allowing third parties to integrate into their stack. For example, we would seek to integrate our CRM with Microsoft’s cloud Exchange and Sharepoint offerings. 
Looking ahead over the long term, I want to make an important point: software in the cloud is going to be more competitive and more open than software on the desktop. The analogy here is the wireline to wireless transition in telecom. Not long ago (thought it feels like ancient history) there was really only one phone company in each country, often known as “the phone company” – because no further qualification was needed. Today, there are very few places in the entire world where there is not a choice of 3 or 4 wireless providers. It is one of the most dynamic markets in the world, as in if you blink, you missed a product turn.
Looking at the cloud ecosystem, we have major forces operating that practically ensure that we are not going to have a monopoly. We have a competitive service provider market, an ultra-competitive data center market, and we have infrastructure offerings like Amazon that make it easy for cloud software vendors to scale up quickly.  Consider the crucial client operating system market, which no longer means just the desktop and laptop, with mobile and tablets being where the action is. The mobile OS landscape is a real horse race between Apple, Google, Microsoft, Blackberry, Nokia and Palm/HP – the only certainty here is that it is not going to be a monopoly. Even on the business desktop, Mac OS, riding on the astounding success of the iPhone and the iPad, is making strong inroads, and it is unlikely Microsoft is going to be able to stop Apple from making its presence felt in business computing. This is not to say that Microsoft won’t remain a formidable player; I personally think Win Phone 7 is a serious and credible offering, and will gain reasonable share. My point is that the client operating system monopoly is over. The constellation of forces, from carriers to device vendors, from application developers to consumers and businesses, precludes that possibility.
Why is all this relevant? If Microsoft cannot consolidate the client operating system market, it cannot monopolize the cloud. It was the Windows monopoly that practically ensured the Office monopoly. If the cloud apps market is not an inevitable monopoly, by definition, many vendors are going to flourish, and there will be many opportunities to differentiate and add value. Microsoft has made it clear it is not going away, Google is not going away, and we want to be clear that Zoho is not going away. While the short to medium term impact of Microsoft’s strong cloud showing is actually a positive for us, we strongly believe we have a really good long term opportunity here. Of course it all comes down to execution and we like our chances at Zoho.