Two weeks back, Zoho Corporation sued Freshworks for copying its trade secrets. I wrote a report on comparing the two businesses during my MBA as part of a course requirement. In the wake of recent developments, I believe it will be an interesting read: attaching below, a version of the essay. Disclaimer: I worked at Freshworks for fourteen months before pursuing MBA
The Indian software industry used to be known for its offshore service operations of companies in the West. During the last few years, the trend has been changing. Two companies are building software products to the world from the capital of the southern state of Tamil Nadu. Freshworks and Zoho, are very similar companies, in their business strategy and problem-solving approach. They differ in aspirations and vision. Freshworks is a relatively new age internet start-up focussed on aggressive growth. It engages in guerrilla marketing, often going head to head with one of the industry leaders like SalesForce, which is more than ten times its size. Zoho portrays itself as a neighbourhood company from southern Tamilnadu with big ideas and empathy for small businesses. This essay studies the companies from a strategic perspective, compares their choices and attempts to identify their essence.
In the last few decades, India has become a global powerhouse of the IT services industry. Tata Consultancy Services, Infosys, Cognizant and Accenture recruit in large numbers from the engineering colleges around the country. They take advantage of the prevalent labour arbitrage, offer software services for Fortune X companies in the West. The Indian economy has prospered due to the growth of the software services industry. Tata Consultancy Services has an amassing 8.37 trillion INR in market capitalization as of June 2019, which is a little higher than 8.36 trillion INR market capitalization of Reliance Industries.
The explosion of data coupled with the availability of high-power computing enabled businesses to move to the Cloud. Migration to Cloud is a painstaking process for engineers in a company; therefore, they were outsourced to eastern countries like India. Indian software service companies, during its long affiliation with western clients, developed expertise in Cloud computing. It forms the base for software as a service (SaaS) products.
Traditional software products came with licence or purchase options often priced at exorbitant rates. Office essential software was purchased at negotiated terms, but during the brink of the millennium, things changed. The dotcom bubble period saw many businesses opening in silicon-valley without a strong vision or knowledge. Later, when the bubble was burst, only a few, invested firms survived. Companies started after the dotcom bust emphasized on investing in their productivity tools. As the cost of acquiring a new customer started rising, companies began listening to their customers. A new category of products called Customer Relationship Management (CRM) was born.
CRM consists of all the steps in the sales cycle from lead generation, approaching a client, documenting the interactions, follow-up and eventually closing the account. Sales associates who work with multiple clients were facing problems of keeping track of their customer interactions, and often these details were handled in excel sheets. Salesforce, the world’s leading SaaS player today, started developing and selling CRM software that is hosted on the Cloud. Businesses need not have dedicated servers, network monitors in their office space. The property can be used to grow their business. This revolutionary idea in Cloud computing gave birth to the SaaS marketplace.
While IT services in India were still growing in the early 1990s, a young Princeton PhD Sridhar Vembu started his career at Qualcomm in the United States. He says that he could not find a single product in the US that was manufactured in India, while products from China, Taiwan were common. He started AdventNet Inc headquartered in Chennai, Tamilnadu in 1996. AdeventNet started selling software for telecom operators in the Bay Area. AdventNet Inc was later renamed after its successful CRM product, Zoho, as Zoho Corporation.
Girish Mathrubootham, a product manager at Zoho Corporation, faced a problem with his television getting broken in transit in 2009. He approached the shipping company’s customer service and months went by without any viable solution. He realized that their customer service software was ancient and broken. Later on the hackernews website, he saw frustrated comments from customers of the software about its high price. He quit his job at Zoho and started developing Freshdesk, a support desk software. Freshdesk, launched in 2010, was rebranded into Freshworks in 2017 after adding an array of SaaS products to its portfolio. Freshworks has raised $400 million and has surpassed $200 million in annual recurring revenue.
After the advent of Cloud computing, starting a business became very easy. Registering an office space and running the company from the comfort of the laptop became very common. However, only a handful of companies become big. Everyday tools that businesses need vary based on their scale of operations and the complexity of the sector. Traditional SaaS companies develop the software by understanding the problem of big enterprises — the software becomes heavy, comes with many features, and eventually, the price is very high. A small business might not need many of these features.
For example, let us assume a help desk software is required for a company operating on the scale of Amazon. The software should be able to withstand the complexities of a global e-commerce giant. It will need support to be available in hundreds of languages, process queries from tens of channels. Whereas, a small boutique shop in the corner street, running their business through a Facebook page might not need the sophisticated features of the support software used by Amazon. They would also not be able to afford it. This is where Zoho and Freshworks operate — focusing on small and medium scale businesses who seek affordable software to run their business hassle-free.
IT service management (ITSM) is another problem faced by companies of small and medium-size. As the companies grow, they accumulate assets in the form of laptops, monitors and other accessories. They should be protected and audited frequently for any mishap or misuse. ITSM software helps them manage assets in the company.
Affordability issues can be viewed in two ways. Firstly, the high price paid to the software that is financially not viable to most businesses. Secondly, the licensing deal. Many companies work on very thin bottom-line, and they cannot afford to pay for licensing fees for a lifetime. Monthly, yearly flexible subscription plans will benefit these companies. Zoho and Freshworks offer them a free trial for the first month. The free trial helps the customers to audit the software for their needs and if they deem fit, proceed to purchase.
Prof. Saral Mukherjee says, “strategy is all about closing doors”. At any moment, a business will face multiple opportunities to choose. The strategy of the company depends on the occasions they say no to-hence closed doors. Let us analyze the strategy of the two firms.
Both Freshworks and Zoho are privately owned companies. Zoho was bootstrapped from Sridhar Vembu’s own money, and he has refused to take any investor funding. He says that investor funding will force the company to focus on high growth, and the company might lose focus on its values and objectives. He further says, “Beyond money, there is also a mission and purpose in life.” Yet, three of the five billionaires (in dollar terms) from Tamil Nadu are namely Sridhar Vembu, Sekar Vembu and Radha Vembu. Zoho is a family owned business that has not prioritised aggressive growth.
Freshworks is a VC friendly company. Accel Partners, Tiger Global, CapitalG and Sequoia are some of the investors in Freshworks. The company has delivered 61% average annual growth over the years. The focus of Freshworks is to grow and grow faster.
Zoho has said no to the conventional marketing techniques. It has positioned itself as a company that brings out products from rural Tamilnadu and Andhra Pradesh. An Advertisement seen recently shows Sridhar Vembu walking in the paddy fields of Tenkasi. He talks about how a world-class software product is made in the fields of southern-rural Tamilnadu. Another Zoho ad, aired during the GST rollout, discusses the Zoho software that integrates the GST feature into the auditing module. Sridhar Vembu localizes his positioning.
Freshworks is an aspirational company. Even though they started their relationship with small business customers, they wanted to grow big. Salesforce, one of the market leaders of the SaaS industry, conducts a conference every year called Dreamforce in San Francisco, California. Freshworks advertises its products on the shuttle buses running between the conference venue and train stations. Last year, it went a step further to trend #FailsForce in a blimp around the conference venue. Freshworks’ positioning is its user interface and affordability. It targets customers who are annoyed with high priced, less user-friendly products.
Zoho primarily drives its recruitment through campus and hires at entry-level. Around 20% of the employees come via Zoho University route. Engineering students in Chennai look up at Zoho as the place to start their career. The attrition rate of Zoho is high as SaaS companies are coming up in the urban part of Chennai with competitive salaries.
Freshworks founder Girish Mathrubootham studied at SASTRA University. More than half of the workforce in Freshworks hails from there. Freshworks is strategically a poster brand for aspiring software engineers in Chennai. Amazon, Cisco and Paypal are the only sizable multinational companies in the city. Freshworks, which has been enjoying the soft spot from the press, is the place to be for Chennai software engineers. Freshworks also poaches talent from Zoho corporation and top technology companies. Girish Mathrubootham and his co-founder Shan Krishnasamy were Zoho employees. Spotting ex-Googlers, Amazonians is very common in Freshworks office.
Everyone in Zoho joins with the position ‘Member Technical Staff’. All the managers start with ‘Member Leadership Staff’ designation. The promoted ones get to be Team Leaders. All Team Leaders report to one of Sridhar, Sekar, Manikandan or Radha Vembu. Zoho has a flat hierarchy. CEO Sridhar Vembu sits with other engineers in an open workspace.
Freshworks follow traditional multilevel reporting system which ranges from an entry-level software engineer, business development executive, customer support executive to CxOs who report to CEO Girish Mathrubootham.
Variety is a key area where both companies differ. Freshworks, initially named the same as its first product Freshdesk, at the time of writing the essay, had ten products in its portfolio. Over half of them were launched within the last two years. Freshworks focuses on building capability on its core product Freshdesk and expanding it to the other products in the portfolio. For example, help desk software such as Freshdesk has incidents reported as tickets. A support agent will be assigned a ticket with a Service Level Agreement. Once it is resolved, feedback is taken from the customer to improve their experience. Freshservice, ITSM tool treats all the service incidents as tickets with IT experts as agents. Freshsales, CRM software operates all the prospects as a ticket, sales representatives as agents. Likewise, Freshrelease tracks engineering tasks as tickets and respective engineers as agents. It may appear from the outset, Freshworks has multiple successful products. But, all of them have one common identity as a workflow tool. It has been tested and mastered and is quite successful too.
If we see Zoho’s product portfolio, it tells a different story. AdventNet started with WebNMS, a tool for telecom operators. Once it became successful, Zoho Office Suite was simply upsold with the existing consumers. In 2007, ManageEngine, IT operations and Service Management software was launched. Since the majority of Zoho’s customers are small businesses, it has multiple products supporting mail operations, financial accounting, customer relationship management, help desk, IT support, security, operations management. It also has a separate suite of products to support the Internet of Things (IoT) for small and medium businesses. The critical success of Zoho platform lies with the product Zoho Flow which seamlessly integrates the data across the above mentioned Zoho products. With over forty five products, Zoho aspires to create one unified experience for its customers. Combining all the products, it has created Zoho One, one subscription plan to use products to empower sales, operations, support, HR, marketing and operations. Zoho is focused on portraying itself as a one-stop solution provider for small businesses, whereas Freshworks aspires to be a multi-successful-product brand.
The closed doors discussed above will lead us to understand the functioning system and strategies of Zoho and Freshworks.
Traditional SaaS companies focus on Fortune 500 clients. The deal size of the sales is enormous. Consider Zendesk, which operates at a high level and upper mid-level customer segment. They will typically hire a sales executive in their California office with around 100,000 USD salary. With an average deal size of 5000 USD, the sales executive is expected to close at least 20 deals every year to meet the cost to the company. The large deals will take lot of time to follow-up and close the account. Whereas, Zoho or Freshworks, operating from Chennai office can hire a fresh out of college grad for around 35000 INR per month. They target small businesses with relatively small deal sizes ( as low as 50 USD) but work on a high-volume basis.
The start-up ecosystem has made it easy to start a business. Therefore, there is plenty of demand. Traditional SaaS companies, based out of the United States, cannot operate in this space due to the high cost incurred with employee compensation to the company. A considerable segment of small and mid-size businesses is available for grab, taking advantage of labour arbitrage — the key benefit of IT service companies, Zoho and Freshworks are building world-class software products from India.
Even though their business strategy is the same, Freshworks and Zoho have two different souls. Freshworks is burning cash of its investors in aggressively expanding the operations. 60% annual growth rate is a voluntary standard for the company. Girish is looking to list Freshworks in NASDAQ stock exchange and will be the first Indian product company if he manages to do that.
Sridhar Vembu is not interested in raising money. His business is self-sustainable. With an entirely bootstrapped company, he believes that he has the freedom to choose the way the company operates. Zoho believes in the public good. “ We are a state-of-the-art tech company with a very old-fashioned approach to company building. “, says Sridhar Vembu.
Zoho has said no to aggressive growth, focuses on its strengths and moves slowly. It has got an array of products, but there is no strategic focus on moving up the pyramid. Zoho is a risk-averse company; they serve small businesses and operate at volume.
Freshworks is a fast growing company aspiring to be a market leader. When Freshdesk was started, they acquired customers quickly with prompt service and delivering delightful moments. If they diversify their portfolio and replicate the same success, they will become one of the market leader. They are also trying to expand into high-end customers. This is a fundamental shift to its core strength of labour arbitrage-business model. From the analysis and the current market scenario, it is understood that Freshworks is undergoing a transition in their strategy.