Is Zoho the future of enterprise software?

Zoho

Developers at Zoho’s office in Ramapuram, Chennai. Zoho has around 2,600 employees, of which about 96% are based in India.

Chennai/Mumbai: It’s an 18-year old Indian software product company not too many people have heard of, and venture capital and private equity investors have wooed unsuccessfully for close to two decades.

Salesforce.com Inc., a San Francisco, US-based cloud computing company, once considered buying it and an offer was made and declined.

The company recently crossed 10 million users for its suite of offerings, all of which are on the cloud, with customers paying for what they use (the well known software as a service, or SaaS, model).

All of which translates into a word that suggests that significant things are happening, and even more significant things could be in the offing—buzz.

It’s a typically cloudy day in November at the DLF information technology (IT) park in Ramapuram, in the heart of Chennai, and the buzz is palpable at the two offices of Zoho Corp. Pvt. Ltd, housed in the adjoining blocks of the IT park.

On Friday, 21 November, Zoho is hosting its first “Zoholics” event in India.

This one is targeted at entrepreneurs, and is all about innovation and building what Zoho calls a “product culture”, and whether it makes sense to seek venture capital (it will be interesting to see what Zoho says about that)—all things the firm is equipped to talk about, but one gets the feeling it is also part of a larger coming-out party.

After all, after 18 years of maintaining a lower-than-low profile, Zoho, with its simple yet catchy name and colour block logo, has launched a media campaign that includes a print ad and a television commercial.

Software is “…our craft, our identity…,” says the ad. The punchline? “Made in India. Made for the World.”

Coming-out campaigns sometimes herald an initial share sale but Sridhar Vembu, who co-founded Zoho under another name in 1996, along with five others—the parallels with Infosys Ltd, the Indian IT firm that was started by seven co-founders and became the bellwether of the Indian IT services business, are unavoidable—says there is none in the offing.

The reason for the “massive marketing campaign in India”, he explains, is that Zoho wants to sharpen its focus on the “tremendous opportunity in India”.

Zoho currently gets about 50% of its business from the US, about 30% from the UK, and the remaining from other parts of the world, including India.

India, which is among the company’s top eight markets, is not only a talent base but is also emerging as a market in its own right, Vembu adds.

“And all the trends look favourable in terms of all the new businesses coming up, which we see as potential customers for Zoho. Our plan for the next 10 years is to grow our product suite and sharpen our focus on the country.”

Zoholics fits in with that agenda, says the company’s chief evangelist, Raju Vegesna, not to be confused with the entrepreneur who owns information technology services provider Sify Technologies Ltd.

“We in India are so tuned into a services mindset that we thought we could help and share our expertise with entrepreneurs who want to start a product company—how to scale up and sell to global markets. We have done all that,” says Vegesna.

“Obviously, if they like the vision and look up to Zoho, they may end up using our products, too.”

There are other things that point to the opportunity that is India, adds Vegesna.

The number of Internet users in India has crossed 250 million, and that bodes well for Zoho, he explains, because all its business is done online.

It is natural for a company to want to do well in a country that houses its global headquarters.

Zoho, which in the year ended 31 March 2012 earned about Rs.474 crore in revenue and a net profit of Rs.154.74 crore, according to its latest filing to the Registrar of Companies, India (Zoho is privately held and doesn’t declare its numbers), has around 2,600 employees, of which about 96% are based in India.

The other 4% are spread across countries including Japan, China, the US and the UK. Zoho’s product managers sit in India with its engineers, who comprise about 80% of the workforce; its sales and marketing people are based in the company’s US office.

“Pretty much everything happens here—from product management, engineering, architecture, including the data centre to manage and remote control, etc.,” says Vegesna.

What is a Zoho?

Zoho doesn’t mean anything.

It’s a name that the company adopted only in 2009 and under which it started operating in the mid-2000s after Raju and Vegesna agreed that AdventNet was not an impressive name for a company that sees itself solving the business problems of small- and mid-sized entrepreneurs.

Names such as Apple Inc. or AdventNet that start with an “A” made sense in the age of telephone directories.

By 2005, telephone directories were obsolete, and it didn’t matter if a company’s name started with “Z”.

Zoho was born in 1996 as Advent Network Management (a mouthful), and changed its name to AdventNet the same year.

In 2005, when Vembu and Vegesna were looking for new names, the only thing they knew was they’d like lots of vowels in the name.

“It sounds good. For example, Google or Yahoo,” says Vegesna.

“Our target market was small offices. Hence, SOHO (small office, home office) was an ideal name. Since soho.com was not available, we thought, why not try zoho.com,” recalls Vegesna.

The URL was available on www.buydomain.com for $5,000.

“Let’s buy it,” Vegesna told Vembu.

“A domain name costs only about $10. Why do you want to spend so much,” Vembu recalls, protesting.

Vegesna offered to come up with the $5,000 himself and Vembu relented.

“It was a good decision, in hindsight,” Vembu says.

Zoho currently has about 30 software products bundled under three broad segments—collaboration, business and productivity tools.

The most popular has to be Zoho CRM for customer relationship management, which competes primarily with Salesforce.com Inc.’s CRM tool (the market leader in that segment), and similar CRM products from Microsoft Corp., Oracle Corp. and SAP AG.

The Chennai-based firm also has Zoho Creator, which allows anyone, even someone without a programming background, to build apps, and the Zoho office suite, which includes a word processor, a spreadsheet and presentation tools, similar to office suites such as Google Inc.’s Docs and Microsoft’s Office 365.

The company started with six employees, all co-founders.

Boom and bust

They included Vembu, also the company’s chief executive officer, and Shailesh Kumar Davey, who as vice-president currently handles all the engineering units at Zoho. The other co-founders are Tony D. Thomas and Sreenivas Kanumuru, who left to start their own ventures, and Vembu’s two brothers—Kumar Vembu and Sekhar Vembu.

All were engineers, and none had any concrete idea of what AdventNet should do. All were clear it shouldn’t become another IT services company. They also decided not to seek venture capital or debt.

“We didn’t have a very strong idea—more of let’s take it one at a time. We just wanted to do something to prove ourselves,” says Vembu.

It was an application programming interface, or API, developed by Thomas (who had worked in the network department of US-based AT&T Inc.) that gave Zoho its first success. “It was a Java-based SNMP API, and it was a pretty boring name for a product,” recalls Vegesna.

Later, some Japanese printer makers approached Zoho to use the API in their printers. “We made some money, and ploughed it back in our business,” says Vegesna, adding the firm called that brand—WebMNS—and it still exists for original equipment manufacturers (OEMs) such as Cisco Corp.

Zoho initially sold WebMNS licences for about $60,000 per user. Later, volumes went up and prices came down. Around the year 2000, Zoho’s revenue was about $10-20 million.

Then, the dotcom bubble burst and “99 of our 100 customers died in just a few months”, recalls Vegesna, who joined the company that year.

That was the moment of reckoning for Zoho. “Because of our zero debt philosophy, we happened to save some money. That kept us afloat and gave us enough run time—a couple of years—to chart out a new direction”, says Vegesna.

The new direction was to move away from selling software to OEMs and to focus on products for IT departments.

In 2002, the firm launched OpManager, a network monitoring tool that is now part of ManageEngine, an enterprise IT management suite.

In 2004, Zoho launched its email and CRM applications. “We were also playing with the Web, and thought that it would make sense to come up with an Office suite for the Web. We launched our first word processor in 2005 under the Zoho brand,” says Vegesna.

In 2005-06, there were 17 word processors in the market. However, by 2008, Vegesna recalls Google giving away its office suite for free. “We wondered how we would compete with them. Would someone pay for our product, especially when the likes of Google were giving it for free?” That’s when Zoho decided to focus on the business application suite.

“Services companies are less productive than product companies. Indian services companies typically earn a revenue of between $40,000 and $60,000 per employee. In contrast, a product company like Microsoft earns around $700,000 per employee while Google earns $1.3 million and Apple earns $1.9 million per employee,” says Vegesna.

Zoho’s bets appear to have paid off. The firm, which ironically started out as a salesforce.com customer, is now a much-smaller yet serious competitor.

“In 1999, we were one of the early Salesforce.com customers. We had about 18 licences. We thought it was really expensive for what was offered. So we thought of developing a product for ourselves to use. That is how Zoho CRM was born,” says Vegesna.

Salesforce.com even made overtures to acquire AdventNet in 2008, but Vembu says he declined the offer. Instead, the company focused on building itself into an enterprise software product company.

Zoho runs on Zoho

“We call ourselves a business operating sytem—an underlying fabric over which your entire business can be run,” says Vegesna.

Zoho’s logic is that if it can run on Zoho products, then any of its customers can, too.

The company’s employees use Zoho-branded Web-based email, calendar, spreadsheet, docs, office suites, CRM, campaigns (for marketing), books (for accounting), support (for customer support), recruitment, and connect—a Facebook-like social networking site that runs on the intranet.

“About 90% of our productivity tools are Zoho. The aim is to have our units run on Zoho. We eat our own dog food, and ensure our products run well. We use it internally for at least a year before offering it to our customers,” says Vegesna.

Each product is run like a separate firm, he adds, with the product manager being akin to a CEO of that unit. It takes 1-3 years to develop a single product. In some cases, Zoho has also scrapped a few products.

For instance, Zoho Books was done twice. Zoho Campaigns was done thrice because “we did not like the initial versions”. And some products were just not released.

Zoho today claims to have over 10 million users for its suite of products. As it expands, Zoho employees will soon shift to their new Guduvancheri campus in Chennai.

David vs Goliath

Zoho may be a small firm but it competes with Salesforce.com, Microsoft, Oracle, SAP and Google in various segments.

A 6 May report by research firm Gartner Inc. notes that worldwide CRM software made for a market worth $20.4 billion in 2013, up 13.7% from $18 billion in 2012. Strong demand for software as a service represented more than 41% of CRM total software revenue in 2013, the report said.

The top five CRM vendors accounted for 50% of CRM software revenue in 2013. Salesforce.com continued to be the largest vendor overall in the CRM market with 16.1% of the market. SAP, with a 12.7% share, remained No.2 in the overall CRM space, followed by Oracle’s 10.2%, Microsoft’s 6.8% and International Business Machines Corp.’s 3.9%.

“Hyderabad is salesforce.com’s largest office in India and serves as its main hub for all business functions. Salesforce.com is highly committed to its customers, partners, and growing business in India. We have a strong partner and customer ecosystem and we look forward to being the customer success platform that empowers Indian companies of every size and industry to connect with their customers in a whole new way,” said a salesforce.com spokesperson in an email response on 15 November when asked how the firm counters competition from Zoho.

Zoho, says Jaideep Mehta, managing director of India and South Asia at research firm International Data Corp. (IDC), “has done incredibly well, grown very rapidly and is certainly a pioneer in India in the product space”.

Zoho, said Mehta, “shows that it is possible to create a product company in India and make it a global brand. They are a SaaS (software as a service) player, which is a descriptor for the technology architecture that they deploy, their pricing model, and the way they deliver services. They are primarily a CRM SaaS player and, hence, compete with the likes of salesforce, Oracle CRM, Microsoft CRM and SAP. It is safe to say that within the online CRM market, they are a very significant company.”

Alok Shende, founder and principal analyst of Ascentius Consulting, says the cloud-based solution market comprises two sets of players.

The first are incumbent vendors and comprise the likes of Microsoft, IBM and Google that are well-entrenched in specific domains and are “carrying forward their franchise into adjacent cloud-based application markets”.

The second set consists of vendors that “came as industry outsiders but with an intent to reorganize and upend traditional software industry paradigms. This set experienced high mortality rates but the ones who survived and sustained high year-on-year growth have truly arrived”.

“Zoho is a prime example. Not only did it see product categories much before the others but the fact that it has bootstrapped on its own and survived for close to two decades is testimony to its business model. To be sure, its market share in India office productivity and CRM suites, a market valued at $250 million, is relatively small. However in markets such as SMB (small and medium businesses), the opportunity is huge,” says Shende.

Zoho’s management team insists it does not look at market share numbers.

“Our philosophy is simple: Test our product for free. If you like it, buy it. Don’t buy it based on numbers, or the brand. Volumes will get you revenue, not necessarily profit. Zoho has been profitable every single year in the last 18 years,” says Vegesna.

Vembu, too, insists “if you look at our traffic numbers, we have a very impressive user base. We just happen to take a more organic approach as opposed to a hot-sell model. The world economy is still soft though it may look good on the surface. You cannot take good times for granted. We don’t. When you’re used to spending a lot of money you don’t make, you can’t pull back easily”.

“We are not saying buy our products because we are made in India. It is all about who can move fastest. Take the case of Microsoft, which is facing a very difficult transition from the desktop to cloud. And they clearly cannot be the leading player. They are in a reaction mode. When we moved from mainframes to the PC, IBM was dominant, but competition followed. My job is to make Satya’s (Microsoft CEO Satya Nadella) job difficult (laughs). No offence meant. He’s a good man and a friend, but we have to compete.”

Posted by Leslie D’Monte on Live Mint After keeping a low profile for 18 years, this Indian software products company courts visibility with an ad campaign themed ‘Made in India, Made for the World’         

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