Zoho, Where Engineers Reign, Rewrites the Rules of Office Software

10/21/10Follow @wroush

It would be easy to say that Zoho, whose online office productivity software has attracted 3 million users, is the worst nightmare for desktop software makers like Microsoft and even for a newer generation of Software-as-a-Service companies like Salesforce.com. But Zoho is more complicated than that.

To figure in its competitor’s nightmares, Zoho would have to be an entity that other companies understood and therefore feared. In fact, the Pleasanton, CA-based company is something new and almost completely alien to the established software culture: a tech-savvy company that got tired of paying high prices for the software it needed to run its own business, and simply assigned its engineers to build something cheaper and better.

There are plenty of startups in the San Francisco Bay Area where the engineers “think they can build a better word processor than Microsoft can,” says Sridhar Vembu, Zoho’s founder and CEO. “But if you apply business thinking to it, it’s not strategic for them. But [at Zoho] the engineers rule. From the beginning I have kept the company in that mode.”

The first application Zoho’s engineers built, a primitive online word processor called Zoho Writer, came in 2005. It was a side project at the time—the company’s real revenue was (and still is) generated by its network management software for enterprises. Zoho Writer didn’t really take off until Google bought a competing program called Writely, turned it into Google Docs, and proved to the world that browser-based software could handle tasks like word processing.

But five years down the road, Zoho has created online alternatives to nearly every piece of software required to run a small or medium-sized business. Business customers pay a single bill each month and get access to e-mail, word processing, calendars, Web conferencing, spreadsheets, project management tools, presentation builders, customer relationship management tools, website monitoring, and more. “We are trying to be the IT department for these small and medium businesses,” Vembu says. “We’re trying to create a portfolio of products so that businesses can pay a monthly fee like a utility bill and get all the software they need.”

Sridhar VembuOf course, that’s also the ultimate vision behind Google Apps, Microsoft’s Office Web Apps, and Microsoft’s brand-new Office365 offering. But Google itself offers only seven Web-based office applications (Gmail, Calendar, Docs, Groups, Sites, Video, and Wave). Microsoft’s experiments with online software, meanwhile, extend only to Word, Excel, PowerPoint, and OneNote on the productivity side, plus Exchange, SharePoint, and Lync in Office365. Both companies have been lapped several times over by Zoho, which offers 25 online productivity applications—all built on a single core that makes it almost trivial for Zoho’s programmers to let users cross the boundaries between its apps. If you’re a sales executive using Zoho CRM, for example, it’s easy to read and reply to Zoho e-mail and even open and edit Zoho Writer documents without leaving the CRM app.

How has a 1,200-employee, 100-percent bootstrapped company come out of nowhere to offer a serious challenge to the giants of consumer and business software? As Vembu hints, it’s largely the story of a company where the engineers have the upper hand—which isn’t too surprising when the CEO has a B.Tech from the India Institute of Technology and a PhD in electrical engineering from Princeton. So there was nobody sitting in the company’s sales, marketing, or financial offices with the power to tell its developers that it was impossible to reinvent the productivity software market.

But there are some other important factors as well. For one thing, the company had room to experiment. Known as AdventNet until last year, when it took on the brand of its fastest-growing product line (the name Zoho is a play on “small office/home office”), the company enjoys a comfortable, $40-million-a-year revenue stream from its established enterprise software products, the widely used network management tools WebNMS and ManageEngine. The maturity of those products means the company’s developers don’t have to spend all their time maintaining and improving them. Also, Zoho stands somewhat apart from the mainstream of U.S. business software market: its entire software development effort is focused in Chennai, India, far from the shadow of Redmond or Mountain View.

And down at the level of the software code, the company made an important decision back in 2003 that cleared the way for many of its subsequent innovations. “From the beginning we built a framework, middleware if you will, that predated Zoho,” says Vembu. “We knew that we would be building a lot of applications, but we didn’t know what.” The middleware, in essence, insulates the company’s applications from the files they work with; it means all of Zoho’s apps have access to disparate underlying resources, and on the back end, it means the company has an easier time scaling up its SaaS infrastructure to meet demand.

But none of this was deliberately planned. In fact, the company’s very first cloud application, Zoho Writer, got started over a lunch conversation in mid-2005.

Vembu recounts: “One of my senior engineers and I were talking, and he said, ‘You know, all of this AJAX stuff, this client-side browser software, is getting more powerful. Is it time to look at things like office suites on the Web?’ I said ‘I’m a little dubious, I don’t know.’ He said, ‘I have a couple of engineers in my group, why don’t we pull together a prototype?’ They had other responsibilities, but their products were mature, there weren’t a lot of challenges. And by the fall we had launched the word processor. That is really how it all got started.”

Zoho WriterThat led pretty quickly to e-mail and calendar apps, followed by online discussion boards and a Salesforce-style CRM system. In many cases, the online apps evolved directly from systems the company had built for internal use.

“We meet our own needs,” says Zoho evangelist Ragu Vegesna. “We have a very active discussion forum internally, and we used to use some open source forum software, but spent a lot of time just keeping that up. So it was easier to create one ourselves, and that’s how we ended up building Zoho Discussions. The same with third-party CRM tools. We were a SalesForce customer but it was becoming expensive. We decided to do it in-house, and we found that it was so valuable that we decided to offer it to our own customers.”

All of Zoho’s apps are free for personal use and for teams of up to three people. For four people or more, companies that want access to the basic “Business Suite” of Zoho apps, including e-mail hosting, calendaring, word processing, spreadsheets, presentations, chat, discussions, and collaboration features, pay $50 per user per year (the same price as Google Apps). Additional applications like CRM are available for smaller add-on fees; whatever your business is using, Zoho will send you a consolidated bill at the end of every month.

Zoho’s fees can add up fast for organizations with lots of users. But you have to compare them to the retail prices for Microsoft’s Office Home and Business ($199 per user) and Office Professional ($349 per user) or for Salesforce.com’s CRM Suite ($65 to $125 per user per month, compared to $12 to $25 per user per month for Zoho’s version). The per-app pricing means companies can pick whatever they need. Zoho provides a console where managers can see exactly who in their organization has access to which application, and how the costs are adding up. The overall platform is designed for a la carte flexibility. “We see the Business Suite as something everybody in business would need, but with CRM or Web conferencing, maybe only 10 percent would need it,” says Vembu.

It’s as easy for customers to leave Zoho as it is to join. For the most part, Zoho’s applications use common file formats that are easy to export to competitor’s applications. “We have a comprehensive engineering vision about how to build all this, and we hope that people will find value in our vision, but we also recognize that customers want to pick and choose,” says Vembu. “We think this marketplace will have many players. Microsoft is going to be strong, Google is going to be strong. Everyone from IBM to HP to Amazon is throwing their hat in the ring. We don’t think there is going to be a monopoly.” (Vembu blogged on that final point just yesterday.)

Still, Vembu thinks some companies are better positioned for the SaaS future than others. Vembu doesn’t want to be part of Salesforce.com—he’s criticized founder and CEO Marc Benioff in public forums and has turned down an acquisition offer from the SaaS giant. And he believes that Microsoft, in particular, will have a hard time adjusting to the new realities.

“I think they are still a very desktop-centric company,” Vembu says. “Building software for the Web is a very different game. Today it would be very difficult to run Zoho’s spreadsheet, for example, on one machine, because the functionality is spread to different services that are pulled together from multiple servers. These are incompatible ways of thinking about software. But it’s not that companies can’t make the technology transition. It’s that they can’t make the business model transition and the cultural transition. Microsoft’s problem is that they are used to collecting $300 per copy and selling 15 million copies a year, and now they are coming to a world where consumers get it free, businesses pay, it’s an annual subscription, and they could leave at any time.”

The fact that customers can easily walk away from Zoho is “a feature, not a bug, of this model,” says Vembu. “It keeps us honest. Every day we have to do stuff to satisfy the users. On the other hand there is the opportunity to earn loyalty through superior execution and support.”

Vembu doesn’t claim that Zoho has all the answers, or that its engineers are smarter than everyone else’s. And there are plenty of hot software areas where its developers haven’t ventured—the company isn’t trying to build a social networking system that might compete with Facebook or LinkedIn, for example, or a file sharing system that might compete with Box.net or Dropbox. But Vembu is clearly not afraid to listen to his engineers’ creative ideas, and to graft on new businesses when he sees new opportunities.

“We think that [Saas] is going to be the future,” he says. The global market for AdventNet’s original product, WebNMS, amounts to perhaps $100 million, he says. For ManageEngine, perhaps a few billion. But for the Zoho suite of Web apps, the possibilities are “much broader”—Vembu projects that 30 to 40 million business users around the world will be logging on to Zoho daily by 2015, and 100 million by 2020. “That’s why the name of the company is now Zoho.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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