Workday: The Next Software Power?

Workday has landed three large companies as customers -- important votes of confidence that it can be trusted to handle some of a corporation's most crucial computing tasks. Flextronics, the biggest of the three, plans on rolling out the Workday human resources management system worldwide for more than 200,000 employees in the next two years. "Workday could definitely be the next Salesforce.com," says David Smoley, Flextronics' chief information officer. "Their model is in line with companies like us. We want to keep things as simple as possible and keep costs as low as possible."

The other major customers are Chiquita, with 25,000 employees, and Life Time Fitness, which plans to adopt all three of Workday's services, adding accounting and payroll to human resources management.

If Workday does a good job of serving these clients, it will gain credibility with large corporations that are looking for alternatives to traditional software packages. "They're in the phase where they're getting big customers. If they do well with the rol-outs they'll get the attention of a lot of mainstream corporations," says analyst Jim Holincheck of market researcher Gartner (NYSE: IT) . David Dobrin of B2B Analysts is even more effusive: "Workday is like the iPod for enterprise HR software. It's a better and simpler way of doing things, and people can see it."

A Long Rollout

Rivals caution that these are still early days for Workday, though. It will take years for the company to build out all of the functionality large corporations need. Its trio of large customers is willing to wait while it adds capabilities, but not every company will be so patient. "Twenty customers does not a success make. You have to be ready to put 10 years into this deal," cautions Zach Nelson, chief executive of NetSuite , a company that provides accounting and HR services for small and midsize companies, and which has spent a decade building up its offerings.

So far, Workday and the Software as a Service business model have not had a big impact on the traditional software companies with which they compete. Oracle's (Nasdaq: ORCL) application software revenues grew by a rambunctious 31 percent last quarter. And SAP's (NYSE: SAP) own on-demand software, Business ByDesign, has gotten off to a rocky start since it was launched last September. SAP discovered potential customers wanted more capabilities than it had expected. At the same time, investors complained that the amount of money SAP was investing in the new offering was squeezing profits. So it has slowed its global rollout of the service. "There's some interest in this, but it's not as big as some say. It's overhyped," says SAP Chief Executive Henning Kagermann.

The folks at Workday are willing to be patient. Duffield, though he's 67, is driven to achieve the same kind of success with Workday that he had as founder and longtime chief executive of PeopleSoft, which was one of the leaders in traditional corporate software before it was bought by Oracle four years ago. He's bankrolling Workday with some of the $1.2 billion he made on PeopleSoft and foresees it eventually following the same kind of trajectory. "Workday could end up being the second coming of PeopleSoft," he says. His partner in the venture is Aneel Bhusri, 42, the company's president, who also was an executive at PeopleSoft.

'A Real Chance of Delivering'

The Workday strategy was to focus first on building human resources services and then flesh out the portfolio with most of the major computing systems a company needs to run its basic functions. It has already introduced accounting and payroll systems and is working on order processing and procurement modules. The company has 58 customers, and 25 of them are now fully operational on their Workday systems. Bhusri is cautiously optimistic. "A lot of people didn't think large companies would choose the on-demand model for these critical systems, but we have proven they will," he says.

Life Time Fitness is an important proof point. It was partway down the path of choosing a traditional software package when one of its managers happened to sit next to a Workday employee on an airplane flight. After meeting with Duffield and Bhusri and testing their services, Life Time Fitness abruptly changed direction. First it replaced HR and payroll systems from Ceridian with Workday's services, and now it's replacing Microsoft's (Nasdaq: MSFT) accounting software. "It was a no-brainer to go with Workday," says John Hugo, the company's controller. "It's less expensive, and we don't get locked into contracts with hidden maintenance and upgrade costs."

Workday still has a long way to go to catch Salesforce.com, which is on track to bring in $1 billion in revenues this fiscal year. "There's only one Salesforce.com," quips Benioff, its CEO. Still, he sees plenty of promise in the business Duffield and Bhusri are building. "They have a real chance of delivering," Benioff says.