Mark Smith's Analyst Perspectives

In a move to invigorate adoption of its cloud computing and talent management applications, SAP has announced its intent to acquire SuccessFactors – a deal valued at US$3.4 billion . SAP’s years of development and business efforts have produced only mediocre results in customer growth and revenue in cloud computing for human capital management comparably to its expectations and others in the market. In a teleconference SAP and SuccessFactors executives hyped the potential of the combined organizations. SAP co-CEO Bill McDermott said that it will become a “Cloud Powerhouse” and a “Unbeatable Force” and “will become the number-one cloud computing HCM solution in the cloud – period.” This may overstate the case: SuccessFactors is unproven as a power in cloud computing beyond the appeal of its own applications for human capital and HR. It can’t compare, for example, to the reach of Salesforce.com and its Force.com and application ecosystems like that in sales, marketing and other people-related application areas nor provide a platform and tools supporting collaboration and mobility. I was surprised that SAP spokespeople did not spend much time in this announcement discussing the substance and value SuccessFactors will add to its offerings in human capital management, an area where SAP has struggled to gain market share over the last five years. It was a surprise when executives stated it already had a partnership with SuccessFactors for product integration; there is nothing about this on the partnership pages of either SuccessFactors or SAP. One indication of SAP’s low standing in this people-focused application market was shown at the recent HR Technology Conference trade show where SAP booth was barely visible in communicating with its customers or pursuing new business opportunities. SAP claims that there is only a 14% overlap in HCM customers between it and SuccessFactors, which will provide opportunities to expand its customer base; however, this will depend to some extent on how many customers aligned with other suppliers of cloud-based applications will want to shift after choosing beyond SuccessFactors. And speaking of overlap, it appears to be significant between the on-premises applications in SAP Human Capital Management and SuccessFactors’ Business Execution Suite. When we actually assess the applications, it appears that there will be challenges ahead. For the basics of talent management, SAP has been pushing its on-premises SAP ERP HCM, which includes recruiting, performance assessment, competency, learning, succession, compensation and analytics. For the cloud it offers the SAP BusinessByDesign suite, which is basically ERP in the cloud with HR capabilities added; both of these lack some of the functional depth of products from SumTotal Systems and Workday who have HRMS and talent management applications in the cloud today and they’re sufficient to meet the needs of many customers already. Workforce Analytics is an increasingly important aspect of HCM; we have completed benchmark research on it. SuccessFactors has taken steps in this area with two acquisitions (of YouCalc and Inform) that it recently rationalized into its own application architecture and product. Here SAP has a complete and competitive offering that it recently energized with a better interactive tool set and capabilities for workforce planning. There’s another overlap in collaboration where SuccessFactors purchased Jambok and Cubetree to createJam, which directly intersects with SAP Streamwork. The list of product overlap continues in mobile computing with SuccessFactors BizX Mobile and SAP Sybase. Unless SAP plans to discontinue a significant number of applications and products, it faces plenty of work to rationalize the two portfolios or face internal competition of cloud computing vs. on-premises product lines; it also poses a task to avoid confusing customers and prospects. SAP of course prefers to spin this situation as synergy for collaboration, including with the experienced SuccessFactors sales force, but a channel conflict appears more likely. We expect SAP’s account management to try to protect the existing license and maintenance upgrades and sales of the on-premises systems, while SuccessFactors is good at marketing the rental of its software as a service (SaaS). SAP is not as fully engaged in marketing and selling to HR organizations as SuccessFactors, which helps it gain access to global companies. The point here is that SAP will need to make significant changes to how and where it markets and sells and how compensates its sales people as the portfolio evolves after the acquisition. This new deal occurs just as SuccessFactors is completing integration of products acquired from Plateau to boost its learning management system (LMS) – efforts that I recently assessed. SuccessFactors likely has learned some lessons about dealing with overlap of applications here, although on a much less complex scale, as well as communicating with customers about the changes. SAP of course has long experience in developing policies for continuity of support and migration of customers, which it will need as it makes decisions on the fate of its own applications that may have to be put on maintenance life-support as it goes forward with the SuccessFactors offerings. SAP and SuccessFactors also need to address further gaps in areas like leveraging social media with recruiting that our firm recently benchmarked and is a major priority to increase the access to talent across the Internet. Integrating HRMS and talent management applications and data from cloud-based to on-premises systems is just beginning, and automation of migration, synchronization, integration and single mastering of key data assets (such as regarding people) is immature at best. SAP will have a complex task to provide application and data integration that span its existing cloud-based applications and those of SuccessFactors to SAP’s on-premises suite, which users will want to happen as quickly as possible. Currently this technology gap is addressed by competitors in information management software including Dell Boomi, IBM, Informatica, Information Builders, Pervasive and SnapLogic. Our recent benchmark on business data in the cloud finds significant need and opportunity to help organizations automate their data related needs. SAP should be realistic in its expectations on what it can achieve with SuccessFactors in the human capital management market. While SuccessFactors is a major player, there are others providing midsize to very large HR organizations with access to cloud-based applications; they include but are not limited to these that our firm has assessed: ADP, Cornerstone OnDemand, Halogen Software, Infor Lawson, Kenexa, Kronos,Oracle, PeopleFluent, Saba, SumTotal Systems, Talent Technology, Taleo, Ultimate Software and Workday. In fact Taleo already has 20 million users on its platform and SumTotal has almost 15 million, which are basically in the same range of adoption or more as SuccessFactors. Also remember that SAP is not as prevalent in the growing workforce management market where human capital management is provided mostly to hourly workers where providers like Kronos, Infor, Workforce Software, SumTotal Systems Ceridian with acquisition of DayForce, Empower Software and others are dominating this segment of HCM applications. All of this means that SAP acquiring SuccessFactors does not immediately make them a powerhouse or leader immediately as we need to holistically at applications that support all the people and human capital in an organization and not just the salaried workers. SAP executives said that SuccessFactors will be leading its cloud computing strategy, and it will make SuccessFactors CEO Lars Dalgaard head of its cloud business and add him to its executive board, but so far the company’s success has been in building point applications for HR that do not have the volume and velocity of major transactional applications, which SAP had been addressing in its SAP BusinessByDesign. But SAP had been slow to advance its HCM in the cloud, as I assessed so this is an opportunity for them to provide a robust offering to companies using SAP ERP. With Lars moving to a larger role, it will be challenging for him to provide the current level of cycles on the core business which could have an impact to not letting the integration into SAP policies and procedures impact the potential of the SuccessFactors investment. For companies using or planning to use SAP for HCM in any of its flavors, from SAP ERP HCM to the HR part of SAP BusinessByDesign to the new HCM applications, we advise waiting on new deployments as this acquisition throws their future into question. Organizations using SuccessFactors can continue business as usual for their core application suite, but they should carefully examine new areas like analytics, collaboration and mobility to determine whether the integration of the companies and overlapping technology strategies will slow down the pace of delivery. We expect this announcement by SAP and previous ones in 2011 to provoke more acquisitions in the talent management market. That will require even further due diligence by buyers to determine if what they choose will be part of the future or left in the past. I have seen some really bad analysis of this announcement in the last 48 hours missing any depth on the details of the applications and implications of the overlap and the future of organizations current use of SAP or SuccessFactors. Remain pessimistic on all of these changes and the impact to the future but remain confident that these applications will make a significant difference to the value of your human capital. SAP needed help in both talent management and cloud computing, but it will take time for customers and the organizations to determine what will be possible as they integrate the business portfolio of applications. Until then, stay focused, and be wary of any fast movement by either company to get you to make a commitment until the transaction is complete and the roadmap is clear. Regards, Mark Smith – CEO & Chief Research Officer

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