Just last week we delivered a webinar on trends in the Talent Management Systems market, and discussed the fact that this market is rapidly becoming commoditized and that the big vendors were starting to make a major impact. Listen to this webinar to get a good understanding of where this market is going. (Click here for the replay.)
Since this news is brand new, let's address a set of issues immediately and we will put together a more detailed Q&A for members in the coming week. This acquisition creates far more questions than answers.
1. Why did SAP acquire SuccessFactors? Primarily for cloud computing expertise.
The big message from SAP is cloud computing. SAP has a stated goal to generate $20 billion in the cloud by 2015, and SAP management sees SuccessFactors as a key to this strategy. Remember that SuccessFactors is only a $320 million company, so to SAP this is still a very small step forward in this strategy. It was interesting that the launch materials and SAP executives hardly mentioned the need or interest to integrate SuccessFactors with SAP's existing talent management systems, which are quite extensive. So this is not an acquisition initially designed to create a next-generation talent management solution - but rather one to help SAP build a winning cloud-based ERP solution.
The SAP executives talk extensively about the company's "in-memory database" architecture and the value of using SuccessFactors' analytics capability as a core part of the company's analytics strategy. Remember that SuccessFactors' analytics software was acquired from Infohrm only a few years ago, and is far from a complete business analytics solution today. It is not a modern SaaS-architected BigData system at all. The SAP executives have high expectations for technology and cloud expertise from this acquisition.
I talked about this topic with Sanjay Poonen, SAP's President of Global Solutions at SAP and he made it simple. SAP wants to take its Business OnDemand offering and make it much bigger and more successful. They see SuccessFactors and Lars as the key to this success.
Consider the huge price multiple. SAP has a price to sales ratio of 3.7, so SAP shareholders will only see a return on this investment if the SuccessFactors acquisition leverages itself into three times its revenue ($1.2 billion) - which is years away. Financial analysts are already asking questions about the impact of this acquisition on earnings (SuccessFactors is not a profitable company by Gaap standards). So this transaction is focused on building a major future cloud business, not only Talent Management.
2. Sales synergies: some positive, some negative.
From a SuccessFactors standpoint, there is a huge upside simply from cross selling. According to the launch information only 14% of the customers overlap today, so there is a huge set of SAP customers who can be sold SuccessFactors software. However there is a major downside to this: every Oracle or non-SAP customer who currently has SuccessFactors is going to think twice about that investment - and non-SAP customers are now very unlikely to select SuccessFactors.
There are close to 2 billion working professionals around the world, and SAP claims to have around 450,000 of them running some form of SAP software. This means that 3/4 of the potential buyers of talent management software are using a competitive HRMS of some kind, and may not be interested in "SuccessFactors, an SAP Company." So while the selling opportunities are now great, the number of potential new customers also gets smaller. Think about all the big Oracle or PeopleSoft customers who purchased Successfactors or Plateau. They are unlikely to want to build a long term strategy around these products going forward - unless SAP convinces them to change out their core HR applications.
Also consider the reaction of the 3000+ customers who license SuccessFactors or Plateau today. The 84% of them who are not SAP customers are going to seriously question whether their SuccessFactors investment is right over the long term. As I discuss below, this acquisition is going to create a chain reaction of other acquisitions, which makes these customers highly vulnerable to switching vendors.
3. Product Integration: lots and lots of questions. And what happens to SuccessFactors innovation?
The long term trend for ERP-based Talent Management business is driven by integration and product features. Once this acquisition is completed, buyers will want to know why the SuccessFactors-SAP solution is more integrated, function-rich, and easier to use than a Taleo-Peoplesoft solution, a Workday solution, an Oracle solution, or another combination of vendors. The HR software market is highly fragmented, and for this acquisition to pay off over time the companies must build a strong integration roadmap.
In the conference call the point was made that "the two product sets are already integrated." This is absolutely not true. What about SAP's other business on demand software? What about SAP's 10 year investment in its own LMS, talent management software, HCM data models and capability models, payroll, and other highly complex HR applications? SAP has a performance management system and a very carefully developed competency and job model which has been developed over 7-8 years.
The SAP engineers (and SAP is an engineering-driven company) are going to have to make hundreds of decisions about how to integrate and rationalize SuccessFactors products with SAP products. And all this effort typically slows down innovation and takes lots and lots of intellectual energy. I just read a quote by John Chen (CEO of Sybase) describing his experience with the SAP acquisition process (and I used to work at Sybase so I have some experience with that culture). He mentions repeatedly that the product integration is going far slower than he expected because there are so many SAP engineers (and projects) to work with.
Remember that the ERP vendors (SAP, Oracle, ADP, PeopleSoft) generally did a very poor job of building talent management software in the first place. It was that lack of innovation which enabled SuccessFactors, Taleo, Cornerstone, SilkRoad, Saba, and other vendors to even exist. And today there is a whole new breed of innovators coming to market, including such names as LinkedIn, JobVite, Jobs2Web, Rypple, Achievers, Globoforce, Wisetail, Branchout, and hundreds more. This market is not waiting for SuccessFactors to build new capabilities - it takes on a life of its own. If this acquisition slows SuccessFactors' ability to innovate, having an SAP logo on the company wont necesssarily make it win business.
As we discuss in the webinar, there are huge numbers of new innovations taking place in talent management: social recruiting, social and agile performance management, social learning, social rewards, and social career management (listen to the webinar for more details). If SuccessFactors gets bogged down with lots of integration, will they be able to keep pace with the billions of dollars of investment going into the "next generation" of talent management? History says no, but time will tell.
4. Lars Dalgaard and his role.
Lars Dalgaard is a gifted and highly talented executive who has built a hard-driving, innovative software company which in many ways legitimized the talent management software market. If this acquisition takes place, Lars will take on a new role as head of cloud computing for SAP - and join SAP's board. He will now have many new products and businesses to integrate.
The level of complexity is now an order of magnitude greater, and this new role gives him a greatly expanded set of responsibilities. It is not obvious that Lars will fit into the SAP culture, but time will tell. And one might ask who continues to drive and lead SuccessFactors?
We had one of Plateau's brand-name customers come to us this week and notify us that SuccessFactors had decided to stop support of one of their critical products and that their professional services and support contracts had gone away (SuccessFactors explicitly stated they do not want to be in the Plateau professional services business). This customer's reaction was that perhaps it was time to look for a new provider when their contract comes up for review next summer. This type of behavior is not uncommon in enterprise software - companies make very strategic investments and when they see their products poorly supported they look for a new provider. Even though Lars claims that the Plateau integration was done in 45 days, customers still have to weigh in and understand what this kind of acquisition means to their long term investment. If Lars is now running cloud computing for all of SAP, someone is going to have to step up and deal with many integration and support questions for SuccessFactors in the short term.
On the positive side, SAP now has a smart, hard-driving leader to help build its future cloud applications strategy. On the "risk side" will the company continue to have the drive and innovative leadership it has had to date? Other leaders will have to step in.
5. The Chain Reaction: Workday, Oracle, Taleo, and others will react.
This move is likely to set up a chain reaction. Oracle could decide to acquire Taleo. ADP could decide to acquire Cornerstone. Mercer could acquire Peoplefluent. IBM could decide to acquire another series of vendors. While I think this acquisition still has many questions to answer, large vendors will now see this as "the beginning of the end" of the era of independent talent management vendors - setting off a chain reaction of other acquisitions. I believe this market is still very young and has a long way to go - but the bigger vendors may just feel it's ready for consolidation.
And the sales and marketing story of these other companies will now change. Workday and Oracle will show how much more integrated their products are and how far they are ahead in end-to-end integration. Taleo, Cornerstone, Saba, SilkRoad, Peoplefluent, SumTotal and the other talent management vendors will demonstrate how open their platforms are and how quickly they can innovate... and they will make sure to remind you that you do not have to replace your HRMS to implement talent management. The company that really looks vindicated here is Workday, and this will even further accelerate companies considering the Workday integrated platform.
Today, while more than 1/3 of all buyers would like a single vendor solution, customers do not want their talent management software highly interlocked with their HRMS. Experience has shown that when this happens companies can no longer upgrade their talent software, because they are so dependent on upgrades to their HRMS. So what is SAP's vision here? Will SuccessFactors stay open? This creates a dark cloud of confusion about how open SuccessFactors will be in the future, especially given the other ERP vendors focus on talent management.
What does all this mean to you as a buyer or owner of SuccessFactors or Plateau software? I think this move incents you to take a deep breath and wait. Listen to the company's detailed plans for integration and future product support. See what additional investments in R&D the company plans. Try to understand which elements of the product set are likely to continue and which may be discontinued. And if you are a committed non-SAP HRMS customer, listen carefully to the company's strategy to integrate its products. (Plateau customers are just starting to understand what SuccessFactors' plans are for all the software they are using - now they have to realize that there is almost a 100% overlap between Plateau and SAP's offerings and should wonder what happens next to their investments. Plateau customers have now gone from being the primary customer of their vendor to being the secondary and now third in line in priorities and investments.)
Remember that from SAP's standpoint, the company wants to build a $20 billion Cloud Computing business based on integrated end-to-end ERP applications. From your standpoint as an HR or Talent Management leader, you need a product set which delivers what you need today. Your interests and SAP's may or may not be aligned - so now is the time to rethink your strategy.
More to come as we gain more information - and we will be publishing a detailed Q&A for members in the coming week.
Update: On December 6 SuccessFactors announced the acquisition of Jobs2Web, a company that provides integrated recruitment advertising and employment branding tools for talent acquisition. Jobs2Web is a best-of-breed solution which greatly improves the candidate experience and gives recruiters an integrated platform for social and traditional recruiting. This is an excellent complimentary acquisition which helps SuccessFactors compete with Taleo and gives SuccessFactors customers a more integrated end-to-end Talent Acquisition platform.
Bersin & Associates New Research on this Market: Talent Management Systems 2012: Market Analysis, and Talent Management Systems 2012: Buyers Guide and Market Analysis.
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Josh Bersin writes on the ever-changing landscape of business-driven learning, HR and talent management.
His favorite topics include strategic talent management, creating high-impact learning organizations,
and how organizations drive business change and competitive advantage through talent strategy and technology.
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