Cloud // Software as a Service
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9/18/2012
09:53 AM
Chris Murphy
Chris Murphy
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Zuora: $82 Million Bet On 2 Big Ideas

Zuora is the latest startup whose success hinges on customers' willingness to turn their business over to a cloud vendor.

Zuora, a startup with $82.5 million in venture financing, is betting on two big ideas.

One is that subscription services are becoming such a big part of companies' revenue streams that they need software designed from scratch to deal with the nuances. Zuora dubs it the "subscription economy" and cites Zipcar as an example--people subscribe to a car as a service rather than buy one. But they also point to established companies like Lowe's offering a home monitoring service.

The second big idea is that CIOs will trust run-the-business, revenue-focused operations to a 5-year-old cloud software company.

The first big idea, that companies need a parallel system to deal with subscriptions, is the most debatable and most interesting of the two.

Zuora CEO Tien Tzuo, the one-time chief strategy officer of Salesforce.com, is tapping into the trend whereby companies don't make money by selling things--music, books, movies, cars--but by selling services that provide those things. There's no great debate that this trend is growing.

[ Stuck in a strategy rut? Read 6 Uncomfortable Questions IT Teams Should Ask. ]

The debatable part comes when Tzuo argues that selling a service is so different from selling a thing that companies should junk their ERP systems and use Zuora cloud software to manage the entire pricing-to-cash-to-revenue recognition cycle for subscriptions. ERP systems were made to manage a physical object that's manufactured and shipped, Tzuo argues, and companies are contorting themselves into knots to make that software work under a subscription model. "It's a Rube Goldberg mess," Tzuo says. "What we're arguing is the ERP model is fundamentally wrong." Selling a service involves offering a wide range of pricing plans with different service levels, and in ERP that often requires creating a different product for each variation of those services, Tzuo says.

Zuora offers its Z-Billing and Z-commerce cloud software to manage those functions. Its new Z-Finance software, announced this week, manages the accounting for those sales, intending to make it easier to handle the recurring nature of subscription revenue. Companies still need general ledger software to report financial results for shareholders, but Z-Finance is meant to integrate with the general ledger to handle most of the heavy lifting for steps such as revenue recognition of a long-term subscription.

Zuora has started offering all three cloud software services in what it calls a Z-Business suite, starting at $100,000 for the enterprise edition and $30,000 for the "growth edition," with fewer features. Pricing tiers are based on invoice volumes.

Is Zuora The Next Salesforce.com?

Zuora has a disadvantage compared with Salesforce.com in its early days: Zuora can't do an end-run around IT to sell its products. Salesforce was notorious for selling its Salesforce management software directly to a sales team, getting a foot in the door before the IT organization knew what hit it.

Tzuo knows that tactic well: He was employee No. 11 at Salesforce, rising to become chief marketing officer and later chief strategy officer. But because Zuora services manage revenue and have to integrate with accounting systems, Tzuo describes it as a "complex sales" process that's very different from Salesforce.com.

But there's one obstacle Zuora doesn't face, and it's the reason Zuora's big idea No. 2 isn't all that debatable: Companies are absolutely ready to run critical systems on cloud software.

Tzuo says Zuora used to get questions from IT teams on whether they could license the software and run it inside their own data center, an option Zuora didn't offer. "We're not getting those requests anymore," he insisted. "Something happened 18 months ago. ... The CIO has to justify why it isn't SaaS or cloud."

Tzuo may have studied hype with a grandmaster, Salesforce founder and CEO Marc Benioff, but here he's actually understating the case. I don't hear the CIO being forced to justify not using cloud software these days; I hear CIOs insisting that their teams consider cloud options.

Something has indeed flipped in the past 18 months. CIOs are increasingly open to using cloud software for critical systems--85% of the companies in our latest InformationWeek 500 ranking use software as a service. But something else has flipped as well. They aren't going to cut SaaS a break for features or performance. If it's going to run a critical operation, it needs to offer a clear and dramatic improvement to be worth the risk. You're going to hear a lot about cloud software this week as Salesforce.com holds its Dreamforce conference. But CIOs no longer need the cloud religion pitch. They only need the business value pitch. Zuora may be founded on two big ideas, but it has to sell only one of them.

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