Deflating IT

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Sep 4th 2008
From The Economist print edition

The chief executive of AdventNet, Sridhar Vembu, has a shot at becoming software’s Michael Dell


AdventnetSRIDHAR VEMBU is a dangerous man. If he succeeds, a lot of people will lose a lot of money: software developers, consultants, shareholders and others. The chief executive of AdventNet does not have fraud in mind. Instead, he wants to remove what he calls the “value-pad” from corporate IT in general and business software in particular: all those millions of dollars he thinks are wasted on inefficient production structures, marketing and, not least, proprietary standards. “In the world of corporate IT”, he says, “the low-cost revolution is very much unfinished business.”

Mr Vembu may have only a fighting chance at becoming software’s answer to Michael Dell, who commoditised much of IT’s hardware business. With revenues of $60m a year and about 900 employees, his firm accounts for a drop in the $3.4 trillion ocean that Gartner, a consultancy, thinks companies will spend on IT this year. And the products he expects to disrupt the IT market, a suite of online offerings for small businesses, have yet to earn much money despite a respectable 1m registered users. Still, his ambitions for Zoho, as he calls the suite, may mark the beginning of the end of the fat years for big Western IT firms, especially the sellers of software.

The 40-year-old electrical engineer was not destined to be disruptive. Equipped with a degree from the Indian Institute of Technology Madras in Chennai, one of the country’s top engineering schools, he set out for a career as an academic. But at Princeton University, where he enrolled in 1989, he became annoyed by “the paper-shoving and the tenure-chasing”. After getting his PhD in 1994, he instead joined Qualcomm, a hotbed in America for wireless technology, and then headed for Silicon Valley. This was the place to be to take advantage of an extraordinary opportunity: “I was convinced that something big was about to happen with software in India,” he explains. “I wanted to be part of it.”

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Even today, many would disagree with those words. India’s IT firms may be excellent at producing custom code and maintaining computer systems. But many have long held it to be much less good at coming up with programs that can be sold. In the mid-1990s venture capitalists gave Mr Vembu the cold shoulder when he shopped around a business plan for software that helped to manage telecoms networks.

This rejection, says Mr Vembu, led him to do the right thing: be frugal and stay independent. When they set up the firm in 1996 he and his five co-founders had to use their own money. Having no cash to waste—unlike so many others in those giddy times—they based AdventNet in Pleasanton, an hour’s drive east of Silicon Valley and much cheaper. Even today it has only a dozen employees there; the rest are in Chennai. Such penny-pinching allowed the company to survive when the telecoms bubble burst in 2001.

With no outside investors, AdventNet could switch to a different business. Venture capitalists would probably have killed off a few of the 18 web-based applications that AdventNet has since come up with under the Zoho name. Several are essentially interchangeable with services that are already offered by Google, the online giant, and will be by Microsoft, its main competitor.

Yet Zoho is no mere clone of Google’s applications. It is the most comprehensive suite of web-based programmes for small businesses, including even services to keep track of a firm’s employees and its customers. What is more, although Mr Vembu does not want to earn money with advertisements, he wants to keep prices for business customers rock-bottom. Zoho’s application for customer relationship management (CRM), for instance, starts at $12 per corporate user per month.

If Mr Vembu still expects to make money, it is because of his firm’s frugal ways. This has little to do with low Indian wages: these are rising quickly, and most Western software firms also do much development in India. More importantly, he says, Zoho’s software and data centres are built for efficiency. The firm spends a pittance on marketing. And it uses free technology developed by others wherever possible. Its subscribers can, for instance, use Google’s authentication service to sign on to Zoho.

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In the land of the giants
But before AdventNet can shake up corporate IT, it will have to watch out that bigger competitors do not squash it. Mr Vembu says that although Salesforce.com, the market leader in online CRM, has done much to popularise web applications, it is still more of a traditional software vendor with huge sales and marketing expenses. Microsoft, having grown up making money selling traditional software, will have a hard time being successful online, he argues. He thinks Google is unlikely to invest much in enterprise applications, because profit per employee is much lower than in its advertisement-financed consumer business.

In a business with high prices and relatively thin rewards it is not obvious how Zoho will win by being cheap, at least with larger customers. Costs are high for a reason. Enterprise applications are complex beasts; they require programmers who know about business; and they are expensive. Customers must be convinced that they can entrust their business to the software. And they need a lot of hand-holding, both in implementing and in running programs. But Mr Vembu is unfazed: “We’ve heard this before from the likes of Digital Equipment and Sun Microsystems. But look what Dell did to them.”

Mr Vembu may be too frugal for his own good. Enterprise software is more than just code: it is an entire ecosystem, which will not disappear soon. Yet the incumbents have no reason to relax. Sooner or later, Zoho or another emerging-economy upstart will let a lot of air out of the corporate IT balloon. At least in their home countries, they should be very successful. And at some point firms in the rich world will ask whether they are paying too much. As Mr Vembu puts it: “The India or China price will effectively become the world price.”