(This story was updated to eliminate redundant reference to Workday's sales increase in 2008.)
Flextronics Chief Information Officer David Smoley knew he was taking risks as he handed over human resources computing tasks for his 200,000-employee company to an outside provider.
What would happen, for example, if the other company lost sensitive employee data, he wondered. Yet by enlisting Workday, rather than using in-house software and hardware, Smoley was able to cut costs by millions of dollars, and he says workers' information has remained secure.
Executives in growing numbers are entrusting computing responsibilities to companies that deliver software and services over the Internet, from outside their walls. Rather than depending on expensive in-house data centers that house row after row of energy-sapping servers, Flextronics has turned to the so-called cloud. "To take full advantage of the cloud, I think you have to be willing to take some risk," Smoley says.
While companies have been experimenting with the cloud in fits and starts for years, they're now turning over large-scale operations to third-party vendors. Pleasanton (Calif.)-based Workday is now handling the human resources software that tracks everything from employee compensation and benefits to hiring for open positions at Flextronics, the Singapore-based maker of such electronics as Research In Motion's (RIMM) BlackBerry handsets and Microsoft's (MSFT) new motion-sensing Kinect add-on for the Xbox 360 gaming console.
Siemens (SI) turned to SuccessFactors (SFSF) for performance reviews and other tasks for its more than 400,000 employees, says Ben Pring, a senior research analyst at research firm Gartner (IT). About 50,000 employees at Winn-Dixie Stores (WINN) use Concur Technologies (CNQR) for travel and expense reporting.
Telecommunications gear maker Huawei and computer vendor Lenovo (LNVGY) are also Workday customers.
The worldwide market for cloud services is likely to grow to $148.8 billion in 2014 from $58.6 billion in 2009, according to Gartner. "It's a big moment of change," Pring says. "The last time companies saw this big a shift in computing was when PCs entered the workplace over 20 years ago." In the next five years, companies will spend $112 billion cumulatively on software delivered as a service over the Internet and comparable services, Gartner says.
Demand for cloud services has been fueled as the recession forced companies to look for extra ways to reduce expenses. Workday's sales grew 100 percent in 2010, 50 percent in 2009, and 100 percent in 2008, says Aneel Bhusri, co-chief executive officer of Workday, which as a closely held company doesn't disclose revenue.
Flextronics' adoption of the cloud is part of a series of computing shifts that resulted in $100 million in savings in three years, the company says. Expense reductions are essential at Flextronics, which has an operating margin of only 2.9 percent. Fewer staff and other resources are needed when a company moves to an outside provider than when it purchases and manages software in-house, from vendors such as SAP (SAP), the world's largest maker of business applications, Smoley says. "You're not buying $3 million worth of servers and signing a deal with a third-party integrator for $10 million," Smoley says. He's needed less than 20 people to implement Workday. "For an SAP implementation you would be talking 60 people, maybe up to 100 people."
Cloud services, like the one Workday provides, let companies rent hardware and software. The vendor handles the heavy lifting of upgrades in its own data center, while clients pay a monthly fee per worker. Salesforce.com (CRM) pioneered the concept of software as a service a decade ago. Today the choices are broader and include renting messaging and collaboration apps from Google (GOOG) or computing and storage capabilities from Amazon.com (AMZN) or Microsoft's Azure, released in November.
By November 2009, about 100,000 companies used software as a service or cloud applications, according to Bruce Richardson, former chief research officer at AMR Research. With 67,900 paying customers, Salesforce.com was the largest provider, followed by Concur with 9,000 customers, and NetSuite (N), Taleo (TLEO), and SuccessFactors, according to a Nov. 20, 2009, blog post by Richardson, who has since become chief strategy officer at Infor, a provider of cloud services.
Accenture (ACN) CIO Frank Modruson says he's drawn by the possible cost savings and that he plans to move the company's internal e-mail system to a cloud service over time. "I'm running a couple hundred thousand mailboxes," says Modruson. "If I can get it for cheaper, I should." Accenture also uses Taleo's software as a service for recruiting employees.
Some other large software makers, including Oracle (ORCL) and SAP, are playing catch-up. "SAP should be running screaming, the company is significantly behind," says Daryl Plummer, group vice-president at Gartner Research. "Oracle is saying it's a leader in cloud computing but … it's not anywhere near a leader," says Plummer.
Still, cloud arrangements can carry security and reliability risks. For some CIOs it's easier to bet on well-established enterprise vendors such as Oracle, Hewlett-Packard (HPQ), or SAP than take a risk on a startup such as Workday.
Other information technology managers are still experimenting with the cloud on a limited basis. Pitney Bowes (PBI), maker of postage scales and mail-sorting tools, is weighing Netsuite and other alternatives to SAP and Oracle for smaller geographic areas or new parts of the business that "aren't necessarily big enough to justify putting in the traditional big enterprise resource planning solution," says Donna Dietz, vice-president of technology planning and quality at Pitney Bowes. Dietz hasn't decided which alternative she will choose. "If it works really well and the price is right and the model is right, then we may expand in the future," she says.
One of Dietz's first cloud initiatives was letting Microsoft host Pitney Bowes' e-mail system for the approximately 22,000 workers that use e-mail. She's also in the process of offering Salesforce.com to the entire company after having tried it out in a few divisions. With this transition, Dietz sees her role evolving. "We will still have to run some things ourselves around security and monitoring and controlling our data, but our roles will become much more about being great supplier managers," Dietz says.
Not to be left behind, Oracle sells some cloud services, including Oracle On Demand and two software-as-a-service applications that cover such tasks as marketing and contact-center operations. The company also sells Oracle Argus Safety, an advanced drug safety and risk-management app for life science companies. Customers can also rent such products as databases and software development tools through Oracle On Demand. Oracle did not respond to requests for comment.
On-demand is here to stay but "we don't buy that everything is going into the cloud," says Sven Denecken, vice-president for the on-demand line of business solutions at SAP. "We believe for the substantial future it will be a hybrid environment; customers will own certain software, they will rent software, and they will have software on devices." For customers that want to rent software, SAP offers Business ByDesign. SAP plans to release sales, travel, and HR services in the first quarter, Denecken says.
Denecken says that while competitors like Salesforce.com or Workday make services for pieces of what SAP does, they lack the integration into other systems. Aside from managing e-mail marketing campaigns, for example, salespeople also want to know what happens after the order has been placed and whether it has been shipped or whether the customer actually paid, he says.
For Flextronics' Smoley, Workday's cloud services serve as an alternative to outsourcing. In 2007, after Flextronics acquired fellow electronics manufacturer Solectron , Smoley looked more closely at HR information system outsourcing because Solectron had already outsourced those systems. "We realized we could save tens of millions by bringing it back in-house," he says.
Smaller companies will provide significant competition to Oracle and SAP, Smoley says. "SAP and Oracle and the systems that for the last 20 years have enabled us to connect all the parts of our organization into one single monolithic system gave us tremendous value initially, but it's now become a bit of an albatross," he says. Those systems once gave his company speed and flexibility, he says. "Now what we're finding is that you can't change fast enough to keep up with what the customers want, so it slows you down," he says.