Both SAP and Oracle recently acquired providers of software-as-a-service human capital management solutions, setting the stage for a big battle in the cloud. What does this mean for customers of both companies, and for the HCM space in general?
One way to gauge the interest level in enterprise applications is to look at recent acquisitions. By that measure, human capital management (HCM) is building some incredible buzz.
Last week Oracle announced it would spend $1.9 billion to buy Taleo, a provider of cloud-based talent management software. In December rivals SAP and Salesforce.com both made HCM purchases of their own, with Salesforce agreeing to buy social performance management specialist Rypple for an undisclosed amount and SAP inking a $3.4 billion deal for cloud-based HCM provider SuccessFactors.
Many industry analysts believe this activity is part of a coming-out party for software-as-a-service. Tim Jennings, Ovum’s chief analyst for Enterprise IT, described Oracle’s acquisition as the latest move in “an aggressive and competitive wave of market consolidation in the cloud-based Human Capital Management (HCM) space.”
Calling HCM “the next SaaS battleground,” Jennings said, “Both Oracle and SAP have existing on-premise HCM solutions, but both have been prepared to pay out large sums on cloud-based equivalents, rather than simply transitioning their existing solutions to the cloud.”
Katherine Jones, director and principal analyst, HCM Technology, with Bersin & Associates, said HCM’s star has risen as companies find it increasingly difficult to get specific desired job skills in new employees. “Companies looking at HCM strategies are beefing up in areas like succession planning, performance management and talent development. There is more emphasis on internal training now. If you can’t buy your skilled workforce, you’re going to have to do more corporate-specific training in-house.”
A little history
HCM was cloud before cloud was cool, Jones said. At one time, SAP and Oracle commanded most of the HCM market, largely by selling on-premise solutions as part of a package with their ERP software. But a dozen or so years ago a slew of cloud-based HCM software providers, including Taleo, SuccessFactors, Recruitsoft and Recruitmax, entered the market.
The largest and most successful of them, like Taleo and SuccessFactors, gobbled up their smaller competitors to create portfolios of cloud software that addressed all of the major HCM needs such as recruitment and performance management. “Those companies did everything but payroll and were close to being an integrated HR suite in the cloud,” Jones said, and they found favor with human resources professionals who often found it difficult to get their departments’ needs addressed by resource-strapped IT organizations.
Such solutions became more popular as HCM expanded beyond the traditional human resources (HR) function, said Leighanne Levensaler, vice president of Product Strategy for Workday, a cloud-based HCM software provider founded in 2005. “The CFO is now interested in the impact of human capital on business performance, so there is much more focus on tools and metrics to give insight, and not just from an HR practices perspective,” she said.
The cloud difference
Cloud HCM applications are generally easier to install and use than their on-premise counterparts, Levensaler said, and the multi-tenant architecture used by Workday and other SaaS providers ensures customers benefit from frequent refreshes. “It’s the power of one. Our customers are all on the same version, so all of our developers are working on the next version and not on five different versions we have to support.”
Levensaler said Workday’s “unified platform” approach offers a native, inherent integration between HCM, payroll and financial management applications and built-in analysis and reporting capabilities that yield better “workforce intelligence” than on-premise software.
Jones also mentioned the growing importance of integration. “If you don’t have integrated applications in HCM, you cannot get good analytics,” she said. “If you want to ask, ‘What is the cost of sourcing talent in my subsidiary in Israel compared to finding talent in with the right experience in my organization in Poughkeepsie?,’ you need integrated programs to answer that kind of question.”
Industry insiders view the recent acquisitions by SAP and Oracle as a way for the software giants to quickly expand their cloud presence. This is an especially interesting move in Oracle’s case, as its existing Fusion HCM offering was already available in both cloud and on-premise versions.
Systems integrator eVerge Group, an Oracle partner, is installing the cloud version of Oracle’s Fusion HCM so it can gain in-house experience with the product before offering it to its customers. Esteban Neely, the company’s president, believes cloud HCM like Fusion will be a popular choice for government agencies and other cash-strapped clients that may be running aging on-premise HR systems.
“Let’s say you bought Peoplesoft HR 10 years ago,” Neely said. “Those customers would probably be paying $800,000 a year in maintenance. Now they can get a new system for what they are paying in maintenance. And guess what, maintenance will now be $160,000 and not $800,000.”
Ovum’s Jennings believes Oracle will offer Fusion HCM in both cloud and on-premise versions, along with Taleo’s cloud applications, for the foreseeable future and will maintain separate development paths for the products.
“Both Oracle and SAP seem willing at this stage in the development of the market to build multiple application portfolios, to meet multiple customer scenarios,” Jennings said. “Technically and commercially, the SaaS model is very different from on-premise and it is proving easier to buy rather than build. Oracle has also shown willingness to support multiple suites with its Applications Unlimited strategy, and this has proved successful for the company.”
Jennings said the emergence of a strong market for SaaS applications poses a competitive threat to SAP and Oracle. The two giants want to consolidate the cloud HCM category before the competition becomes too strongly established, he said.
He thinks Workday could become an attractive (albeit expensive) acquisition target for a major vendor, mentioning Salesforce, SAP and Oracle as potential acquirers. “Workday must also be of interest to IBM, even if not a typical IBM target, and as an outside bet, it might represent a cloud application on-ramp for HP,” Jennings added.
Longer term, Josh Bersin, CEO and president of Bersin & Associates, believes Oracle will “definitely” integrate Taleo with Fusion HCM. “There are many complementary features and Oracle customers will want to see Taleo integrated in several ways.”
That isn’t likely to happen any time soon, Bersin added. “Oracle has a large set of customers running Taleo and will definitely maintain the Taleo products for many years to come. This is precisely what Oracle did with PeopleSoft, so we would expect this to continue for Taleo.”
Ultimately, Bersin expects Oracle to offer Fusion HCM as an integrated suite for all prospects, while positioning Taleo for smaller companies. “Taleo has a great small business offering now, which Oracle likely will continue to sell aggressively,” he said.
Given this, Bersin said the companies most likely to be impacted in the near term by these recent acquisitions are Oracle and PeopleSoft customers also using SuccessFactors talent management software.
Those companies “should think hard before signing a long-term renewal contract,” Bersin said. “While these products are likely to be supported for many years to come, SuccessFactors will most likely push its investment toward a more integrated solution with SAP.”
More on integration
Companies’ desire for deep integration will, in essence, force companies to choose between SAP’s and Oracle’s HCM offerings, Bersin said – or to choose an already integrated option like Workday, which he called “a viable option for many SAP or Oracle customers.”
In particular, Bersin wrote in a research bulletin titled “Oracle’s Acquisition of Taleo: Implications for HR Software Buyers and Vendors,” HCM users want to see added integration in for key areas:
- Single, integrated employee profiles. Made available to both employees and employers, such profiles can provide a single “system of record” for analytics and also make it easier for employees to manage their own careers.
- Integrated models for workflow, workforce management and security. With integrated workflow engines, companies can develop a set of “rules” and apply them to all elements of the various HR practices.
- Integrated content management, competency management and job profiles. Integration between core HR systems and talent management systems will add great value by removing the need for companies to work with two different sets of job descriptions, profiles, competency models.
- Integrated user experience. Integrating the components of the different systems into a single, easy-to-use interface will boost employee adoption of HCM systems.