Zoho at a crossroads: Stepping up means stepping out

I've known Zoho for roughly 15 years. I was introduced to them when their, at the time, "free-up-to-5-users" CRM product came onto the market, fully baked and ready to serve small businesses across the globe. They caught my interest.

I can't remember entirely accurately, but I think they were either owned by or called themselves AdventNet until 2009 when they adopted the Zoho brand moniker. They also owned, rather quietly, Vtiger which was a contender in the world of free and open source CRM. In fact, Vtiger was probably, back then, #2 to SugarCRM, (ironically, I think it was built on SugarCRM's platform). I was intrigued because there was this very quiet company spreading its tentacles around the world and the world didn't even really know it -- though their customers did.

Ironically, the world still doesn't know it. Not really.

My connection to Zoho as an analyst/influencer/interested party came through someone who at the time was their Chief Evangelist, Raju Vegesna. I met him at several conferences including CRM Evolution and was immensely impressed with him as an evangelist for Zoho -- one who kept me up on what the company was doing. I was equally impressed with him as a person -- a very good human being. Zoho's downside was that I couldn't find much reference to them "out there" because they really didn't market much though I'd see their presence in some developer groups and forums and technical sites. But I kept my interest up because of my trust in Raju. One thing that I think gets overlooked a lot when it comes to the intricate forces that govern the ups and downs of tech companies, is that the relationships of the tech company executives to people out there in the market can have more impact than the quality of their technology. Note that, I didn't say financial return, I said impact. I'll veer a second to tell you a story that supports this idea.

A few years ago about eight analysts were sitting at lunch together at a gathering of a CRM technology provider who had been acquired by another company, one that clearly had zero understanding of CRM or for that matter, anything at all. The analyst relations person for that company was incredibly highly regarded but that day the company itself did and said things that, aside from their deep arrogance, were outright stupid and deserved a verbal pounding. But, as you know, its in the way that you do it, not just that you do it. While we all ate, and spoke about how awful this company was, we also informally discussed at the table how we would shape our critiques because we didn't want the AR guy to get in trouble. The critiques had to happen, but, the sharpness of language that might have been part of the critiques was foregone because it could have hurt the career of our friend. We had a responsibility to the public to point out the deficiencies -- so they were. But its up to us how we phrase that -- and, if we didn't have that regard for the individual -- the phrasing would have been different. We are dealing with human beings, not just abstract entities called companies, and their lives have to be taken into account in our dealings. That may sound obvious on the surface, but when you view the black and white views that a lot of people including my own brethren often have of companies, you realize that the nuances that are created within the companies by the interpersonal dynamics are not being taken into consideration.

Back to Zoho.

I trusted (and trust) Raju. He always fairly represented the company's strengths and was willing to acknowledge the weaknesses. So despite the fact, I found little public evidence of market impact, I kept up my interest in Zoho.

Over the ensuing years, I had ups and downs with that interest in Zoho because I wasn't sure that they wanted or even cared about their messaging and positioning, nor did they really reach out much. But nonetheless, my initial insight into the company held firm. I realized that they had an engineering-first business model -- one that more often than not fails, but in their very particular case, seemed to be working really well.

The bulk of business models that are successful incorporate a lot of elements that are necessary for the business to gain the traction it needs to grow either incrementally or exponentially. For example, a vision -- where the business sees itself and what's it's doing in the context of the world that it inhabits. A mission -- how the company sees itself supporting those it serves now. Strategies that take the mission and vision into account, ranging from product roadmaps to thought leadership materials to programs to engage customers. Plus a culture that can sustain all of the above. I'm obviously vastly simplifying this here, but there really isn't room or time to go through a complete picture. This type of business model is a highly recommended framework and starting point for many companies -- and tends to be a standard path to success when it is adopted -- though like anything else, it can fail and it can be the wrong one too. But there are companies who succeed with outlier models or grow quite large with those models. For example, Callidus Cloud before their acquisition by SAP was well served by a mission driven model that took care of customer needs as they became manifest. Zoho has succeeded largely due to its outlier model -- an engineering product-focused model. But the question to me was why had that succeeded?

In that period, I got a chance to get to know them a bit better, and I actually keynoted their first user conference -- a big step into the public eye for them -- which had about 60-70 users. They called it Zoholics, which I thought was kind of cool. I had a chance to interact with their senior management including founder and CEO Sridhar Vembu who I found to be a powerful advocate for what he was doing and also a man with a social heart. But after I left I wasn't sure about how committed they were to grow to a mega concern, something that their growth trajectory at the time indicated was a possibility.

Then, about a little more than a year ago, my eyes began to open a great deal about the Zoho business model -- in part, thanks to Raju, but also due to someone I've often spoken about in these posts, one of the most significant industry influencers/analysts Brent Leary, who has been a strategic adviser to Zoho over the past 2 years. What I realized is that one of the reasons for the "indifference" over the years to having a highly visible public profile with a lot of splashy activities, was that their culture, which is a truly extraordinary one, was geared toward making the human beings involved with them happy that they were associated with them -- and that means employees and customers, which engenders advocacy/loyalty from both groups. That was the be all and end all. This kind of culture has been a distinct rarity, since the massive decline of loyalty from companies and to companies that was characterized by IBM's attempt in the late 90s to trim their employees pensions by switching the funds to cash-balance plans -- a move reversed due to significant push back from the employees. Eventually, IBM's attacks on pensions damaged and in some cases destroyed the pensions that some of the employees had built up over 30 or even 40 years. But it also represented the final nail pounded into loyalty's coffin. IBM had been the poster child for its loyalty to its employees and their loyalty to it. But the IBM debacle made clear that the new mantra going forward would be employees really shouldn't be loyal to companies because the companies weren't loyal to them.

Zoho is a "contemporary throw-back" to when loyalty to each other was a meaningful concern for companies, employees and customers. They are a company whose culture is organized around valuing its employees and its customers -- and not just in word but in deed. There are a significant number of employees who have been there since the founding of the company -- at the senior management level, it's double-digit numbers and that could be toward the higher end of double digits, though don't hold me to the latter.

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I got a solid look at their culture at their first analyst summit in January 2017 and a less than solid look but a decent glimpse into their game plan and the first steps beyond an engineering only business model.

Two anecdotes suffice I think to give you a reflection of their culture. Every single person at the analyst summit got a hand cooked breakfast. That might not seem like much but the amount of effort and care that goes into something like that even for 70 total people is quite a bit. But it reflects how much they value the individuals they deal with -- and that's not marketing fluff or hype. Second, in the course of a conversation I had with Sridhar (the above-mentioned CEO) he told me of an agricultural property that he is using to grow, I think it was 12, ancient grains to test sustainability so that he could help with world hunger. I was telling Sridhar a story about the Green Revolution in the 1960's that was created by the development of a fast growing, high yielding strain of dwarf wheat that helped alleviate hunger for more than a billion people in the 60s but at the same time took expensive fertilizers and lots more water than a normal dwarf wheat strain -- thus disrupting a lot of ecosystems -- from the peasant farmers, to the soil itself. The jury to this day, almost 60 years later, remains out on the success or failure of the program. Sridhar then told me of his farm. He is/was trying to solve a world problem, not just build tech. What made the story even more compelling was that the person running the farm, was a Zoho software developer who had an advanced degree in microbiology and agriculture (again, I'm a little fuzzy as to the exact degree, but the kind of advanced degrees that qualified her to run the farm) who had, when they were chatting told him about that. He gave her the chance to fulfill her dream. Is that still the case two years later, I don't know? But what I do know is that is a great example of how Zoho thinks about culture, how they value their customers, employees and all that are embraced by their universe.

The other event that told me there was a change in their business model afoot was an announcement made at the summit about a revamping of their offering and its pricing.

Zoho has an enormous portfolio of products (called Zoho One) -- 40+ at last count. They range from Zoho CRM to Zoho Creator which is forms with workflow and rules engines to Zoho Survey -- what it is obvious by its name to Zoho Books (all apps) to Zoho Zia, their artificial intelligence layer. I can easily keep going. Keep in mind their current target market is small businesses and I believe they have more than 250,000 customers. They are a highly integrated set of applications and at this point due to the cross integrations with their own applications able to handle customized solutions based on a variety of product use and custom objects that can easily be built. The look and feel (which has been significantly revamped in the last two years) is clean and I'll call it enjoyable for the most part with a few of the apps still undergoing the refresh of the UI.

In 2017, they took ALL the apps and bundled them into Zoho One. Zoho One is a package that provides you with every single application in the arsenal for as low as $30.00 per user/month. All 40+. A game changer when it comes to competition. The other thing is that most of the add-ins such as Zia Voice (their business version of Alexa -- more later on this) come with Zoho One. They have a mega-powered customer support operation for all the apps that is available 24/7 -- all within the price. They even have a lab that works with customers to build proofs-of-concept.

Zoho One when announced in 2017 was just that, an announcement but as we fast forward to 2018, we see that it's now what all the tens of thousands of Zoho customers are migrating to. That has vast implications for both Zoho's business model and for the competition in the field. But I'll hold that to the summary.

Zoholics 2018

Raju graciously invited me to keynote the second day of Zoholics 2018, which I've just returned from. I accepted because I wanted to speak at Zoholics again and see how it had grown; I am never going to say no to Raju; and it was in Austin Texas and I had never been, having turned down several invites to South by Southwest over the years. Plus I needed to dig deeper into Zoho. I hadn't seen much of them in 2017, almost a mild regression in visibility and that concerned me. Which leads me to one of their problems, should they want to evolve to a next level.

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Zoho has kept itself shrouded and there is a lot of mystery that surrounds the company. Nothing bad or undue, just ... mystery. For example, no one really knows their revenue and as a privately held company with also, BTW, no outside investors, they have that right. But the mystery creates wisps that wind their way through hallways and pipes and that travel up and down the neural pathways. Thus, for a short while there was speculation on their revenue which literally led to some telephone-like rumor that Zoho was claiming a billion dollars in revenue but their actual revenue was perhaps $200 million. Zoho remained mute. The Zoho mysteriousness led to speculation that was just wild and wide. First, to clarify, Zoho NEVER claimed that they were a billion dollars. My guess is that they are north of $200 million for sure and possibly Yukon North if not Arctic Circle North.

But part of the mystery is the culture itself. You see how incredible the culture is. As incredible as it is, they are that protective of it. So there is a mild degree of insularity that keeps the shroud over them. They don't have this marvelous culture so that have conversation points in the market. They have it because they organically value the people they deal with because they are that kind of people. But what they don't do is take it and try to make it a model for anyone else or describe the best practices of this culture so that others can learn from it. I don't think that's deliberate at all. They just concentrate in other places. But that's the net result. The shroud of mystery remains a cloak over the company.

But when you go to Zoholics, you see the culture celebrated and the extant business model. There were 800 at the AT&T Education and Conference Center in Austin, which is the most vibrant center of the many Zoho locations at this point. That was a number that they capped the attendance at, though they could have drawn more if circumstances were right. But the audience was a very engaged 800 people. They were involved with the Zoho culture, the products, the staff. They paid attention to the presentations and were more involved than I had seen at many other of my presentations for a long time. I spoke on Customer Experience -- yes, experience, not engagement, a very different presentation. Brent L. spoke on Conversational Interfaces. We got the demos of the newest iterations of the latest applications and the audience was thoroughly interested in everything -- from concepts and strategies to product development and execution. Anita Campbell, one of the most powerful influencers in the world of small business and its technology, gave a presentation on her use of Zoho Creator 5 at her company, SmallBizTechnology, and the room was packed to the rafters.

Zoholics is a good name for the event.

Two things occurred to me after watching multiple demos of the technology -- one in general and one specific. I saw perhaps eight or 10 of the 40+ products in some state of production or another on the day I was there. What occurred to me is that Zoho, given the depth of capability being built into each of these products, was planning something more than their traditional focus on the small business. There were some functions and some services that small business people wouldn't ever in anyone's wildest imagination need. But mid-sized businesses might. Which leads me to think that they are going to move into that market in the not terribly distant future. I found that a large percentage -- I believe 60 percent of Fortune 500 companies already use one of the Zoho products which tells you that it scales and that they haven't ignored the enterprise or mid markets. That said, please don't assume I know they are moving upstream for a fact. I don't. Their mystery shrouds my vision. But I am an analyst and I see what I see and I tell you what that is, and you decide whether or not it makes sense to you. They have already built what is close to a platform but at the moment is seen by them, as well as the outside world, as a series of fully integrated applications (and the integrations work really well for the most part) that provide the ability through mixing and matching applications and building custom objects for any business in any vertical to have the appropriate tools to manage their business.They call it the operating system for small business.

There are still holes. While their Zia Bot for customer service is a truly well done bot that can manage customer service requests. Zia Voice, their version of Alexa, fails to meet the "human sounding voice" test necessary to succeed with a conversational interface. Brent Leary in his presentation made the point that 41 percent of the respondents to a survey on conversational interfaces felt that it was a "friend." The bar for this, of course, is set by Alexa, the Amazon Echo's human named and nearly natural human voice that has transformed how household and now businesses interact in their environments. The Zia Voice was highly robotic (in the Mr. Roboto sense of that) and even at one point pronounced Zoho, "Zaho." Not there yet. But it was one of the few products demonstrated that wasn't.

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The event showed the nascency of some of the effort that they are making. For example, the only two analysts there were Brent and I -- and we are close to the company. They have enough interest in the market to draw dozens. But the real question is, do they want to?

What I mean is this. They are not buffeted by a lot of outside pressure. They are by far the most successful small business technology software company (except maybe Intuit) that I have ever run across. They are what I thought perhaps, at one time, Infusionsoft could be, but that, sadly, isn't the case nor do I see that ever being the case. Zoho, on the other hand, has been successful and managed to maintain their culture and the loyalty of their customers and employees without a lot of business model transformation. They will continue to grow with that outlier model for a while yet, I would think. Past experience says that they probably will reach that limit in two or three years -- but I don't put anything beyond them, including accomplishing a lot more without changing the model.

But...

Summary

Zoho is at a crossroads -- and the good news is that unless something dramatically bad happens whatever turn they decide they want to make, they will succeed most likely. What is in question is how successful they want to be.

• They can continue along the same somewhat mysterious path for the foreseeable future, without the external pressures that most companies feel and still maintain their extraordinary culture and continue to build their excellent products. They will be comfortably growing for years to come.

OR....

• They can start making some changes and perhaps grow exponentially, but external competitive pressures will start to hit them.

What I see, but again, don't KNOW, is they are going for the latter. The indicator as I said is the deep functionality embedded into their 40+ applications -- some of which a small business of any size would be less than interested in, but a mid-sized business absolutely would. Plus, they have more than 200 events scheduled globally this year alone. Those two things alone indicate that they are gearing up to go upmarket and to get out there and make an impact. That coupled with their investments which I will not go into and their ambitious planning which I will not go into, tells me they are going to make the moves.

But...

They could grow comfortably doing what they are doing without the exact same concerns that the rest of the market has.

However...

If they are going to make the transformation to another level, they need to be mindful of some things that they will have to do:

1. Focus more on marketing (beyond the billboards real and electronic you find everywhere, which are cool but don't really tell you much).
2. Participate more in the industries they are a part of, ranging from small business functions and technology events (meaning, not their own).
3. Build a serious analyst relations program.
4. Understand who they are going to run into competitively that they currently aren't competing with and plan accordingly.
5. Understand that unless they can evolve their marvelous, yet slightly insular culture to a new level, they are going to lose some of the closeness they have now. I'm not saying they can't keep it; but as you scale it becomes a lot harder. And insularity isn't an option in what I am talking about.
6. Spend considerably more time on thought leadership -- meaning the propagation of ideas, not only practical uses of Zoho. The latter, they do quite well with already, the former, not so much.
7. Their culture and their activities for social good are a good starting point for teaching businesses how to have social impact. Make that part of their life as a company.
8. Several other things.

If they want to continue along the same path, a lot of this isn't necessary or even desirable.

This may be one of the most intriguing companies I've ever run across and one of the most appealing. They are also among the most mysterious to the market that they ultimately serve. Whatever they decide to do, they will more likely than not, succeed at it. But they still have to decide what they want to be when they are full grown. I'm excited to know what that is.