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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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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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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