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Workday IPO could bring new respect for SaaS human resource software

Analysts also say improved financial accounting and CPM tools will open new arena in fight with Oracle and SAP for large enterprise market.

Sometimes when a company goes public, it's not just about the money. Take Workday Inc., for example.

The provider of on demand human resource software filed in July with the U.S. Securities and Exchange Commission (SEC) to raise $400 million in an initial public offering (IPO). Yesterday, it announced share prices of $21-24.

But one analyst said Workday's main motivation is not raising capital -- it's respect.

Workday turning sights on large ERP financial accounting

Workday made its name as a cloud-based alternative to on-premises human resource software. It hasn't really challenged SAP and Oracle in financial accounting for large enterprises.

But that may be changing. In interviews last spring, Workday executives said they were building up the platform's financial accounting, planning and reporting features. Now in the quiet period before Workday's initial public offering, they can't give specifics, but analysts briefed on the new features are impressed.

"I've had some meetings with them," said Paul Hamerman, vice president and principal analyst at Forrester Research Inc., based in Cambridge, Mass. "It's looking pretty good."

Workday will be helped by its service-oriented architecture, which makes it easier to capture data across the enterprise and feed information to the financial accounting engine, according to Hamerman.

He said the company has gradually improved its financial management features and is planning to go directly after an enterprise market that has already bought into its human resource software.

Workday 17, released in August, added time and attendance features that, while "lightweight" compared to those of longtime leader Kronos, should appeal to project-oriented industries such as consulting and engineering, Hamerman said.

The release also has new Worktags that extend analytics and multi-dimensional reporting by enhancing how financial statements and ledger balance reports are displayed, according to Workday.

"I think it's a powerful feature," Hamerman said. "It's an in-memory [analytics] system and all the information is instantly accessible."

Workday is already starting to attract financial accounting customers, said John Van Decker, research vice president at Gartner Inc., a market research company based in Stamford, Conn. "For core financials, I don’t see that there's a lot of issues."

Corporate performance management (CPM), on the other hand, has been a weakness, according to Van Decker. Right now, companies typically run a different planning, budgeting and forecasting tool on top of Workday, though a partnership with Tidemark could help beef up those functions, he said.

Workday is already one of the four "credible" Software as a Service (SaaS) suites that can give CFOs the confidence to move their core financials to the cloud, said Bill McNee, founder and CEO of Saugatuck Technology Inc., a consultancy based in Westport, Conn. The others: NetSuite, Oracle Fusion Financials, and SAP Business ByDesign.

McNee estimated that only 5% to 10% of the HR customers also use Workday financials. But with the in-memory analytics improvements and increasingly sophisticated workflows, he said, "within 12-18 months they're going to be a powerhouse with their financial suite."

--David Essex, Executive Editor

"Workday is going public for one major reason and it's not money," said Bill Kutik, technology columnist for Human Resource Executive magazine. "Founder Dave Duffield is a billionaire from the hostile takeover of PeopleSoft by Oracle. The major reason is for the respect it brings them with large-company clients, who feel much more comfortable working with a vendor that has to meet the accounting requirements of the SEC. In my mind, that is the biggest reason. It will increase their position of being a serious cloud-centric HR option."

Workday has been "elephant hunting" for two years, Kutik said, which means it's going after customers of enterprise resource planning (ERP) giants Oracle and SAP, its main competitors in human resource software. Now it even wants a slice of their financial accounting business (see sidebar).

Workday claims 325 customers, including big players in multiple industries. The list includes Flextronics International Ltd., Chiquita, Kimberly-Clark Corp., American International Group Inc., Lenovo, Georgetown University and Google.

"The recent 2012 HR Service Delivery and Technology Survey Report from Towers Watson contains some very good information on SAP, Oracle and Workday in their research of over 600 companies, and it's obvious that customers are considering Workday as part of the big three even though their market share is quite a bit lower," said Jarret Pazahanick, an SAP HCM consultant and managing partner of EIC Experts, a Houston-based consultancy that helps deploy SAP-based employee interaction centers.

Kutik agreed with that assessment.

"[Workday] now stands with the sleeping giants of Oracle and SAP, which have woken up to the competitive danger of SaaS [Software as a Service] to their huge on-premise installed base," he said.

On the Oracle side, there's the year-old Fusion HCM, an all-SaaS product for core HR and talent management. While Fusion HCM has attracted a fair amount of attention, it has not attracted a huge number of customers, Kutik said. And SAP has SuccessFactors, a cloud-based HR solution.

"Both of these guys are reacting to the sudden popularity of SaaS for basic HR software," Kutik said. "But they're both behind in a big way to Workday."

Marquee customer's CEO sits on Workday board

Workday's largest deployment to date is Flextronics, a provider of electronic manufacturing services with a global workforce of more than 200,000. A customer since 2008, it made payments to Workday totaling nearly $5.7 million in the last two-and-a-half fiscal years that ended on July 31, according to the SEC filing.

Flextronics CEO Michael McNamara owns stock in Workday -- with an option to purchase additional shares -- and sits on Workday's board of directors.

One analyst who requested anonymity said the cozy relationship should raise a couple questions: Did Flextronics know its CEO stood to gain personally from the purchase decision? And what should Workday disclose when citing Flextronics as a customer reference?

Another analyst said a drop in Flextronics' payments from $2.7 million in the fiscal year ending Dec. 31, 2009, to $45,163 for the six months ending July 31, 2012, should raise a red flag, although he admitted he's not sure what it all means.

But a third analyst said software companies typically drop their prices for early clients, especially when -- as in this case -- a large one serves as a marquee example of Workday's ability to scale. He said the recent payment reduction doesn't mean anything.

A Flextronics spokesperson said company officials were out of the country and unavailable for comment.

HR's big three: Oracle, SAP, Workday

Workday's growth has put a lot of competitive pressure on SAP and Oracle and is one of the key drivers in both companies' strategic purchases, Pazahanick said, citing the SuccessFactors and Taleo buys. "I believe that customers will be the ultimate winners in the short term due to these competitive pressures."

A Workday spokesperson said the company is in its quiet period and unable to comment. Oracle declined to comment.

But a SAP executive claims her company provides a more gradual, modular route to the cloud than the "rip and replace" approach of Workday. The SuccessFactors purchase "really concentrated from the beginning on reinventing HR and connecting people strategy to the business strategy," said Folia Grace, vice president of product marketing for SAP's cloud business unit. "It really goes well beyond traditional HR and focuses on talent -- how you motivate talent, how you engage talent, how you measure metrics around talent contributing to the organization. And it's all based upon comprehensive analytics."

In contrast, Grace said, Workday started with a focus on replacing core HR systems of record in SAP and Oracle shops.

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Understand the SAP-SuccessFactors roadmap

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But analysts said Workday is attractive to large companies for several reasons. It is transforming the user experience, easing deployment, and building products that HR managers want, especially for talent management, said R "Ray" Wang, principal analyst and CEO of Constellation Research Inc.

"They're making it easier," Wang said. "It's the adoption factor that's big here."

Kutik agreed that Workday is easier to use than the on-premises ERP systems, which provides a huge advantage to HR departments. From IT's perspective, companies have to devote fewer IT resources and infrastructure to Workday.

"They're not running someone else's software," Kutik said. "They're not maintaining it; they're not upgrading it. They're just making sure it doesn't [mess] things up."

In general, Workday appeals to chief financial officers (CFOs) because it requires a monthly payment rather than a large perpetual license at the front end -- something that all CFOs love, he said.

"Arguments rage about at what point does it become the same cost," Kutik said. "Is it five years out? Ten years out? Think about paying rent for 10 years vs. buying your house. There comes a time when you would have been better off buying your house. [In this case] what makes it so difficult is to factor in yearly maintenance. The hardest thing to do is factoring in upgrades, and what they cost you to do. And they're often difficult to do with an on-premise solution. The vendor often doesn't offer a lot of help."

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Bill Kutik states, “There comes a time when you would have been better off buying your house.” SaaS vs. on-premise is not a clean analogy to “rent vs. buy”. Bill alludes to this, but does not elaborate.

With SaaS, the annual subscription cost is fairly comparable to “rent”. However, on-premise is not simply comparable to “buy”. Due to annual maintenance and upgrades every 3-5 years, there is a fluctuating cost-of-ownership component. These costs – particularly upgrades – are variable and therefore difficult to predict and plan.

From a CFO’s perspective, a key value of SaaS is cost predictability.