Workday’s Last Workday? AI and the Future of Enterprise Software

0:00Joe Schmidt:No one likes doing like these crazy tasks inside of Workday. No employee likes interacting with Workday. No one wants to go into this portal. And so if you can go out there and solve these problems, there's a huge pot to go after. If you think about where you have to go capture these customers, if someone has already become a customer of Workday or already become a customer of ServiceNow or Salesforce, it is so hard to rip them off. That's why these gross dollar retentions are what they are. Like they're the gold standards for a reason. We're seeing the cracks in the most defensible businesses in the world.

0:31Joe Schmidt:And it's a really exciting time. And the race is on. What does it take to replace one of the most entrenched systems in enterprise software? For the past two decades, platforms like Workday have become the backbone of how companies manage people, data, and operations. They're deeply embedded, highly defensible, and nearly impossible to rip out. But platform shifts change the rules. Just as cloud transformed enterprise software in the 2000s, AI is creating a new opportunity to rethink how these systems work and whether they should exist in their current form at all. The question now is not whether these systems are valuable, but whether they can evolve fast enough.

1:14Joe Schmidt:Elena Berger speaks with Joe Schmidt, partner on the enterprise team at A16Z.

1:22Elena Burger:Hello, everyone, and welcome to Monitoring the Situation. I am here with Joe Schmidt IV. Thank you for making that delineation.

1:34Joe Schmidt:I appreciate it.

1:36Elena Burger:Joe is a partner on the enterprise team at A16C, and we are here to actually, I think, first just answer a big important question, which is why has the enterprise team been writing so many obituaries lately, so many eulogies lately? And what have these eulogies been for?

1:57Joe Schmidt:Yeah, no, thanks for having me on. Excited to be here. Yeah, it's funny calling them eulogies. And I think that this piece was intended to be much more balanced than maybe people have taken it to be. But I think that, you know, if you just think about where we are in the cycle right now with enterprise software, a lot of the biggest businesses that are out there today were kind of built in the last kind of technology shift, which was obviously the shift from on-prem to cloud. And that's really the big opportunity for most companies that are being built. Selling to big enterprise buyers is basically adopting some big shift and then building their platform around it.

2:32Joe Schmidt:Once those kind of core primitives have been set, basically these markets end up moving into a different type of innovation, which ends up being like point solutions that are built on top of some kind of core backend system. And the reason for that is if you think about what these systems are actually doing, if you take Workday, obviously it codifies your HR business processes and a bunch of business logic internal to your company inside of one relational database. And there's a bunch of really complex stuff that happens there. But the actual experience of that, that an actual employee or an HR administrator or someone in IT experiences, is fundamentally the same today as it was in 2005.

3:12Joe Schmidt:and so if you come in and you say, hey, I'm going to rebuild Workday and you tell, you know, the CHARO that or you tell, you know, the CIO that they're going to be like, okay, but like what does it actually do differently than what Workday has done previously? And you're going to say, you know, until now it would have been very hard to say it was going to do something different. And so what many companies have been doing, you know, over the past 15, 20 years and this has been basically all of enterprise software has been building little point solutions on top of that. So you've seen a bunch of things in recruiting, a bunch of things in finance and so on and so forth.

3:40Joe Schmidt:And Workday has become the home for a lot of those businesses over time. Obviously, we talked about some of their acquisitions. And so what's really interesting about this moment in time and why we're writing so many obituaries, which I hate calling them that, it's like these are opportunity pieces. And it's an opportunity for Workday, just the same as it is for, you know, startups, is that for the first time, you can actually go to a CHRO or you can go to a CIO and say, the way that this core system works for you today can be so fundamentally different. And we can change the actual way that the work is being done by your team and the way that these platforms are actually interacted with by your employees or your customers.

4:17Joe Schmidt:That's the opportunity. I see that in HR. We're seeing that in ITSM. We're seeing that in CRM. We're seeing that in the biggest and most defensible categories, historically defensible categories. And I think we're going to see a replatforming. And that's why you see, obviously, what's happening in the stock markets happening today, because a lot of investors are talking about that and don't worry about that. And a lot of incumbents are too. So that's why we're writing these pieces and that's the opportunity.

4:44Elena Burger:Yeah. So the SaaS products of yore can't get their, you know, their juicy PE ratios. They can't, you know, bank on incremental revenue and crazy operating leverage anymore. They actually have to do real work and, you know, like either pivot and, you know, adopt AI or get outcompeted by, you know, the insurgents who are. So with that in mind, I feel like we should pull up your piece and, you know, chat through it. Yeah, I have to. So let's just get into it. And you can, this is, it's called Workday's Last Workday. We published it on A16Z.news this morning. And you opened the piece by calling Workday the most important and least loved product in enterprise software.

5:35Elena Burger:And I know that, you know, I think you agonized over this opening sentence a lot. So can you sort of explain this sentence? Like, what does this tell us about the nature of enterprise software? How can something be, you know, crucially important, but also like unloved completely?

5:55Joe Schmidt:Yeah, I mean, I think maybe it goes back to what I just talked about in terms of like when and how these were built and maybe who these were built for. and I think, you know, I'm sure some people that are watching this have interacted with Workday in their day-to-day and maybe some people are, you know, Workday professionals, whether it's consultants or HR admins that actually deal with this on a day-to-day basis. But when Workday was built, this is now a 20-year-old, like, you know, business and the architecture is obviously 20 years old. It was a better version of, you know, kind of the PeopleSoft, Oracle, you know, businesses that existed back in the past.

6:29Joe Schmidt:And it was built for those internal teams, right? And so I think it did a good job of solving for the problem that it had at the time. And I'm not going to sit here and say there's nothing good about Workday. It has 97 % gross dollar retention. It is the name in the category. But I really don't think that the user interface for employees is anything close to what great software looks like today, right? Like I am, we are a Workday shop here at Injury Sonora. It's like I've logged into Workday. no, I'm not kidding you, three times in the past 12 months. I am the insurance person here in Andreessen Horowitz.

7:03Joe Schmidt:I have no idea what my benefits are. No idea. I went in actually not too long ago to like actually try to find my compensation information in Workday. It took me six and a half minutes. Like I am a technology investor. So yeah, it's just not built for that. And I think the more I talk to people, the more I realized that that experience is broken. And the opportunity here is to kind of, you know, build that again. So I think it's really important because it has very important information. What I just said, like my compensation information, my benefits, those are critical. But like navigating that is extremely hard.

7:38Joe Schmidt:And I've never met anyone that likes it.

7:41Elena Burger:I had to log in considerably more times than you in the past month because I was applying for an apartment and I had the exact same pain of like, where do I find anything and you know like like why is this so difficult to use so completely completely resonates i think like you also earlier were talking about platform shifts and like you have this great kind of mini history lesson right here like we should maybe just like touch on this for a second but kind of like what exactly was the platform shift that created workday and like now let's like just be super clear-cut about what this new platform shift is that we're seeing right now

8:18Joe Schmidt:Yeah, I mean, the obvious answer to the platform shift we're seeing now is, you know, kind of the shift from businesses that weren't AI native to businesses that are. That's the opportunity here. I actually love the Workday story. Like, it was, you know, a crazy kind of hostile takeover of PeopleSoft. You know, there's Larry Ellison, these, you know, these amazing entrepreneurs and Dave Duffield and Neil Busser. I'm going to script his last name, Busserri. but you see them come back and say, hey, we see this shift. Like we just lost our baby. We know exactly what to build. We know all of the edge cases that you need to solve for.

8:53Joe Schmidt:And solving for that in 2005 was actually a heck of a lot. You know, it's still really hard, but it's even harder back then just considering how hard it was to build software. And so I think these guys are amazing entrepreneurs. They saw this opportunity and they built the cloud native version of what they had just built at PeopleSoft. And so they were the perfect founding team. They built this incredible business. And I think it's just an amazing success story. So that's really what they wrote. And obviously there's the architectural gap. And then there's this other kind of backdrop that basically every leading enterprise software company of today wrote, which was the shift from, hey, we're going to spend a bunch of money on CapEx and have a bunch of servers in some back office to, hey, we want something that's multi-tenant and kind of shifting that into OPEX spend.

9:37Joe Schmidt:And so that's what they kind of designed their business to do. And that's what they did. So now when you look at today, there is not, to my knowledge, someone that's built like an enterprise ready, right? You know, feature parity, HR, HRIS or HCM. Like there's just not someone that's done that for the enterprise. I think you can actually do that. I think you can build it. I think it's extremely challenging. And, but I think the reason for that is now companies can look at this piece of software and say, it can do things today because of the way, you know, agents allow you to work and the things that humans can do if they have an AI data piece of software.

10:14Joe Schmidt:It can do things today that the past versions of this couldn't do. And so when you think about what it takes for a large enterprise to rip and replace some piece of core technology, the experience has to be very different. The cost profile of it has to be different. It has to allow you to save a bunch of money, grow, have a better, you know, employee or customer experience in a material way. And so I think that's what we're seeing with other businesses across enterprise software. We're seeing that in the other big categories that I mentioned here. And I think we're going to see it in HR. And so that's the opportunity.

10:44Elena Burger:Yeah. And just to maybe strawman the critics for a second, because you do talk a little bit about, you know, okay, we have like Gusto and we have here, let me just find this bit right here. So like, what would you say to these guys who are kind of like, well, we have deal and, you know, we have, we've got, so we have all these other startups that are kind of, you know, in the space already, like, like what is.

11:10Joe Schmidt:So I think there's, there's two ways to answer that question. One, there's the people that are going kind of after core HR and core payroll today. And then there's kind of the orthogonal or adjacent opportunities. Like, you know, obviously Andreessen is, I think the biggest investor in deal and I'm an enormous deal fan. I think it's an incredible team. They're not exactly doing this, you know, play. Right. So I think that like, that's just a separate kind of category in and of itself. And I think maybe the part, the company that builds this business that we're talking about in this post could be an amazing partner with deal over time, right?

11:41Joe Schmidt:So I think there's an opportunity there. Then you talk about Gusto and the other people that are kind of building what I would call a greenfield type strategy for, you know, an HR system. That is an opportunity, right? We see that across many different categories. Like we have businesses in our portfolio that are doing that for ERP, like Rillit. There's companies that are going after that for CRM, right? There are businesses that are doing that in all these other categories, banking, right? Think of Mercury. So there are those plays. I think that that's the only way that you can build these types of companies when it's not in the middle or beginning, or sorry, not the middle, but the beginning of a platform shift.

12:18Joe Schmidt:Because if you think about where you have to go capture these customers, if someone has already become a customer of Workday or already become a customer of ServiceNow or Salesforce, it is so hard to rip them off. That's why these gross dollar retentions are what they are. They're the best standards for a reason.

12:33Elena Burger:It should be look at this. Yeah, we can look at them. I mean, look at this. Beautiful chart for a second. Yeah.

12:37Joe Schmidt:It's an amazing business. And so what I think the opportunity is now is you can go after these people and go head to head instead of Greenfield, it's Brownfield and say, hey, you have been a hostage to Workday, right? Like you have been a hostage here and you can be freed with whatever new piece of software if someone can build this in the right way and form and fashion. So that's the opportunity. And I think that what we're going to see is enterprises now have the kinetic kind of energy build up inside of them to go do the rip and replace. But you need to build this in the right way and you need to solve the problems intelligently.

13:10Joe Schmidt:And then I think you'll do this. And there's going to be a lot of people who listen to this or read my posts and say, hey, you're full of hot air. Like, you know, you clearly haven't thought about this or talked to anyone. The reality is I talked to like a bunch of Fortune 500 and also private companies that like use Workday. And I told them the kind of business that like I think should exist. And some of them were like, I would buy this from you if it existed right now. So it's like, it is actually already happening. No one likes doing like these crazy tasks inside of Workday. No employee likes interacting with Workday.

13:41Joe Schmidt:No one wants to go into this portal. And so if you can go out there and solve these problems, there's a huge pie to go after.

13:48Elena Burger:So before we get like super granular about what these problems are and what the opportunity space is, like I feel like we should talk about what Workday is doing right now. because like, like, it's not like they've been sitting on their asses. Yeah. Their AI ARR has hit like$400 million in yearly run rate. It's growing triple digits year on year. Like, like they're, they're not doing nothing. So can you talk about the products that they do have and kind of where you feel like they fall short or maybe where you feel like they're sufficient or good?

14:22Joe Schmidt:Yeah. So first, like I, I wrote this piece to be balanced because I do think, like, again, I said it, Workday is one of my favorite software stories ever. Like, I think the business is unbelievably defensible. Until 12 months ago, I would have never thought about even writing this post. And it took 12 months of me thinking about this to write this piece because I was like, I had to convince myself that it was possible. And there are like, I think what I'm seeing are like the early signs of cracks. And so one of my favorite parts of this, and this is not just specific to Workday, but there are so many different enterprise software companies now that are reporting some metric affiliated with AI revenue that I think is just like kind of ridiculous.

15:02Joe Schmidt:And so when I talked to, you know, professionals about like the flex credits, like I would say flex credits and people would just start laughing. And it's interesting to get that reaction because I think it's basically, I wrote this, I think it's basically just a procurement innovation. I don't think anything is actually, you know, fundamentally changing. It still, you know, costs$25 ,000 to go get like a Workday Extend license and then build an app. Like, you know, it's still like these flex credits are still just like a procurement innovation. There's not like actually agentic experiences that are being delivered inside people's workday instances and workday platforms.

15:36Joe Schmidt:So I think that that's like a big kind of farce right now is that this AI revenue is actually AI revenue instead of just like one CIO talking to another saying, I need AI revenue. I need to spend money on AI. Let's get together. You know, and I joke, let's go to Ruth's Chris and celebrate. Like, you know, nothing like a butter cake and procurement. innovation to make it work.

15:58Elena Burger:Yeah, yeah. And now I think this brings us to kind of like, okay, what, you know, this is what the title of, you know, the entire second half of the piece is, what an AI Native Workday should look like. Yeah. Should we just kind of talk through a couple of these categories and kind of what you've seen, what you've heard, the kind of founders that you're talking to, also the kind of demands that you're hearing from Fortune 500s and just kind of like, what does this look like?

16:31Joe Schmidt:Yeah, I think like I write this because I think that these are the six very important properties. And then I talk a little bit about like tactically how I think you should start. I think that these were the big ones though of like, why do people not switch, right? And like, what could get someone to switch? I think the first one is like unanimously understood now to anyone who's like seen what coding agents can do and has like seen what like great migration businesses or like implementation businesses or AI native are doing today. I think you can deploy a system like this and call it 30 to 60 days.

17:07Joe Schmidt:Whereas historically, this is 12 plus months easily and can be much longer than that and cost you a bunch of money. Like that is going to happen. It's going to happen across enterprise software. And that's why, you know, like that is the fundamental building block of like why these businesses now can be kind of ripped and replaced much simpler. When I talk about Workbench Native, I thought a lot about like what to call this. But if you talk to an HR, you know, administrator, there's so many like random things that they have to do to make Workday work on a daily basis. And like, this can be something as simple as like doing payroll for like a certain type of role inside the company that like doesn't have the exact same parameters.

17:47Joe Schmidt:And so they have to do it in a G-sheet. It could be spinning up a new business unit and doing a bunch of configuration. It can be like trying to think about an employee experience where, Elena, you lived in New York until recently. You were coming to San Francisco and you wanted to know, hey, who's in San Francisco? Is Joe in San Francisco? How do I actually find out that information? There's no good way of doing that inside Workday. So how do you build that experience? So I think that this workbench native, allowing HR teams to genuinely build versus, hey, spend$25 ,000 to build anything on top of Workday and then also get yourself a consultant that can build it for you.

18:23Joe Schmidt:Like, I think the days of that in an enterprise software are gone. Like anyone who's experienced the, you know, joy and magic of like building things with Cloud Code is going to tell you like, that is going to be everywhere at some point. So I think that's going to be really critical. This agent first piece is, I think that like thinking about the way that like I talked through my, you know, issue or your issue of trying to like get anything out of Workday. Like, I just think that like agent first is going to be the way that these systems, work in the future. You saw the Salesforce headless announcement.

18:52Joe Schmidt:They're doing as much as they possibly can to shift towards this future. And I see Workday doing this too. So I think that people are going to stay inside the tools that they're using or there's going to be an AI native version of this. You can just actually allow agents to do work for you. I think the open piece is critical. Security is paramount and permissioning is really critical. And then the compliance piece is the last one, which is you know, this is a heavily regulated space. And so just thinking through like, how do I monitor that? And how do I ensure that like my platform is like enterprise ready, global ready from the start is critical.