Softscape Settles SuccessFactors Lawsuit

Posted on December 23, 2008. Filed under: HR Systems | Tags: , , , , |

Today Softscape settled the lawsuit filed by SuccessFactors in March of 2008.   This lawsuit, which we wrote about in a prior blog post, revolved around a contentious sales presentation which was developed by Softscape and leaked into the public domain.   In the final settlement Softscape agreed that the presentation in question had some errors and should not have been distributed directly to customers.

As we discussed in our earlier post, this type of activity is very common in the enterprise software business.  It is very common for almost every software company to create harsh and pointed “talking points” about competitive products and claims.  In my days in the software industry I wrote many such documents and frequently used them in sales training and customer discussions.

In this particular case, the lawsuit, filed by SuccessFactors, seemed unnecessary and of little value.  SuccessFactors has managed to grow at over 70% during the period since March and both companies have continued to grow and prosper as the market for talent management software continues.   All the vendors in this market will continue to build aggressive sales presentations and I personally do not think lawsuits are a good way to promote healthy competition.

We continue to have great respect for both companies, and we firmly believe that the most important way to build a software company is to build excellent products, clearly segment the target market,  provide outstanding customer service and support, and stay very close to evolving market needs.   Both Softscape and SuccessFactors are successful, growing companies and both are executing well.

The Talent Management Software Market Evolves

We do see some major changes taking place in the talent management software market – and we will be explaining this further in the coming months.    Not only is the market growing, but it is becoming more mature – organizations now realize that the “talent management suite” is not really a suite, but a complex set of enterprise software which must provide a complete solution for many elements of people management.   The days of young, small companies entering this segment of the market are ending – and the players today are rapidly expanding the definition of “talent management” software to include much more than the traditional elements of performance, succession, and career development tools.

Watch for more from us in this exciting and evolving market in 2009.

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Where is the “Talent Management” Market going?

Posted on November 9, 2008. Filed under: Enterprise Learning, HR Systems, Talent Management | Tags: , , , , , , , |

As the US economy lost 240,000 jobs last month and the unemployment rate rises to 6.5%, one of the questions I know many people ask is the direction of the “talent management” marketplace.  Let me give you our thoughts on the trends taking place.

First, the urgency of “talent management” in corporate HR organizations has not slowed.  In fact, nearly every organization we talk with is moving ahead with their new talent management strategies, which includes redesign of performance management, further integration of their HR organization, assignment of a Vice-President or other senior HR leader responsible for “talent management,” and the desire to implement talent management software.

Second, we also are finding that most companies are also reducing the size of their HR and L&D organizations (the US L&D market in 2008 has shrunk significantly, and we will be publishing this data in the next few weeks).  We are now working with many organizations to restructure their training departments to create more centralized organizations in the interest of reducing costs, and we see a dramatic dropoff in the development of new L&D initiatives which are not directly related to talent management.

Third, organizations are cutting back on travel and other development-related expenditures and now investing more in lower cost, collaborative learning infrastructure.  One Fortune 100 company we are working with has decided that instead of replacing their learning managment system they are going to implement new collaborative, Learning 2.0 strategies using low cost social networking software to enhance their sales and service training and create more employee engagement.  The LMS “upgrade” looked like a $5 Million project, so it is going on hold.

Fourth, the talent management systems market continues to grow, but at a slightly slowing rate.  In fact, if we look at the Q3 2008 revenues of four publically traded companies, SuccessFactors, Taleo, SumTotal, and Saba, we see positive but slowing revenue growth in every single company.  Revenue growth rates at these four companies are 77%, 39%, 12%, and -1% respectively.  Unfortunately, each of these public companies continues to lose money and all have seen their market caps drop (along with the entire market).  But the market is still healthy:  for example we know that private companies are also growing – Plateau, GeoLearning, and Learn.com each grew by over 25% in the last year.

Fifth, if you look at the talent management software market, which we see as a tremendously important part of corporate HR and talent management going forward, it is beginning to become a bit crowded.  While we still see explosive growth into many years in the future, our latest research now shows that most buyers see similar features from many software providers.  As a result the “price to enter” the market is higher, and software vendors have to invest more and more in sales and marketing to maintain their revenue growth.  SuccessFactors, the fastest growing of all, continues to invest an amazing 61% of its revenue in sales and marketing, which is unsustainable for any company over a long period of time.   We firmly believe that the talent management software market, just like the LMS market, will segment itself into leaders in different segments (global enterprise, enterprise, mid-market, and eventually small business) – and both Oracle and SAP will continue to grow.

Bottom line:  Today’s economic environment has caused new stresses for the HR and L&D organization and will definitely slow the market for talent management software.  But is the party over?  Not at all.  Organizations of all sizes continue to push ahead with their new talent management, social networking, capability modelling, and collaborative learning strategies — they key is to maintain the focus on these programs in a highly efficient way.

New research on these topics:

The Essential Guide to Performance Management Systems and the Market

Enterprise Social Software 2009:  Facts, Analysis, Trends, and Vendor Profiles

The Talent Management Factbook

The Corporate Learning Factbook

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SaaS will never Kill Licensed Software

Posted on August 29, 2008. Filed under: HR Systems | Tags: , , |

I have to smile.  Today I read an interview with Harry Debes, the CEO of Lawson Software, discussing why he thinks the SaaS (Software as a Service) model will fade and die.  While I dont agree 100% with his discussion, I do agree with much of what he has to say.

I also have lived through the era of mainframes and dumb terminals, service bureaus, the ASP model, and now SaaS.  Every new incantation does the same thing:  move the burden of software development and systems management from the buyer to a vendor.  And in every era since the 1970s, the service-provider model has not won over 100% of the market.

There is no question that SaaS business models are great for solution providers once they reach a certain size.  SuccessFactors is desperately trying to prove this in the HR market (but so far they still lose nearly 95 cents for every dollar of revenue they produce).  Many solution providers like payroll providers (ADP, Paychex), CRM (Salesforce), Survey Software (Vovici), and others are doing fine.  And the reason they succeed is because the product they sell provides tremendous amounts of functionality and their core market is mid-sized to small companies.  Salesforce.com in particular has done an amazing job of also providing APIs and integration solutions to integrate its product with many internal systems.

But in most large enterprises the hodge-podge of internal systems is quite complex, and buyers become nervous about being dependent on a small company’s R&D for strategic applications.  The largest talent management software providers today are less than $200M in revenue, while their customers are often billion dollar companies.  It will only take a few mergers or product failures for buyers to scratch their heads and wonder if they did the right thing.

Our research clearly shows that many companies prefer the SaaS model (particularly small and mid-market companies), but the larger more complex organizations often prefer to own the software, pay for it once, budget for the ongoing maintenance fees, and put their additional dollars into customization, integration, and internal development.  Hence our research finding that most SaaS solution providers still get 80-90% of their revenues from companies with fewer than 10,000 employees.

It’s very exciting to read articles (and marketing from vendors) about how exciting the SaaS model is.  It’s very interesting and exciting for sure, but I have to agree with Harry that it won’t take over the world of enterprise software. 

His comments are here:  http://news.zdnet.com/2424-9595_22-218408.html .

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Your “Incumbent” HR Systems Vendor – What to do?

Posted on August 19, 2008. Filed under: HR Systems, Talent Management | Tags: , , , , , , , , , , |

I just completed a series of interviews with three organizations going through the important, challenging, and time consuming process of implementing a new performance management system.  In each case (a large healthcare provider, a global mining company, and a global call center operations company), the company is using the implementation of a performance management system to implement a new, re-engineered, strategic performance management process.  But rather than discuss this, I’d like to give you some thoughts on their vendor strategy.

These three companies each chose to use their “incumbent” systems vendor.  Rather than go to the “biggest” or “noisiest” systems vendor (I wont mention any names), they felt that they would see far greater benefits by using a newer system from their provider of recruiting software.  Why did they do this?  Because in each case they felt they had a wealth of data, experience, and strong working relationship with this company.

This points out two critical points, which we are publishing in a major research bulletin in the next few weeks:

1.  The biggest ROI from HR systems comes from integration, not automation.  As Leighanne Levensaler, our Director of Talent Management research has pointed out in many of her findings, the real breakthrough benefits of HR systems now come from newly enabled applications, such as pay-for-performance, integrated career and development planning, enterprise succession management, and strategic internal and external recruiting – not from automating or improving a single process.

As our data will prove, this means that the benefits of integration are now far greater than the potential downside of going with a product which may be missing a few features.  (Assuming your incumbent vendor is developing the features you need.)

This means that if your LMS vendor has a solution, or your recruiting vendor has a solution (or even your ERP vendor), you should really look hard at the time, energy, and existing investment you have made in this system before you rush out and bring in a new solution provider.  Obviously there are tradeoffs when your incumbent vendor is not keeping up, but in today’s HR systems world remember that “integration” is far more important than “automation.”

2.  The big “Incumbents” are getting their acts together.  The second point I want to make is that the traditional incumbents (recruiting systems providers, ERP providers (Oracle, PeopleSoft, SAP, Lawson), and LMS providers) are all getting their “talent and performance management” software acts together.  While there are many feature differences between the providers (and our Talent Management Suites research will help you identify these), all now provide some form of an end-to-end solution which includes performance management.

While this continues to be a wild and wolly world of innovation (watch social networking coming around the corner), we think the role of your incumbent is becoming more important than ever.

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Perspectives on the SuccessFactors and Softscape Lawsuit

Posted on March 19, 2008. Filed under: HR Systems, Talent Management | Tags: , , , |

On March 12, two of the leading talent management software vendors went to war.  SuccessFactors, a leading provider of performance management software,  filed a lawsuit against Softscape, a leading provider of integrated talent management software.

The lawsuit, and continuing press releases, claims that Softscape inappropriately logged into SuccessFactors’ internal systems, distributed false and misleading claims about SuccessFactors’ customers and products, and misused SuccessFactors’ name and logo in a presentation distributed to clients.

We have seen both the filing and the presentation in question.  I would characterize it as a very aggressive marketing move by Softscape with a combination of truth, exaggeration, inaccuracies, and salesmanship.  It was cleverly designed to be used by internal Softscape sales representatives but was also designed to look like a SuccessFactors-created document (not a very ethical thing to do).

As an analyst firm, we admire both companies tremendously.  They each have tremendous strengths in their products, their people, and their support.  They have vastly different heritages and strategies, and these differences have likely led to this dispute.

Some Perspectives

I spent almost 10 years of my career in a highly competitive software market – the database industry.  During my tenure as a product, business development, and marketing director at Sybase, I woke up almost every day worrying about one arch rival competitor, Oracle.  This relentless focus on our competitor had its good and bad sides.

On the positive, it helped us gauge the market and make sure that our value proposition was clear and distinct.  On the negative side, however, we found ourselves consumed with internal debates, discussions, and speculation about what was going on across the bay (both companies are in the San Francisco Bay Area).  In fact, our VP of Marketing purchased “The Art of War” by SunTsu for everyone to read, helping us learn how to “outflank” and “outposition” ourselves from our competition.

My perspective now, almost than 1o years later, is that this is not a good way to run a business.  While all companies (particularly software companies) serve markets with many competitors, no long-term sustainable business can develop great products and services with a single-minded focus on their competitors.  Rather, they must take this energy and enthusiasm and focus it on their customers, their market, and their desired position in that market.  While competitors are a wonderful source of ideas and energy (nothing like fear to get you going in the morning), overfocusing on them leads you away from your market, your customers, and your core value proposition.

SuccessFactors is clearly the “marketing leader” in performance and talent management software in the US today.  They are spending 2-3X any other company (and more than 1X revenues) in this area, so clearly they are very visible and present.  Our research indicates that SuccessFactors has more sales people than companies twice their size in revenues.

This strategy, that of trying to build a “first-mover advantage,” is just that, a strategy.  It may or may not succeed in the longrun.  Other companies, like Softscape, have a different approach.  Softscape has built its product over many years and offers a rich, complete, and well proven HR solution – which includes an HRMS as well as modules in every major talent management area.  The company is internally funded and has chosen to grow steadily through internal growth.  The company has invested heavily in consulting to help their clients “implement talent management” not just “implement HR software.”

While bashing the competition may be a common, visceral reaction of any company (and Softscape was clearly in this market long before SuccessFactors), my perspective is that it often takes the “bashing” company in the wrong direction.  Rather what I recommend every software company do is admire your competition.  Learn from them.  And make sure your information is accurate.  It is very easy to “guess” about what your competition is doing – when in reality they are probably having many of the same challenges you are. 

Our recommendation to buyers is to ignore this entire episode.  It is a common thing in hotly contested software markets and both companies are suffering by raising this to such a public level.  It may make good theater, but it does not help either company (or you) succeed.

Our recommendation to other software vendors is to try to avoid this type of focus.  Spend your waking hours talking with your customers and prospects, building offerings that meet their needs, and thinking continuously about your value proposition and how you can find new opportunities to add value.  If you do these things you will find your “niche” and your competitors will wake up one day saying “wow, I wish we had thought of that.”

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Wow. Performance Management Really Matters in Retail.

Posted on December 13, 2007. Filed under: Performance Management, Succession Planning | Tags: , , , , , , , , |

As we continue to study best-practices in talent management and talk with many organizations, we see more and more evidence that top-down goal alignment and transparency truly do drive business results. 

For example, we recently had an in-depth discussion with the Vice-President of HR at Bon-Ton Stores, a highly-successful mid-sized retailer which operates among the higher performing retailers in financial performance.  Bon-Ton has grown from 35 to 287 stores with more than $3.7 Billion in revenues in the last five years.  The company acquired several set of high-end stores from Saks and has integrated the merchandising, distribution, and retail operations with great success.

As we discussed the organization’s keys to success, the VP of HR told us that the CEO has always paid very close attention to the development of its people.  In fact, the company has developed a comprehensive, competency-based approach to recruiting, management, leadership development, and succession planning which is far more integrated than any other retailer we have spoken with. 

The company prides itself on transparency (the 16 core competencies are broadly available), goal alignment, and training.  Each year a set of “critical roles” are identified (there are 87 as of now), and succession plans are scrutinized for these positions.  (Research members can read more about Bon-Ton and its competency model in our research library.)

After this detailed discussion I went back to our High Impact Talent Management benchmarking database and reviewed our findings about retailers.  Some astounding facts came up:

Retail organizations with enterprise-wide performance management processes which are standardized and open (transparent) (approximately 21% of organizations in our database) are 47% more effective at delivering a high-performance culture than those without formal programs, and 71% more effective than those with no performance management processes at all.

All I can say is “wow.”   The retail industry is one of the most difficult of all to manage:  high turnover, rapid product cycles, and low margins.  Yet here, as in other industries, sound people-management processes really pay off.  When we refer to “transparency,” we refer to the process of clearly communicating company values, goals, and individual sales objectives across all employees, stores, districts, regions, and divisions.  This is what drives Bon-Ton’s success – and many other retailers as well.

If you have not yet figured out why performance management should be a transparent, organization-wide process, you should.  Read our High Impact Talent Management® research for more details.

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SuccessFactors goes Public

Posted on November 24, 2007. Filed under: HR Systems, Performance Management, Talent Management | Tags: , , |

Last week was a big week in the world of corporate talent management systems.  SuccessFactors, one of the fastest-growing providers of performance management software, went public.  The initial IPO valued the company at about $500 Million, or close to 9 times sales.  This valuation is very high relative to the other companies in this market (Taleo trades at 5-6X sales, Kenexa is trading at 2-3X sales, Salary.com is trading at 7.5X sales, and Saba and SumTotal trade at 1-1.5X sales).

What does this high valuation mean?  It illustrates three big things going on in this market:

1.  Growth rate matters.  First, SuccessFactors’ high growth and aggressive “become #1” strategy is highly valued by Wall Street.  Internet companies have found that the #1 player in a market tends to take 50% or more market share, and #2 is often 20-30%, and the remaining fall far behind.  

Does this strategy make sense in the talent management software market?  Not nearly to the degree it may matter in generic internet companies. The reason is that the market for HR software is very broad and segmented:  small businesses have very different needs from mid-market companies, which have very different needs from global enterprises.  Today SuccessFactors has done extremely well in the small to mid-sized market segment (where other focused competitors like Halogen <www.halogensoftware.com>  play) – but still has very small market share among global enterprises.  I believe that we are at least 3-5 years away from consolidation in this market – today most of the players are likely to grow.

In addition, today the different vendors in the market have very different strengths.  SuccessFactors’ strength is in its performance management modules.  Other vendors focus more heavily on recruiting (Taleo, Kenexa, Authoria), learning (Cornerstone, Saba, SumTotal), compensation (Workstream, Workscape, Salary.com), and HRMS (Ultimate, Oracle, SAP).  Buyers come to the talent management problem from different problem spaces, so they tend to select vendors based on their primary problem to solve.

2.  SaaS matters.  Second, SuccessFactors is a very well run Software as a Service (SaaS) company.  While other talent management systems vendors are also providing SaaS (notable CornerstoneOnDemand, Learn.com, Salary.com, and GeoLearning are three others which exclusively deliver in this manner), SuccessFactors has positioned itself very well in this segment.  Wall Street is very enamored with this business model (Salesforce.com has a similar valuation ratio to SuccessFactors), hence its high valuation. 

I know that many other software vendors are working hard to reposition themselves into this category.  The SaaS business model works very well when companies get large enough to amortize their infrastructure costs over many hundreds of customers.  In the early days (even SuccessFactors does not expect to be cash-flow positive for at least two more years), this business model demands a lot of up-front expenses for infrastructure, sales, and services.  

Remember, when you buy software from a SaaS vendor, you are essentially transferring the IT costs and software service expenses to them.  Presumably they are going to be much more efficient at it than you are – since they are supporting hundreds of customers with the same code.   The total cost of software development and maintenance may be the same for both SaaS and licensed companies, but in the SaaS case, all the implementation expenses are managed by the vendor.  You pay a higher monthly cost, but over the longrun our research shows that if you select the right platform, and the vendor provides open, easy-to-use interfaces, you will save money in the SaaS model.  (We have an in-depth research paper on this topic for research members).

3.  Business model matters.  Third, today Wall Street sees future profitability as more important than current profitability.  Today, as we wrote about a few months ago, SuccessFactors is a highly unprofitable company.  Even taking into account the deferred revenue, the company is spending almost $3 for every $1 of revenue.  According to the strategy, within 2-3 years the recurring revenue (“deferred revenue”) will start to catch up with the very high sales and development expenses to make the company profitable.   Investors believe this, hence the high multiple.

One can see evidence of this taking place with large, well-run companies like Salesforce.com, which is now profitable.  Traditional software companies (Saba and SumTotal for example) are not seeing this business model benefit.  Both these traditional software companies are still unprofitable but seem to be unable to convince Wall Street (at least so far) that they have a road to high profits in the future.  I think we will see an increasingly intense push by all the traditional software vendors in this market to lean toward SaaS models, in an attempt to capture the SaaS long-term profitability model.

That said, let me remind everyone that many traditional software vendors are very very profitable.  Oracle, SAP, Microsoft, Symantec, and many other companies that “ship software” have reached the “knee in the curve” where their sales revenues are high enough to dwarf their R&D expenses and they see tremendously high margins on software.  I believe this is still very possible in the HR/talent management software market — but only for companies that focus very intensely on market segments where they can get very high growth rates and avoid building products which do “everything for everyone.” 

One of the biggest challenges which traditional HR software vendors face is their tendency to try to build software for all types of buyers – from small businesses to global enterprises.  This spreads them very thin and makes it hard for them to gain enough traction in a single market to generate a profitable business model.  If there is one piece of advice I try to give to any technology provider in the HR and training markets, it is to focus, focus, focus.  When a vendor finds a segment they can dominate (geotraphic market, industry, problem area), their profitability goes way up.

Bottom line:  SuccessFactors is a very well run company (customers are very happy) which has really helped create the market for performance management (and now integrated talent management) software solutions.  Their highly successful IPO bodes well for everyone – the financial markets now see success here and this means more money and more investment for all the players.  More investment means better products, healthier companies, and faster-maturing solutions.  We should all wish SuccessFactors well and we will hope that others in this market see similar successes.

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Performance and Recruiting Management Shootout – Who Won?

Posted on October 24, 2007. Filed under: HR Systems, Performance Management, Sourcing and Recruiting | Tags: , , , , , |

Industry’s First Integrated Performance and Recruiting Shootout

This year’s shootout focused on the powerful integration (but not well understood or adopted) between performance management and recruiting including the coveted, and often elusive measure of “quality of hire. Four leading talent management suite vendors were included; Authoria, HRsmart, SuccessFactors, and Vurv had 75 minutes to demonstrate how their products support meaningful integration using the same three scenarios.   Our principal analyst in Talent Management Systems, Leighanne Levensaler had the great pleasure of assisting Conference Co-Chair Bill Kutik in the development of these scenarios which served as the script for the vendor to demonstrate:

(Note, these are important scripts for you to consider in your talent management systems strategy.  Read more in our talent management suites research.  For more details on the HR Technology Conference, read our in-depth review of the show.)

1. How an HR generalist identifies the attributes of a top performer (experience, competencies, and performance feedback) to create a position description/job profile, initiates a requisition for a new position, and communicates it to the recruiter;

2. How a recruiting specialist reviews a pool of internal and external candidates, determines which sources provide the best talent (as measured by performance ratings and quality-of-hire metrics), and conducts a search for additional candidates; and

3. How a hiring manager creates a personalized development plan for a new employee, based on the valuable candidate information captured during the recruiting process, and how the talent management solution tracks and provides analytics on the employee’s performance to drive ongoing recruiting of high-quality talent.

Participants in the audience voted after all four vendors demonstrated a scenario. At the end of the third scenario, the votes were tallied and Bill announced that Authoria captured the most votes in all three scenarios and was named the overall winner.

Why did Authoria Win? 
Process Understanding and Excellent User Interface Design.

Is Authoria’s solution that much better than their formidable opponents? As much as we respect and admire the Authoria team and consider their solution to be a leading talent management suite, the other vendors participating in the Shootout also have strong solutions for this integration. From Leighanne Levensaler’s perspective, Authoria won for two reasons.

First, Tod Loofbourrow, their CEO is a fantastic presenter and storyteller. The “story” is important because he told a story of the frustrations HR specialists have today and a story of opportunities that we have with integrated solutions. Tod was easy to follow, particularly if you could not follow what was happening at the speed of light on the jumbo screens.

The second, and more significant reason for their clean sweep, was Authoria’s “sexy, value-add” not “sexy-gratuitous” user interface (available in the new Authoria Talent Management release). Tod and team used the scenarios to showcase how Authoria’s user experience supports meaningful information experiences and decision support including, easy wizards, intuitive visual indicators, embedded analytics, one-click options, drill down options, embedded and contextual performance support, enhanced search, and side-by-side comparisons.

What Can You Learn from this Process?

First, there are many advanced capabilities now becoming available in talent management suites.  Our research details these capabilities across each vendor in the market.  Rather than try to cost-justify your system based on savings in time or paper, we urge you to think about these “cross-functional” capabilities which drive much greater impact.

Second, the user experience is now paramount.  HR systems are used by line managers and employees – often on an occasional basis.  If they are not easy and intuitive to use, they are not used.  Vendors which have not yet focused on easy-to-use, simple user interfaces (it is far harder to make a user-experience simple than it is to make it functional) deliver higher value solutions for you.

Third, the functionality required in these applications is quite complex and continually changing.  Authoria’s acquisition of Hire.com (the source of the company’s recruiting product) brought the company a rich and complete product offering.  Kenexa, Oracle, PeopleSoft, SuccessFactors, Taleo, Vurv (formerly Recruitmax) and many other companies now offer integrated performance and recruiting systems – so you, as a buyer, should shop carefully and evaluate the level of integration, ease of use, and experience of your selected vendor.

Congratulations to each of the vendors that participated in the Shootout.  We look forward to a more exciting contest in 2008!

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*SuccessFactors Files for Public Offering (*updated)

Posted on July 23, 2007. Filed under: HR Systems, Performance Management, Talent Management | Tags: , , , |

(This post was recently updated after conversations with
SuccessFactors VP of Product Marketing.)

Recently SuccessFactors Inc. filed their “S-1” statement, a prospectus to file for public offering.   SuccessFactors is one of the most interesting and fast-growing software companies in the talent management market.  Looking at the S-1 filing helps us understand many things about this marketplace, SuccessFactors, and the Software as a Service (SaaS) model.

SuccessFactors S-1

Fig 1:  SuccessFactors S-1

The Performance and Talent Management Systems Market

SuccessFactors plays in the market for enterprise performance and talent management systems.  These systems enable companies to better manage the “soft” parts of HR;  recruiting, hiring, performance management, succession planning, learning, and to a lesser degree, compensation.

This market is very large and still largely untapped.  In the past, these applications were largely automated with spreadsheets, PCs, and mainframes.  Today, a new market of “integrated talent management suites” has emerged.  These systems give ocmpanies an integrated view of their talent:  skills, performance, learning, potential, and more.

Our research into the addressible market for such software shows that there are around 20,000 organizations ready to absorb talent management software, ranging from global enterprises to enterprises to mid-market companies.  Most of these companies have some form of HR software today (payroll and HRMS) and often are replacing, upgrading, or looking to implement different elements of a talent management suite.   The new play in this market is the Software as a Service (SaaS) model, which enables companies to “rent” this software and implement it without ever installing any software.

 

Addressable Market for Systems

Fig 3:  Addressable Market for HR Talent Systems
(from published research LMS 2008:  Facts, Practical Analysis, Trends, and Vendor Profiles)

As this market grows, it will expand.  As more and more companies implement such software, more potential buyers become ready.   Within this space there are five major segments:  recruiting (formerly called applicant tracking), performance management (formerly called performance appraisal automation), learning management (LMS), compensation (which includes a variety of modules for incentive compensation, benefits, and pay-for-performance), and workforce/succession planning (an application area that is just emerging).   We have market size data and growth rates for each segments (to be published this Fall) – but to summarize, each are growing, and the total market for these systems will be over $3 Billion within the next 6 years.  The fastest growing segment is the one in which SuccessFactors is best positioned, the market for online Performance Management.

Today SuccessFactors, with more than 1,300 customers, has already penetrated the largest percent of this market (by number of corporate customers), and when measured by revenues, now commands between 10-15% of the Performance Management systems market.  This is a very impressive position, given the rapid growth and number of vendors competing here.  The company competes with more than 30 different companies, including Oracle/Peoplesoft, SAP, Authoria, CornerstoneOnDemand, Executrak/StepStone, Halogen, HRSmart, KnowledgePlanet, Kenexa, Learn.com, Plateau, Saba, Silkroad, Softscape, SumTotal, Vurv, Workstream, and most of the other LMS companies.  Taleo is also soon entering this market.

SuccessFactors is a Very Fast Growing Player

In only 5-6 years, SuccessFactors has grown to a $32 Million company and is growing to become a $40-45 Million company this year.   This growth rate makes them one of the fastest growing players in this segment.  The company’s current quarterly sales were stated at $12.4 Million, which equates to several hundred new customers each quarter.  The company currently has more than 1300 customers, which equates to an average revenue per customer of about $80,000 over the last five years and a compound growth rate of around 80%.   This is blazing growth.

SuccessFactors Revenue (from S-1)

Fig 2:  SuccessFactors Sales Revenue

This rapid growth seems to indicate that SuccessFactors is “making this market,” meaning that they are rapidly gaining market share.  As it is, the overall performance management systems market is growing at around 30-35% and is currently the fastest growing segment of HR software. 

SuccessFactors is Far from Profitable Today

One of the important findings in the S-1 is that the company is spending large sums of money in sales and marketing to grow at this rate.  To generate the $32.6 Million in revenue in 2006, for example, SuccessFactors spent $32.3 Million in sales and marketing alone.  This means that it took the company one dollar of sales and marketing expense to generate one dollar of revenue.  A company with a similar business model, Salesforce.com, which is growing at a similar rate, spends about 57% of its revenue on sales and marketing, also a large number, but half of what SuccessFactors is currently spending. 

In addition, the company is also spending 1/3 of its revenue on R&D.  This heavy investment is being used to build out the company’s talent management suite.  Comparing to the similarly fast growing Salesforce.com, this is more than 3X Salesforce.com’s average of 9.6% last year.  One of the real financial stories of the Software as a Service (SaaS) model is ability for a company to leverage its R&D over an ever-increasing number of customers.  Today SuccessFactors’ R&D costs are almost twice as high as  their leading competitive traditional software company, SumTotal Systems, which is spending approximately 17% of sales on R&D.  This high R&D investment is costly, but it is part of SuccessFactors’ goal to rapidly gain a leading market position.

If one totals up these expenses, plus the high expenses on G&A (23% of revenue), you find that for every $1.00 of revenue SuccessFactors obtains, it costs the company $2.00 in expenses.  Adding up the accumulated losses for the company, it has cost the company has lost $49,000 for every customer they have obtained.  The company is far from profitable today.

That said, there is a big upside here – the company’s “deferred revenue” – which is over $56 Million.  This term refers to the ongoing fees which SuccessFactors can expect to receive each year from its multi-year contracts.   In the Software as a Service (SaaS) model, when SuccessFactors books a 3-year contract with a client (as an example), the company only books 1/3 of the revenue each year.  (Licensed software companies, on the other hand, would book it all up front – forcing them to find more and more such deals in order to grow.)  This means that when SuccessFactors shows $32.5M of revenue, they also have another $56M or more of revenue “in the bank” for future years.  So while the company is losing money now, at some time in the future there is a “tipping point” and these ongoing contracts start to bring in enough revenue to offset the high expenses on sales and R&D.

What Does this Mean to You?

First, as an HR manager or buyer, you are most interested in the company’s products and services, which are generally excellent.  SuccessFactors has a very functional and successful product, excellent suppport and service, and a tremendously high-performing culture.  In fact we have seen some of SuccessFactors innovative new software and the company is clearly investing to stay ahead of the market.

Do the financials matter?  In some cases your CFO may want to look for vendors with profitable businesses.  Remember that many HR software companies are small, private, and often unprofitable – and usually these are the companies with the most innovative and well designed products.  Organizations which are conservative and only want to buy from Oracle, Peoplesoft, and SAP find that while their vendors are stable, their products may be behind and support may be lacking.

What the S-1 shows is that SuccessFactors has a big opportunity and is very well positioned.  The company is clearly striving to become the “Salesforce.com” of the talent management software market.   Talent management software (suites of HR process software) are important to all organizations of almost all sizes.  Outside of payroll software and services, software to manage the “HRD” functions of HR are necessary to automate the process of managing goals, documenting performance appraisals, establishing succession plans, identifying leaders, onboarding new employees, and developing employees.  Every well run company needs these processes.

If you are a small or mid-sized enterprise, SuccessFactors is proving the power of the SaaS model.  SuccessFactors all SaaS strategy enables the company to serve this market very efficiently and effectively.   Armed with $125 Million in new capital, we can expect the company to continue to grow and expand rapidly in this market.

Times are interesting – it feels like we are back in the internet boom of the late 1990s again.  The Software as a Service (SaaS) business model has emerged as a breakthrough new way to deliver enterprise software.  SuccessFactors is demonstrating that this model serves customers well and enables the company to grow rapidly.  Hopefully profitability will come soon as well.  We will continue to watch this marketplace and this important and exciting company. 

PS.  Come to the HR Technology Show in October to see and hear the results of our upcoming research on the entire market for talent management software.

(For more information on the markets for HR software, talent management suites, and performance management, please consult our website (http://www.bersin.com or our research membership program.)

 

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