People have been hearing tidbits about PeopleSoft founder Dave Duffield's next company for months. Now he's made it official. Duffield announced his new company, Workday, with a goal of replacing traditional ERP platforms with software-as-a-service tools.

Workday will take on the ERP market with hosted applications using a subscription-based licensing model. It will offer human-capital management applications initially, with finance management tools due next year and resource management and supply-chain apps to follow. It's a business model that Salesforce.com turned into a fast-growth strategy in CRM, and that major software vendors such as Microsoft, Oracle, and SAP have only selectively employed. But the complexity of ERP will likely make this area a tougher sell than sales force management and customer information apps.

"Not many people in this conservative technology environment dream of starting the next big ERP company," says Bruce Richardson, chief research officer at AMR Research.

Duffield, who describes the hosted applications suite as a "modern-day ERP system" isn't your typical startup CEO. The 66-year-old already made his fortune with PeopleSoft, which Oracle bought for $10.3 billion, so he was able to invest in the new company alongside $15 million in venture capital when he founded it with Aneel Bhusri. For talent, Duffield tapped some PeopleSoft refugees, basing his 65-employee company in Walnut Creek, Calif. The basic technology to build and run Workday's object-oriented business services was acquired from former PeopleSoft chief architect John Malatesta, who left the software company in 2000 to build the platform.

But the technology couldn't have been more complicated, Duffield says. That's where Ken Morris comes in. Morris joined Workday as VP and chief technology strategist in March 2005, and product development began that November. "I knew the technology because [Duffield] had started a similar project at PeopleSoft known as PeopleTools," Morris says. Though Duffield champions the software-as-a-service vision, he says bringing together people like Morris and Bhusri has been his main contribution. "I believe in people, and I'm willing to take risks," Duffield says. "Ken is the technology visionary, and Aneel the true market and business visionary."

The object-oriented software, which will be hosted in a third-party data center Workday manages, incorporates entities such as "employee" and business services such as "hire," which are managed by an object management server. That gives the apps flexibility and allows companies to customize them--something that's been difficult to do with many software-as-a-service applications. Companies will also be able to integrate Workday apps with other IT systems using XML and Web services, and they'll have built-in data encryption for data privacy and security. An Ajax-based user interface will be more interactive than other on-demand apps, Duffield promises.

Workday will also look to key partners for support. It will launch with integration to Automated Data Processing's payroll service. And next year, customers can expect Workday applications to integrate into Microsoft Office 2007 for Outlook and SharePoint portal.

Workday will build and market the Microsoft integration feature using Visual Studio to connect processes and information with SharePoint server, enabling various human-resource scenarios such as performance reviews, says Chris Caren, Microsoft general manager for office business applications. "These scenarios might involve Excel or Word, where you might want to manage and collaborate in SharePoint, and eventually write something back to Workday such as pay-raise information," he says. "You can also integrate via Exchange Server with Outlook so you can send tasks and alerts to individuals that Workday initiates." Workday expects to have the integration complete sometime next year.

Workday faces big challenges. This isn't a brand-new market like it was when Duffield helped to pioneer the rise of human-resource applications with PeopleSoft. It's mostly a replacement market--companies giving up packaged apps or programs developed in-house.

Workday won't have a problem securing the first 100 customers because some will want to become part of the new technology, says AMR's Richardson. But will Workday be a $500 million a year company in five years? "It seems like a stretch," he says. "Yet at the same time, look at what Salesforce has done with a much simpler application, CRM, and it now has 500,000 users."

It's too early to tell how the vision of Duffield and Bhusri will resonate with companies. So far, Workday has two customers: Biosite, a 1,500-employee company that develops diagnostic equipment for laboratories; and Kana Software, which provides managed services.