Another One Falls – StepStone Acquired

I’ve been saying it since the beginning of the year – 2010 is the year of the acquisition in the HR Technology space.  It started with a bang just a few short days after the start of the new year with Private Equity firm Bedford Funding acquiring PeopleClick and merging them with another of their assets – Authoria to create PeopleClick Authoria.  Shortly afterwards additional deals were announced which impacted Northgate Arinso, SuccessFactors, Inform, and the list goes on.  In short the HR Technology market has experienced more M&A activity than we’ve seen in quite some time.

Yesterday another deal was announced – European HR software vendor StepStone was acquired.  This was the second acquisition of StepStone in the last year, first an acquisition by Axel Springer a German media conglomerate and the the latest deal which was a spin-off of the software solution portions of the legacy StepStone organization comprised of the i-Grasp and Executrack products.  The solutions business of StepStone was purchased from Axel Springer by HG Capital LLC for 110m EUR, representing a respectable multiple of StepStone’s software revenue.

As much as this deal may cause some angst for some, I personally like this transaction.  StepStone has something that few talent management vendors offer – they will offer their software in both a hosted/subscription model or licensed/premise-based (or any combination in between).  Due to their European roots they handle the unique needs of complex global organizations better than many and have some deep functionality in multiple talent management domains.  Also, due to their delivery model, you can actually customize their software.  While this is not necessarily a plus, it does provides more flexibility than their SaaS counterparts – although it comes at a cost.

Why I like this deal:

1.  By untangling themselves from Axel Springer, they can focus on the core of their solutions business – software.  This will allow StepStone to continue to invest in their products as they have been rather than potentially using excess profit to subsidize other portions of Axel Springer’s business.

2.  Existing customers can be better protected by the management team in place and existing commitments.  With Matthew Parker continuing on as Managing Director, customers should expect to see little, if any impact of this deal.

3.  It will allow StepStone to continue to do what they have been doing for a few years in the US, fly under the radar and attract very little attention while serving the needs of large, complex, global organizations.  Focusing on the SAP install base has worked well for them and should continue to do so in the future.

What’s next?

For StepStone, the management team needs to now focus on two key areas – keeping existing customers happy and addressing any concerns that this transaction might provide, and continuing to invest in evolving their product line.  StepStone currently maintains two product lines, the i-Grasp product which is a SaaS-only recruitment product and the ETWeb product which is either a licensed or subscribed, premise-based or hosted talent management suite.

Maintaining multiple product lines can prove to be costly over time and to maximize StepStone needs to accelerate the transformation to a single technology platform.  Additionally, by working from a single technology platform, integrated reporting, integrated search, and other business process benefits will be available to customers, allowing StepStone to more strongly compete against the likes of Taleo, SuccessFactors, and others.

If nothing else, 2010 is living up to its name of The Year of the Acquisition.

Next to fall….

A mere two business days into the new year and the first acquisition of note in the HR Technology space has already been announced.  Yesterday morning Bedford Funding – the private equity firm that acquired Authoria in 2008 has announced that they have acquired North Carolina-based PeopleClick for $100m in cash and will merge the firm with Authoria.  The new firm is called Peopleclick Authoria and will be run by Charles Jones, the founder and general managing partner of Bedford Funding.

I’ll leave the formal analysis of the deal to the analysts (BTW, Jason Corsello has a great post here –, but the deal does raise a few questions in my mind:

1.  Will this deal set off a new wave of M&A activity in the HR technology space?

2.  With a combined $360m in newly raised cash, will either SuccessFactors or Taleo respond by purchasing a company?  If so, who?

3.  Did Bedford spend too much given the current state of the market – considering 14 months ago they bought Authoria for $63m.

4.  Who picks these company names?  Peopleclick Authoria?  I would have suggested at least some creativity – Peoplethoria or Authoriclick come to mind right now.

Its clear that desired outcomes of this meger may take some time to realize, it will create some interesting opportunity in the short fun.  Meanwhile the speculation is swirling as to who will be bought next and by whom.

Who do you think will be the next to fall?

6 Critical Considerations when Thinking SaaS

Lets face it, HR has historically gotten the shaft when it comes to technology.  In many organizations HR needs to fight for resources against other initiatives which are more closely aligned with core business functions – sales, marketing, production/manufacturing, etc.

With the lack of organizational respect/understand that many HR departments struggle with alongside the historical costs of ERP, its no wonder why HR often has difficulty securing resources to assist with technology-related initiatives.  Whether an organization is tackling the basics such as automating a manual recruitment process (is anyone still handling paper out there?), taking performance appraisals online, implementing learning management capabilities, or moving towards more advanced functionality such as Employee Service Centers with full case management capabilities, fully integrated talent management suites, or advanced analytics with embedded dashboard into role-based portal views, HR often needs to go beyond the capabilities of their internal IT organization.

The answer to many HR organizations struggling with these issues is often utilizing Software as a Service (SaaS) vendors who “rent” their applications to companies. No need to buy servers, install software, maintain code, etc.

Let me start by being very clear –  I don’t advocate HR departments engaging vendors without partnering with their internal IT function.  Whether you partner with IT or go it alone, I wanted to share a few critical elements which you need to consider when thinking about introducing a SaaS solution into your business.

1.  Service Matters – Having an iron-clad Service Level Agreement is the foundation from which you will build your solution.  A SLA will govern exactly how/how fast the vendor is to respond to issues, what expectations are with respect to system up-time, etc.  Think of this as the prenuptial agreement for your long-term business relationship and having expectations spelled out as clearly as possible will save you a ton of headaches later.  SLAs are very much negotiable, and should be reviewed with both your IT and Legal staff.

2.  Upgrades?  Who Needs Upgrades? - Unfortunately you do.  One of the least understood elements of a SaaS is exactly how upgrades are handled.  For example, one large SaaS talent management vendor includes all upgrades in your costs and deliver upgrades to all customers at the same time.  Another leading vendor delivers upgrades on a fee basis and gives you a choice as to when you upgrade.  While both options have their merits, the key here is to make sure you understand exactly what the upgrade path looks like and whether the annual subscription fees include all upgrade costs or not and whether an upgrade requires the use of the vendor’s professional services organization (generally at an incremental cost).

3. Begin with the End in Mind – Just like a car lease, SaaS contracts can run anywhere from 1 to 100 months, with the average tending to be 36 months.  At the end of the contract think you need to consider exactly how you proceed – renewal or replacement.  In the event of a replacement, how do you get your data, at what cost, in what format, how quickly will be be provided to you, on what media, etc.  Most customers don’t think about what happens at the end of the contract when you’re soo focused on getting to the new solution.  Taking the time to negotiate this while you have some negotiation leverage is critical.  Once you’ve notified a vendor that you’re leaving them, you’ll find that they tend to be a little less responsive to your requests than when you’re considering doing business with them.

4.  Change in Control – Let’s face it, no matter who you’re buying software from there is a chance that they’ll be acquired.  Whether they are the leader in their space or a small up-and-coming vendor, there is always someone who would like to acquire them.  Seven years ago no one would have predicted that Siebel or PeopleSoft would be acquired, yet now they’re both part of Oracle.  Who’s to say that your vendor of choice isn’t going to end up on someone’s holiday shopping list?  When acquisitions happen by competing vendors, there is a strong likelihood that your vendor’s solution will be sunset (industry jargon for discontinued).  In the event that this happens, the migration to another solution is at YOUR expense.  It’s a great inconvenience for customers, and an unintended expense.  Be sure your contact spells out exactly what your options are in the event of a change in control as well as official decisions to discontinue products that you’ve purchased/rented.

5. Not all SaaS is the same – There are very substantial differences between the technical architecture of a single-tenant SaaS solution and a multi-tenant solution.  The differences between the two significantly impact how and when vendor code updates are pushed to your system.  For example, a certain leading talent management vendor has a multi-tenant SaaS solution which means all of their customers run on a single set of core code.  For you non-propeller heads reading this it means that everyone is running the same software at the same time.  When upgrades are necessary, everyone will get them all at the same time.  This means that you need to be prepared to upgrade on their schedule, not necessarily yours.  Single-tenant gives you more flexibility when it comes to timing of upgrades, but that’s not always a good thing.  To best understand the differences between different SaaS models I would recommend that you check out this great blog post from Jason Corsello.

6.  Implementations need to be on your schedule, not the vendors – Due to complex accounting rules on how and when firms are able to recognize revenue, most vendors will not be able to count the revenue until their software is deployed.  While there are varying schools of thought on how/when to actually record the revenue and when software delivered via SaaS is considered “delivered”, most vendors have an incentive to get you up and running on their solution as fast as possible.  This can create conflict during the negotiations and subsequent implementation

SaaS is not the right option for everyone.  There are plenty of companies that prefer premise-based solutions and have business requirements which all but eliminate SaaS vendors.  For those whom fit the SaaS model, these guidelines should help to to ease concerns and position you for greater success.

Is the secondary offering the “new” IPO?

Ten years ago the technology market was in such a frenzy with Initial Public Offerings (IPO), it seemed like everyone knew someone who was a “dot-com” millionaire (most of whom lost their fortunes as fast as they found them).  At that time I was working for a Big 4 consultancy and we were losing staff by the bus load to companies like Netscape, Yahoo, Webvan, and others.  Companies were being funded by VCs with millions before the ink with which their business plan was written had even dried.  Money was free-flowing and everyone was chasing the big payday – their IPO.

Since 1999 a lot has changed.  a surprising number of those IPOs have fizzled and many MOST of the companies are either a shell of their former self, have merged with others to stay afloat, or simply shut their doors.  Since 2001 the IPO activity in technology has slowed a fair bit, but there still have been some successful offerings.  In the HR Technology space over the last 5 years there have been a few notable IPOs including SuccessFactors and Taleo.  Additionally there is wild anticipation that Workday has an IPO on the horizon as well.  Along with those mentioned before, there have been a others who have gone public, went private, planned to go public but were acquired before their IPO, etc.  In short, the HR Technology space has had its share of public funds flowing into its coffers over the last 1/2 decade.

With the great recession appearing to be easing finally, and the Dow back up over the 10,000 mark for the first time in over a year there appears to be a trend underway.  While IPOs may not be in fashion, the first cousin of the IPO, secondary offerings are all of the sudden vogue.  Last week SuccessFactors raised $215m in a secondary offering and Taleo just announced that it will do the same – to the tune of $145m based on their current stock price as of the open of market today.  Between these two secondary offerings, they will have raised $360m – more than tripling the cash position of each vendor.

In my last post I highlighted the fact that SuccessFactors appears to be preparing to go on an acquisition spree, and now it appears that Taleo is looking to do the same.  While I can’t predict who they are likely to buy, I can tell you that there is a distinct possibility that they’ll try to outbid one another, driving up the price for the eventual winner.  We’ve seen this happen before- ten years ago.

And this is why it feels like a secondary offering is the new IPO

What does your DNA say about you?

Every company has a specific DNA which defines who they are and what makes them successful.  For Oracle, their DNA is wired in such a way that their M&A process includes acquiring anything that they feel is a threat to them in the market, and their sales organization aggressively seeks to win every deal.  For Apple, their genetic makeup is wired around simplicity in design, allowing form to follow function, and creating an such a strong aura around their products that they can command premium pricing for what is typically a commodity (computer, cellphone, etc).

In the HR Technology space, SuccessFactors has a specific DNA as well.  They have experienced a fair degree of success in developing their platform organically and building their staff around the hiring philosophy of “No A-holes”.   What this means is two things; SuccessFactors is less likely to hire someone from Oracle (see above), and they haven’t built out their capabilities through acquisition of other vendors like some of their competition.  As a result of these decisions they have built a successful company full of nice people, and have a technology platform which is largely built upon a single set of standards, has a consistent look and feel throughout the suite, and tightly integrates from one process to another.

Unless they plan on a radical departure from their current hiring process, I anticipate that the no a-holes policy will largely continue as is.  I also anticipate that the second component of their corporate DNA is going to be challenged shortly.  Last week SuccessFactors conducted a secondary offering to the public markets, raising $215m USD by selling 12,000,000 shares at $15.50.  See the news release here.

If any other company in the space raised $215m, I would have thought acquisition from the start, but with SuccessFactors that thought didn’t immediately come to mind because of their corporate DNA.  But, when you consider that SuccessFactors has a VP of Corporate Development (read M&A), and is looking to hire a Director of M&A, it is clear that they’re looking to acquire someone.

Flush with cash, the market is highly speculative over who SuccessFactors might buy.  As one who needs to understand my client’s corporate culture, I am more interested to see how SuccessFactors’ culture reacts to an acquisition.  Will it be warmly welcomed into the family, or will the acquisition have a long-term impact on the genetic make up of SuccessFactors?  We’ll just have to wait and see.

Continued Confusion about Fusion

Last week at Oracle Open World, the annual users conference for Oracle Users, CEO Larry Ellison officially pulled the covers off the Oracle Fusion Applications.  The product was introduced, demonstrated and discussed in a keynote session with the conference attendees.  While this was a highly anticipated announcement, it did little to answer many outstanding questions.

Here’s what we know:

  1. Fusion will be deployed in both a premise-based as well as Software-as-a-Service model, supporting the needs of a diverse group of users
  2. While some limited Fusion applications are already available, the suite will be generally available before the end of 2010 (which according to this article by Bill Kutik means 31-December-2010)
  3. Fusion is being built entirely upon a SOA protocol.  For those who are not technically inclined, SOA stands for Service Oriented Architecture – meaning that it is easier to share data and integrate processes with other web-based applications
  4. The upgrade path for current PeopleSoft customers requires most to make an investment in migrating to the latest PeopleSoft release – 9.1 which was announced last month

Unfortunately the announcement raised more questions than it answered and has left a great number of people confused about how to proceed.

Some questions which remain unanswered are:

  • Is the Fusion HCM Suite complete yet?  Larry Ellison claimed that Fusion is code complete, but no one has seen the full suite functionality.  Check out Jim Holincheck’s blog post on the subject here
  • Will the first release of Fusion HCM fully support the complex needs of the largest PeopleSoft or Oracle EBS customers on day one?
  • Will the transition to Fusion be a cost neutral option compared to an upgrade of the existing PeopleSoft or EBS product line?  Oracle has indicated that licensing will be swapped like-for-like, but what does this really mean to the average customer?

Ultimately, the announcement regarding Oracle Fusion is a real and meaningful message that Oracle is looking to compete with Workday, SuccessFactors, Taleo, and other Best-of-Breed vendors.  While Workday has been able to compete in the “next-generation ERP” space with little relative competition for the past several years, this is all going to change in 2010.  But for now, customers must continue to wait a bit longer – assuming you know what you’re waiting for.