NetSuite and Workday are poised to cash in on the migration to cloud computing services and perhaps elbow aside today’s corporate software giant

May 26, 2013

A Legacy Feud in Tech



More than two decades ago, David Duffield built a global software company, becoming a billionaire.

SAN FRANCISCO — If the Hatfields and McCoys lived in Silicon Valley, they’d be fighting with piles of cash and lines of software code instead of knives and shotguns. And the fight would be over who wins the most customers in the computer industry’s growing “cloud” of software services. That’s how it is for Aneel Bhusri and Zachary Nelson, whose companies are in contention over the next major shift in computing. In a way, the men are reliving history. Two decades ago, their mentors feuded, and that time, too, the dispute took place against the backdrop of a major shift in corporate computing — when customers gave up their mainframes and moved to software that relied on personal computers closely connected to a server. Mr. Nelson, the chief executive of NetSuite, used to work for Lawrence J. Ellison, the billionaire chief executive of Oracle.

Mr. Bhusri, the co-founder of a competitor company called Workday, used to work for David Duffield, a rival of Mr. Ellison’s. Mr. Duffield is the low-profile founder of PeopleSoft, a once-powerful maker of corporate software that Oracle acquired in a bitter, 17-month hostile takeover fight.How bitter? Oracle defeated a federal antitrust lawsuit brought by the Justice Department before it could reel in its rival. And a month after PeopleSoft was acquired, 5,000 of its 11,000 employees were laid off.

Together, NetSuite and Workday are among a growing circle of tech outfits poised to cash in on the migration to cloud computing services and perhaps elbow aside today’s corporate software giants, like Oracle and the German company SAP.

“It would be a mistake to see this as a revenge play, though other people might see it that way,” Mr. Bhusri (pronounced “Bush-ree”) said in an interview, referring to his company’s efforts to take on Oracle’s business. “PeopleSoft came in second or third. This time we can be first.”

Workday and NetSuite each have annual sales of less than $400 million, about 1 percent of what Oracle sells in software, but the stock of both companies has rocketed on expectations that they are in the heart of a market that could grow five times faster than the rest of the tech industry, according to IDC, the technology research firm.

Companies in this growing area could be acquisition targets. IDC predicts that by mid-2014 the big software makers will have spent as much as $25 billion on acquisitions as they build out their cloud services.

While the market value of Oracle and SAP both reflect about four times their annual sales, NetSuite shares trades at 20 times its sales, and Workday is valued at 40 times. Last Wednesday, Workday reported revenue for its first fiscal quarter of $91.6 million, up 61 percent from a year earlier. In its most recent quarter, which ended March 31, NetSuite also had $91.6 million in revenue, up 32 percent from the same period a year ago.

The two upstarts both deliver services — NetSuite in accounting and Workday in human resources — that perform essential business functions, and from there have broadened into other areas.

Their services perform the same functions as traditional business software to manage tasks like accounting and tracking employee benefits. But instead of selling a license to own that software, which requires the customer to install it on a server, the two companies provide access to their services over the Internet and customers pay on a subscription basis.

Mr. Bhusri, 47, and Mr. Duffield started Workday in 2005. Mr. Bhusri is chairman, and the men share the chief executive role. Mr. Bhusri, a partner at the venture capital firm Greylock Partners, is on the board of several other cloud companies.

“They are all companies in the Dave Duffield model — the good guy model, as opposed to the other guy,” Mr. Bhusri said. An open, self-effacing man, he declined to identify the “other guy,” but added, “I would be amazed if Oracle does not buy NetSuite.”

Mr. Duffield hired Mr. Bhusri at PeopleSoft. Based in Pleasanton, Calif., about 30 miles from Oracle, it was sometimes called the “People company” and was known for its casual atmosphere.

Mr. Duffield often signed e-mails with his initials, D.A.D., and the company regularly held beer parties, where the entertainment was the house band, the Ravin’ Daves. (Mr. Duffield did not play in the band.) And at those parties, Mr. Duffield was known to lead his employees in anti-Oracle cheers.

“He is my best friend,” Mr. Bhusri said of Mr. Duffield.

Mr. Bhusri rose fast at PeopleSoft, but he became caught up in a difficult effort to move PeopleSoft products online. When Mr. Duffield retired in 1999, Mr. Bhusri was not given the top job because he was thought to have too little experience in operations and sales. Mr. Bhusri went to Greylock, but continued to serve as vice chairman of PeopleSoft.

This was about the time that Mr. Ellison co-founded NetSuite with a former Oracle programmer, offering software services for tasks like financial and customer management.

Mr. Nelson, the NetSuite chief, scoffs at the idea that Oracle will acquire his company, based in San Mateo, Calif., a few miles from Oracle’s campus. Instead, he says, NetSuite will become a critical company, not just for accounting, but for retailing and manufacturing globally.

He got the attention of Mr. Ellison in 1996, when as the head of marketing at Oracle he wrote an ad mocking the processing speed of competitors’ products. “It read ‘Gentlemen, start your snails,’ “ recalled Mr. Nelson, a Stanford graduate whose artifact-rich office shows an abiding interest in anthropology. He joined NetSuite in 2002 as chief operating officer, and took over as C.E.O. by the end of the year. “I was in with him forever,” he said.

Troubles between PeopleSoft and Oracle began in June 2003, when Mr. Ellison announced an unsolicited offer to acquire PeopleSoft for $5.1 billion. Within a month, it raised its offer, and touched off a lawsuit by PeopleSoft that accused Oracle of interfering with its business.

The Justice Department began an antitrust investigation. In the ensuing months, Oracle raised its offer to buy PeopleSoft, and then reduced it after PeopleSoft reported lower earnings. At one point, PeopleSoft’s chief executive, Craig Conway, who had worked at Oracle, referred to Oracle as a “sociopathic” company.

Oracle defeated the Justice Department’s investigation in September 2004, the same month Mr. Conway was removed and Mr. Duffield returned as chief. The two hoped to fight Oracle’s takeover with a poison-pill defense, but on the eve of a trial challenging that tactic, PeopleSoft’s board accepted Oracle’s offer of $10.3 billion.

Mr. Duffield, 72, says losing PeopleSoft is still painful. “It was 17 years of my life,” he said. Following his return to the company, he said, “I expected to be there this very day, with Aneel.”

“I don’t dislike” Mr. Ellison, Mr. Duffield said, “he made very good business decisions.” He also noted that if Oracle hadn’t gone after PeopleSoft, and prevailed against him, “I’d still be retired. Amazingly, we got a new chance.” Mr. Ellison, who is 68 and is also pushing Oracle into online software, declined to be interviewed.

Workday’s service, based on technology created by a former PeopleSoft employee that Mr. Duffield and Mr. Bhusri acquired for about $1.5 million, operates without one Oracle database.

That is a rarity among cloud computing companies, and it is a decision that Mr. Nelson of NetSuite thinks will end up hurting the company. “They have to build all this stuff that I don’t have to,” he said. As for SAP, Mr. Nelson added, “Larry has them on such a tilt that they don’t know how to think about things.”

SAP takes an equally dim view of its small rival. “SAP is a major player in the cloud today, with over 29 million cloud users,” James Dever, an SAP spokesman, said in an e-mail. “As for the attacks on SAP, they would be more convincing if it weren’t so easy to see the hand of Larry Ellison working the Zach Nelson puppet.”

This large if unglamorous part of the tech industry — revolving around accounting and human resources software, not shiny smartphones — may be an unlikely rumbling turf. But along with manufacturing, their services are at the heart of the work structure for most companies, making it a very big business.

Oracle and SAP have a combined market value of $258 billion, and according to Bloomberg’s Billionaires Index, Mr. Ellison is personally worth $41 billion, making him the world’s eighth richest man. Mr. Duffield, who is also a billionaire thanks in part to Oracle’s costly takeover of PeopleSoft, acknowledges that Workday now has less than 1 percent of Oracle’s revenue, but said “that’s 99 percent to go.”

But today’s competition isn’t about the money. “They all have that,” said Peter Goldmacher, a managing director of Cowen and Company in San Francisco. “It’s about who owns the future.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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