Mention Workday to anyone involved with enterprise applications, and the first response will probably be something about cloud-based HR systems. A few might also mention accounting systems.
It is becoming increasingly apparent, however, that Workday’s ambitions go beyond human capital management (HCM) and financial management systems. From briefings at a recent Workday analyst summit, it is becoming clear that Workday intends to become the first Tier I cloud ERP provider.
What is Tier I ERP?
The term “Tier I ERP” has been bandied about for many years. It is generally understood to refer to the largest ERP vendors that are able to serve the largest and most complex global businesses. Fifteen years ago, there were several players that could arguably be members of that club. But because of industry consolidation only two vendors remain that fit that definition: SAP and Oracle.
Workday wants to join that club, and it wants to join it as a cloud-only provider. SAP and Oracle may be moving as fast as they can to cloud ERP, but they will forever be, at the most, hybrid providers—offering both on-premises and cloud versions of their systems. Workday, in contrast, intends to be the first Tier I cloud-only provider.
Evidence of Workday’s Ambition
There are several things that point to Workday’s objective.
- Tier I customers. Unlike NetSuite, which leads the cloud ERP market in terms of number of customers, Workday from its very beginning has been targeting large companies. In 2008, it surprised the industry with wins at Flextronics and Chiquita. Since then, it hasn’t stopped, signing one Fortune 500 customer after another. For example, in 2013, it won HP, with 300,000 employees in 111 countries. This year it closed Bank of America, which is now Workday’s largest customer. Moreover, its big company wins are not limited the US. For example, Workday recently sold Nissan and Sony in Japan and Philips in the Netherlands. Recent analysis by our sister IT research firm, Computer Economics, shows that Workday’s typical customer is so large that it stands head and shoulders above all other cloud ERP providers.
- Tier I functionality. The functionality of Workday’s HCM is now approaching that of Oracle and SAP, as it builds out its global footprint. It currently claims to have customers in 177 countries, with 27 offices worldwide. Translations are provided for 25 languages. Outside of the U.S, it still relies on payroll partners, but it is building out its own payroll for the UK and France. Its Financial Management product now has 100 customers. It just announced a new embedded financial reporting capability (Composite Reporting) that promises to do away with a whole host of spreadsheets and data warehouse reports that large companies typically rely upon.
- Tier I cloud platform. Workday has also been building out its cloud platform into one that can handle the demands of the world’s largest enterprises. It is moving its infrastructure to OpenStack, a set of open source components and architecture for software-defined data centers. This makes Workday’s platform less proprietary than it has been in the past. Moreover, large companies need assurances of system availability and reliability. Therefore, like leading consumer Internet services, Workday is building its platform to quickly detect and recover from failure in any infrastructure component. Taking a page from Netflix, it will soon be randomly turning off components in the production environment as a way of ensuring its ability to recover.
Some observers view Workday as less than an ERP provider, as it only provides HCM and financial management systems. But they ignore the fact that Workday has already moved beyond these functions. It already provides purchasing, expense management, and project management functionality. It also includes embedded business intelligence capabilities that embrace data inside and outside of Workday. In one sector in particular–Higher Education–it has already pushed into operational systems, with its launch of Workday Student.
Can other functional areas be far behind? Workday’s CEO Aneel Bushri, pictured above, made a telling comment at the end of the analyst summit, “Financials are the door to everything else,” he said. “After you see us land large financial deals, you will see us moving into other areas: maybe healthcare, which is mostly workflow, plus patient accounting and billing. Layer on top of that strong analytics. It might be a year or two from now, but not five years out. But right now, we can’t spread ourselves too thin.”
This mimics the evolution of most other ERP providers over the past two to three decades. SAP, Oracle, and many others started as accounting systems. Once they were in the door, they then became the natural choice for expanding into operational systems in other functional areas.
Avoiding Side Streets
At this point, Workday has no lack of opportunities. In fact, one of the problems it faces is that there are simply too many good ideas that it could pursue. But if Workday’s goal is to be the first Tier I cloud ERP provider, it cannot afford to take its eye off the ball.
Here are some of the ideas where Workday is saying no:
- Platform as a service (PaaS). Most of the leading enterprise SaaS vendors also offer a platform for their customers to extend the vendor’s system or to build their own complete standalone systems. Salesforce.com with its Salesforce1 platform is the prime example. In its recent user conference, Oracle CTO Larry Ellison criticized Workday for its lack of a PaaS. But Workday is taking another path. First, most user development is for reporting, and Workday excels in its embedded business intelligence capabilities. Second, its applications are highly configurable, which diminish the need for customizations. Finally, where customers truly need to do new development, Workday offers an “integration cloud” to allow customers to build applications on other platforms, such as Salesforce1, and have them interoperate with Workday. With a number of other good platforms offered by other providers, it is difficult to see the drawbacks to Workday’s approach.
- Commercializing Workday’s cloud platform. As noted earlier, the capabilities of Workday’s cloud platform are approaching those of large consumer cloud platforms, such as Google’s or Amazon’s. It is robust, scalable, and fault-tolerant. It is difficult to think of another enterprise software provider that can accommodate the number of simultaneous users in a multi-tenant environment and a single application code line. But at what point should Workday commercialize its platform, either to allow other SaaS providers to build on a separate instance of Workday’s platform, or to license the platform for them to build upon and operate themselves. When asked, Workday’s response is that it would rather focus on building applications.
- Manufacturing industry functionality. Manufacturing companies represent the largest industry sector worldwide. Nevertheless, Workday executives are adamant that–at least at this time–they do not plan to develop manufacturing business systems. In part, this may reflect the founders’ experience at PeopleSoft, where their attempt to gain market share in manufacturing never gained traction. The other reason may be that manufacturing is simply a bridge too far from where Workday is today. Most of Workday’s target markets today have one thing in common: they are sectors where people are the dominant costs–financial services; professional and business services; higher education, software and Internet services; government and nonprofit; health care; and hospitality. These industries are best for leveraging Workday’s roots as an HCM system provider. Workday could change course at any time, but right now, the leadership team feels that chasing product-based businesses would be a distraction.
Strategy is all about choices: deciding what not to do is as important as choosing a goal. Its leadership team is to be commended for keeping its focus.
If Workday’s goal is to become the first Tier I cloud ERP provider, expect to see Workday begin to build out functionality to more fully serve its target industries, like it is doing with Workday Student in the higher education vertical. This might mean merchandising systems for retail or revenue cycle management for healthcare, for example.
At the same time, it is unlikely that Workday will make major acquisitions to fill out its industry solutions. Its acquisitions to date have mostly been for technology (e.g. Cape Clear) or for capabilities (e.g. Identified). Any acquisition of business applications would need to be rewritten for Workday’s platform, and Workday shows a propensity to start with a clean slate in developing new functionality. Workday’s approach also allows it to build upon a single object model for each key entity, such as “person,” rather than interfacing entities between acquired software. Workday’s approach is another point of contrast with SAP and Oracle, which have built up their cloud portfolios largely through acquisition of disparate vendors and are now facing the challenge of integration.
There is another contrast with SAP and Oracle. Workday has a tremendous advantage in that all its customers are on the latest version. Its architecture with a single code base ensures it will never have legacy customers to support–another demand on a vendor’s resources.
The Tier I ERP club today only has two members. But a third member may be joining sooner than we think.