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Cloud Momentum Grows with SAP Bid for SuccessFactors

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Posted December 20, 2011 By Drew Robb     Feedback

SAP’s planned acquisition of SuccessFactors demonstrates that enterprise software vendors cannot ignore the growing importance of the cloud.

SAP’s recent announcement of its intent to purchase cloud-based human capital management (HCM) vendor SuccessFactors has prompted abundant analyst and blogger comment in recent weeks. So what’s the fuss all about?

Andrew Filipowski, CEO of talent management vendor SilkRoad Technology, is one of many industry observers who believe the acquisition was motivated by SAP’s realization that it needs to offer more cloud-based solutions.

“With the HCM sector leading the cloud market in buying intentions, SuccessFactors was one of several logical choices for any of the mega-players with legacy applications looking to deliver a semblance of credible cloud offerings,” Filipowski said.

The cloud ambitions of SAP rival Oracle have certainly become more pronounced. During last fall’s Oracle OpenWorld Conference, Oracle CEO Larry Ellison launched an ambitious cloud strategy. Two months ago Oracle announced its intention to purchase cloud CRM specialist RightNow Technologies.

Filipowski thinks similar deals are sure to follow as Oracle builds a comprehensive ERP portfolio. He notes, for instance, the industry buzz around a rumored Oracle takeover of Taleo, a provider of talent management software.

Filipowski expects more HCM acquisitions by the likes of IBM, Microsoft, ADP, Dell, Google and other companies looking to expand their cloud strategies. Cloud-based HCM technology providers, he said, are desirable acquisition targets because of global C-level interest in recruiting, developing and engaging superior workforces.

“The old guard technology providers with healthy balance sheets desperately need to acquire cloud-based assets to have a chance at relevance or face extinction,” said Filipowski. “With moves like the acquisition of SuccessFactors, the mega-players have capitulated and confirmed that the future belongs to the cloud.”

Weak Spot

China Martens, an ERP analyst at Forrester Research, confirmed that HCM hasn't been a strong area for SAP. It has partnerships with NorthgateArinso and Nakisa, both providers of cloud-based HCM solutions. It has also been working on adding elements of SaaS HCM to its application suite with Careers OnDemand, although that work is at an early stage.

“We're hearing from many clients who are keen to look again at their HCM installed software, particularly how it serves the talent management needs of their organizations,” said Martens. “It will be interesting to see how SAP incorporates SuccessFactors into its existing HCM, particularly as it addresses both SMB and enterprise customers.”

Like Filipowski, Martens expects to see more consolidation in the HCM arena, with on-premise ERP players looking at deeper partnerships and/or acquisitions of cloud HCM pure-plays such as Kenexa, Taleo and Ultimate Software.  She shared a long-term prediction, that will buy SaaS HCM and financials player Workday.

Paying a Premium

What surprised Forrester analyst Paul Hamerman was just how much SAP paid for SuccessFactors: $3.4 billion, which is more than 10 times the annual revenue of the acquired company. Why be so generous?

SAP, after all, already has more than 13,000 HCM customers. But most of them don’t use SAP for learning, performance and talent management. Instead, they prefer a best-of-breed approach to talent management. Hamerman thinks the acquisition was prompted by delays in the internal development of a SaaS career management product from SAP.

“Time-to-market has been a challenge for SAP’s SaaS strategy in general, and this product was likely to be too little, too late,” said Hamerman. “Hence the urgency for SAP to pay a large premium to acquire a leading player in talent management. Having SuccessFactors on board represents a significant opportunity to sell the acquired products into the existing ERP installed base.”

The addition of SuccessFactors adds to a growing portfolio of SAP cloud applications such as Business ByDesign (ERP), Sales OnDemand (CRM), Carbon Impact OnDemand (sustainability), Sourcing OnDemand and Travel OnDemand (expense reporting). While revenues have been rising slowly in this area for SAP, a new and already successful cloud product could provide a major boost, Hamerman said. “By acquiring SuccessFactors, SAP puts itself into a much stronger competitive position in human resources applications and reaffirms its commitment to software-as-a-service as a key business model.”

ERP Angle

Claire Schooley, another analyst at Forrester, looked at the larger ERP picture. After all, HCM falls under the broader ERP category. HCM modules such as talent management are not easy to create, Schooley said. Successful players like SuccessFactors have spent years refining their offerings. So those late to the party have little choice but to gobble up the leading niche players.

“SAP’s acquisition of SuccessFactors gives it functionality and future promise that it really needs,” said Schooley. “Most importantly, SAP gets a strong SaaS offering, with indications of grand plans for future cloud services.”

Yet Schooley is concerned about the problems posed by integration. “While SAP stands to gain a lot from this deal, a massive integration effort lies ahead,” she said. “Enabling users to move from one app to another is not adequate. I see this as a very big undertaking, but SAP must do it quickly.”

Read more about SAP ERP here.

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