Software vendors that specialise in human capital management (HCM) are getting a lot more calls these days – and not just from potential customers. Big software companies and private equity firms are scouring the HCM sector for acquisition targets, attracted by above-average growth prospects for the sector.
Using software to automate administrative HR tasks, such as payroll is hardly new. So it might seem strange that there is now so much interest in this area.
One explanation is that the HCM market, unlike other business software markets, is far from mature as there is still a surprisingly large number of businesses that do use spreadsheets or even paper processes to run their HR.
But the real excitement today is generated by a new breed of ”strategic” HCM applications that expands beyond core HR into areas like performance management and talent acquisition – the new name for recruitment.
”A lot of people perceive HCM to be simply about paying employees and in some markets interest in HCM is still very much payroll-driven,” says Sean Harman, Director of HCM Marketing at Oracle. ”But HR is increasingly seen as a strategic function and we are starting to see board-level appointments of HR directors.”
Christa Degnan Manning, research director at AMR Research gives the example of large retail chains, which are often plagued by high staff turnover and poor customer service. She says a ”fully joined-up” HCM system would allow retailers to hire the right people, cut the amount of time needed to train new employees, optimise workforce scheduling and generate metrics that store managers can use to define priorities and employee incentives.
Traditional HCM packages struggle to cover all these areas well. So, businesses turn to smaller specialist providers that have developed expertise in strategic HCM functions such as talent acquisition, workforce management, workforce development and performance management.
This new breed of strategic HCM vendors includes Taleo which specialises in talent acquisition, Authoria and SuccessFactors, which focuses on both performance management and talent acquisition, and Ultimate Software which provides core HR plus strategic HCM products.
These may not be familiar names to IT managers but they are well known to many HR directors. Indeed, HR departments will increasingly fund new ”strategic” HCM initiatives out of their own line-of-business budgets rather than having to compete for resources and funds from the organisation’s main IT budget.
This trend is made easier by the growing number of software-as-a-service (SaaS) offerings for HCM. Instead of having to wait for the IT department to install and support a new software package, SaaS allow HR departments to bypass the IT department and access strategic HCM functions like talent management over the internet in return for a monthly fee.
”More and more HR applications, especially from younger best-of-breed firms, are being delivered as hosted subscription services, which are easier for HR people to buy and deploy than larger enterprise license sales,” says Ms Manning.
SaaS is gradually taking hold in the broader software market but uptake in the HCM sector has been much faster and it is one reason why smaller HCM vendors have been so successful.
SuccessFactors has signed one of the biggest SaaS HCM contracts with Wachovia Bank. Over 85,000 employees are actively using its performance and talent management software and the number will grow to 100,000 next year.
Not surprisingly, the large enterprise software vendors look enviously at the success being achieved by the smaller specialist HCM vendors.
While the likes of SAP and Oracle have long offered HCM software, analysts say their HCM products are sold within a broader suite of enterprise software and HCM has not traditionally been seen as a priority for investment.
”The HCM offerings of Oracle and SAP are not as well developed because their resources have to be spread across different product lines,” says Ms Manning.
Not surprisingly, Oracle refutes the claim. ”HR is very strategic for Oracle,” says Mr Harman, who argues that only a big vendor like Oracle can support multinationals that want to standardise on a single HCM offering around the globe.
One of the major challenges for HCM vendors is keeping their products up to date with fast-changing legislation and the more countries you support, the bigger the headaches.
Oracle is now the largest HCM vendor having jumped ahead of arch-rival SAP through its acquisition of PeopleSoft in 2004. The latter’s HCM software enjoys a particularly loyal following, although Oracle continues to also offer its own HCM product.
The third largest HCM vendor is Kronos which, unlike Oracle and SAP, only sells HCM software. Kronos, specialises in workforce management and it still gets a small but steady revenue from maintaining time clocks. It has expanded over the years, most notably with last year’s $150m acquisition of Unicru, a small vendor of talent management software.
In March, Kronos was bought by a US private equity firm in a deal worth about $1.8bn. According to Ms Manning, the deal reveals how the stakes are rising in the HCM industry. Other quoted vendors that need to invest heavily to expand or modernise their offerings may choose a similar route. By going private, Kronos can increase R&D spending without the worry about how it will impact quarterly earnings, she says.
An alternative solution for cash-strapped HCM vendors is to be acquired by a software house with deep pockets. Canada’s Workbrain, a competitor to Kronos in workforce management, has just agreed to be acquired by Infor, an enterprise software vendor that has grown rapidly through acquisitions.
Infor, which is also owned by private equity, has more than 70,000 customers globally and while it already owns some HR and talent management applications, HCM has not traditionally been seen as an Infor strength.
That perception will change following the Workbrain acquisition, according to Bruce Gordon, Infor’s chief technology officer, who says the deal will make Infor the fourth or fifth largest HCM vendor.
As well as continuing to sell Workbrain software as a standalone offering, Infor plans to integrate the technology into its own software products. ”We could embed Workbrain’s workforce management into our warehouse management software, where there is a real need for tighter integration as legislation is becoming more stringent,” he says.
Analysts see more acquisitions in the HCM sector as other software houses seek to emulate Infor in integrating strategic HCM functions into their core product range. So, no matter how often the smaller vendors repeat their desire for independence, it is only a matter of time before they are made an offer they cannot refuse.
