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Micah Fairchild Workday’s IPO Solidifies Cloud Model Acceptance and Market Share

3 stars Average rating: 3 (from 90 votes)
 By Micah Fairchild

Workday’s Initial Public Offering: A Post-IPO Questions Review

After Workday co-founder Dave Duffield’s skirmish with Oracle in 2005 over the hostile takeover of PeopleSoft, folks within the industry wondered just how long it would take Duffield to re-build another application; and even if so, whether the HR industry would take to it in the same way that they embraced his former project. Now, 7 years after Duffield introduced the world to Workday, few were surprised when Workday filed its S-1 paperwork to pursue an IPO.

Still, there weren’t many within the analyst community that could have predicted Workday would raise nearly 3 quarters of a billion dollars (or would have a valuation at over 4.5 times as much); especially after the recent high-profile flops of IPOs from Facebook, Zynga and others. However, even though Workday pulled off one of the most successful IPOs of the 2012 financial cycle, perhaps the even bigger story surrounding Workday’s feat is the mainstream acceptance of the cloud and the SaaS technology model as a whole. In fact, as Eloqua’s CEO Joe Payne puts it, this is “simply another validation of the SaaS model, which already dominates the competition”. Be that as it may, there are still a number of questions that we’re getting from business leaders and prospective buyers alike about this latest Workday news. So we thought we’d use this time to address just a few of the most frequently asked ones.

Workday IPO Question #1: What Does the Company Plan To Do Next?

With $637 million raised from selling 14% (or 22.5 million) of its Class A shares, many within the analyst, customer, and investor communities have been left wondering, what exactly does Workday plan on doing with all that money. Some have insinuated that the company won’t be spending any on acquisitions, while others have made the bold claims that Workday is trying to build out the world’s first cloud-based ERP suite.

With regards to acquisitions, according to IDC’s Lisa Rowan, no acquisitions of note are in the company’s sights short term. However, Workday has already publicly stated that its regulatory filings have built in the option for using money for acquisitions. And experts versed within the M&A landscape find it difficult to conceive that Workday won’t be leveraging that option with at least some of this new-found cash to shore up some of its application’s deficiencies. Granted, the lion’s share has been earmarked for research and development (as well as international expansion), but acquisitions are almost invariably on the table regardless of the company’s public statements or pundits’ opinions.

With regards to the larger intentions of a cloud-based ERP suite, I think it’s important to note that very few indications have been given that this strategy is one that Workday will fully embrace. In fact, while an April 2012 InfoWorld article might belie these claims; the company’s latest release (Workday 16) is not a cloud-based ERP-offering. Unfortunately, far too many analysts and customers within the HR, payroll, and HCM communities interchange the terms for Financials and ERP; a particularly pressing problem for those companies that acutally have ERP requirements. More specifically, in order to be considered such, ERP suites need to have the 5 elements of CRM, HR, Manufacturing, Supply Chain, and Financials; and in recent interviews with Workday CTO Mark Peek, emphasis was only given to the core ERP area of Financials. Not only that, but given the company’ increasingly tethered relationship to Salesforce.com, entry into the Customer Relationship Management (CRM) realm would be unwise and quite frankly detrimental.

Workday IPO Question #2: Is the Company Fixing Holes in Their Offering?

As mentioned earlier, Workday sees the Financials side of their offering right now as the area that needs the most significant amount of work. In fact, according to the company’s co-founder Aneel Bhusri, more work needs to be done to bring the Financials suite to parity with legacy systems. However, with Oracle’s purchase of Taleo, SAP’s acquisition of SuccessFactors, and IBM’s late-bid for Kenexa, the fact of the matter is that once rationalization is wrapped up for these companies, Workday’s talent management capabilities will be lagging. Granted new functionalities are being released with each successive update (now on Workday 16), but not nearly at the pace that Oracle and SAP will be up to once at full tilt.

Workday IPO Question #3: What Will This Mean for the Market?

Regardless of how much money Workday raises, or how much additional R&D they’re able to get accomplished with these funds, the fact of the matter is that they have a long way to go before they can even touch the market shares that SAP and Oracle respectively have in the HR software market. After all, currently Oracle commands 12.4%, SAP has 17.4%, and Workday trails behind at a decent, but minimal 3.5%. That said, Workday is closing that gap little by little every day; even doubling first quarter revenues in 2012 to $119 million over the same time last year. So clearly, the company is picking up speed. Perhaps more telling though is how interested prospective buyers are in Workday. As Towers Watson’s Tom Keebler puts it, “this IPO reinforces Workday's place on the short list of prospective vendors that major enterprises consider when they're actively searching for a new HR management system”. Indeed, Cedarcrestone’s latest 2012-2013 HR Systems Survey pegged a growth rate of 300+% for Workday over the next year.

Regardless of those numbers though, PeopleSoft is still the most adopted HRMS solution and according to market research will likely only lose 1% adoption over the next 12 months (some of which is to Oracle’s new venture Fusion). And given that Workday has officially (and on some level for good reason) decided to not offer customer’s choice with regards to deployment (hybrid or otherwise), that market share may not be increasing as quickly as Workday executives and investors may have hoped.

Workday’s IPO: Final Thoughts

In closing, it’s important that prospective Workday customers (and investors for that matter) understand that Workday has become one of the most talked about HR software applications in the industry because of its technology offerings rather than its inherent HCM capabilities. And the incredible showing that the company was able to pull off for their IPO is simply an indicator of how the market is reacting to that technology. That said, with over 350 customers added to its client list since the company’s inception (the largest of which, HP, now tops 300,000 employees), Workday has clearly pulled off one of the most enviable hat tricks that can be achieved in this industry…gaining trust. Organizations that would not have given the cloud a second look just a few years ago are now considering migration and full scale rip-and-replace thanks in no large part to Workday. Yes, their interface is slick and more compelling than most of its competitors. Yes, the multi-tenant architecture can provide efficiencies that cannot hope to be gained from on-premises deployments. But for companies considering this massive of a system replacement, Workday had better hope that their product is as good as their pitch for many years to come. Let’s hope this latest funding does just that. End

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With $637 million raised from selling 14% (or 22.5 million) of its Class A shares, many within the analyst, customer, and investor communities have been left wondering, what exactly does Workday plan on doing with all that money. Some have insinuated that the company won’t be spending any on acquisitions, while others have made the bold claims that Workday is trying to build out the world’s first cloud-based ERP suite.

 

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