How a Cancelled Project at StorageTek Led to Zoho CRM

I have never shared this story in public before, but I wanted to do this after reading Hank Williams’ post (via Hacker News) on race in Silicon Valley. My post is not about race, but it is somewhat related, as you will see below.

First a bit of history. In 2003, our company’s only business was network management software. Our main product at that time was Web NMS, which continues to be a successful and profitable division for us to this day, but at that time, it was the only product line we had. Zoho was not yet born, in fact, we had not even conceived of the name yet. Web NMS had many large equipment vendors as customers, and among them was StorageTek, a multi-billion dollar back-up & recovery products company, which was later acquired by Sun. After a comprehensive evaluation over several months, StorageTek chose our Web NMS product to build remote monitoring capability into their storage equipment, and they also wanted us to set up a team to customize the Web NMS so it could talk to their equipment and provide the specialized reports needed. This project began in 2003, and it was going smoothly. We had a team of about 10 engineers working on this project. We had reached a stage of trial deployment in a few customer sites.

That was when they had a big management change at StorageTek. The Vice President in charge of this project was replaced with a new person. One of the first things the new VP noted was that Web NMS came from an Indian company. Just on that basis, he instructed his purchasing people to terminate the contract immediately and award the contract to another company. The purchasing person, who shared the reason behind the termination with us, felt it was a massive waste of resources, but he was overruled. In fact, because the termination was for no fault on our side, they paid for all the deliverables, even though they were not going to use any of them.

It was sometime in August 2003 that we were notified of the contract termination. It was abrupt – as I remember it, it was on a Thursday we were notified, and they told us we should just stop the project right-away and yes, we could throw away the code. Our team, which was working hard on this project, was devastated. I assembled our team and told them to take the Friday off, and come back fresh Monday. I promised there would be an interesting new challenge awaiting them Monday.

During that year, two threads were running in my mind: how to diversify the company from its dependence on a few large customers like StorageTek, where sales cycles were very long, and decision making was often very political, something we got a perfect demonstration of. Second, I was also thinking about the emerging software-as-a-service market. We were customers of Salesforce, and while I liked their product delivery model, I felt the product itself was massively overpriced. As I analyzed Salesforce, I felt their high price was due to their business model bloat i.e overspending massively on sales and marketing. As a software engineer, I felt we could build a better product and as an entrepreneur, I felt we could cut the bloat in the business model and offer the product at a more affordable price. From my perspective, all this had the added merit that we would target small and mid-sized customers first, which would let us avoid the long sales cycles and the politics. That was just a thought, an idea, without yet a plan of action.

When StorageTek terminated our contract, that thought just crystallized. On Monday morning, I called a meeting and told our team “You are now our on-demand CRM team.” The engineers were incredulous. One of the lead engineers let out “Sridhar, we know nothing about software-as-a-service or about CRM” – I said “Well, you will know soon!”

Today, Zoho CRM is the fastest growing part of the Zoho suite, it is nicely profitable, and it is starting to give Salesforce a run for their money. Zoho CRM also paved the way to our emergence as one of the most comprehensive suite of business applications in the cloud. I guess we should thank StorageTek.

Back to StorageTek – the company they selected to replace us collected a few million dollars and never really delivered on that project. The ultimate irony was that they called us a couple of years later to help them with this project again; needless to add, we declined.