SaaS and Big Software Invades HCM

Many years ago I was a monthly columnist for ASTD's flagship publication T+D, where I primarily wrote about learning and enterprise software. I dreaded that monthly deadline, but typically tried to stir up some debate. The always-too-polite learning industry sorely needed that.

In April of 2003 I wrote what was easily my most controversial column. Titled "Will enterprise software companies take over e-learning?," the column addressed the often-projected theory that large enterprise software companies like Oracle, SAP, Microsoft, IBM, etc. would wake up one day and gobble up all the available market share in the learning technology space. While this was a popular discussion topic, it was one the CEOs of learning technology companies (of which I was one) typically avoided. In other words, it was perfect material for the column.

I took the position that those large software companies weren't going to dominate our industry anytime soon for a variety of reasons. I pointed out all of their weaknesses, their lack of commitment and dismal understanding of this complicated industry… sounding every bit like the overly optimistic CEO I was.

Enthusiastic feedback ensued. The best was an "open letter" to me from Kevin Kruse, then of Kenexa. Kevin has since become a friend, but at the time we were best described as rivals. In his letter, Kevin essentially warned me - and everyone else - that the large software companies entering the market would sound the death knell for our little pure-play companies. As I was running a public company, however, I was constantly assuring shareholders and employees that I didn't see this as an immediate threat.

Kevin was right of course. Well, we both were. His prediction came true, but it took almost a decade to materialize.

Unless you don't care a whit about HR technology, you know by now that SAP has purchased SuccessFactors, Oracle snapped up Taleo and (not quite as dramatically) Salesforce.com consumed Rypple (while stating they would likely be buying more human capital companies in the future). There have also been several other acquisitions by smaller companies. While SAP and Oracle had human capital management (HCM) offerings previously, most agree that these acquisitions represent their first serious foray into the talent side of the industry, beyond "core HR" applications.

While these acquisitions have largely been designed to offer organizations an "end-to-end" suite of integrated talent management applications, there is another element that threads the strategies of these vendors: the movement away from a traditional on-premise, perpetual license software model and toward Software as a Service (SaaS). It was widely reported that SAP's purchase of SuccessFactors was designed to move the company more quickly into "the cloud," and a robust SaaS offering. In fact, SuccessFactors' irrepressible CEO Lars Delgaard was put in charge of this effort.

But, while vendors from small to large rush to offer their solutions via SaaS, they better pay attention to satisfying their customers. Why? Because today, they largely are not. At least that's what HR Technology: The State of SaaS HCM, i4cp's latest research study, concluded.

To be fair, the expectations placed on these vendors are very high; higher than one would normally expect with a relatively new industry and a new delivery mode. While the industry is still quite immature from almost all perspectives - features, functions, integration, delivery methods, etc. - it's maturing quickly. Satisfaction should follow, but our study found that buyers are largely disappointed. For instance:

1. Very few SaaS vendors meet or exceed their customer's expectations (a satisfaction rating of >4.0 on scale of 1 -5).
2. Dissatisfaction was highest in two key areas: robust reporting/analytics and integration tools. The lack of these two important deliverables affects both talent management strategies and organizational effectiveness.
3. The average satisfaction ratings for SaaS HR/TM applications are higher in almost every application category compared to those offered by Enterprise Resource Planning (ERP) vendors (i.e., Oracle, SAP, etc.). This satisfaction doesn't reflect the effects of the recent acquisitions, which should help overall.

This lack of satisfaction hasn't stopped the rush. Vendors such as Workday - founded by Dave Duffield, the founder of PeopleSoft - are enjoying wild growth because they were built as a SaaS application from the ground up. Other vendors - such as Cornerstone, SumTotal and Kenexa - have seen SaaS applications spearhead their growth.

One of the reasons for the interest is lower Total Cost of Ownership (TCO). Recently, SuccessFactors put out the following chart to illustrate why SaaS has a lower TCO than on-premise applications:

Source: SuccessFactors, an SAP company

While this is a pretty straightforward comparison, one issue with models like this is factoring in the realities that large companies wrestle with every day. I asked a few of our HR Technology Exchange members to comment on this chart. While they agree with the general premise, they also felt several important aspects were left out.

"They should have used more seats (maybe 50,000) in order to make a less biased comparison," observed JC Gahamanyi at FedEx Gound. "With more seats, the TCO for on-premise solutions would grow at a much slower rate because there are economies of scale that that must be considered. The decision, at least for large corporations, is not as clear cut as this illustration may suggest."

Jim Gotlieb at AIG agreed. "JC's point is very important, because with larger numbers of employees, the important non-cost elements in the decision come into play. Also, I can't tell whether the on-premise costs assume capitalization or not. In addition, the example understates the implementation and upgrade costs for both on-premise and SaaS. This serves to make the business case for SaaS stronger, but by minimizing the SaaS costs it makes the example less credible."

"Implementation costs look light," added Alan Maxwell at Lockheed Martin. "In particular, for those of us who are bolting on a SaaS app to a legacy core HCM system, there are significant implementation and integration costs."

Oracle and SAP well know that large organizations are complex and demanding. The recent acquisitions are ultimately good for the industry's progress because, as the talent management industry matures, these large players are in a better position to deal with these issues of scale than smaller vendors. They are also in a better position to handle global implementations, something our HR Technology Exchange flagged as a failing of the pure-play talent management companies.

While predictions are obviously precarious, it's easy to see that we're still in the early days of HCM technology. It's not overly optimistic to say satisfaction will improve, as will understanding around the benefits of SaaS vs. other delivery options. Until that time, we're in a buyer beware scenario. Our study suggests there are several basic tenants to follow for buyers of human capital software moving forward, including:

1. Buyers of SaaS applications owned by larger vendors should get visibility to the long-term development and integration plans of the vendor prior to signing a contract. This is true whether buying from an ERP player or a larger talent management aggregator. There have been many promises made with certain acquisitions, and several trade-offs in applications have been insinuated.
2. Buyers should also have a detailed service level agreement that allows an organization some compensation for lack of performance.
3. Adopt a pay-as-you-go model with vendors, regardless of the delivery platform.

In the "open letter" mentioned above, Kevin wrote something very prescient: he said, "The good news is that interest shown by enterprise software companies clearly legitimizes what we're trying to do." Amidst all the current confusion in the field, the good news is that human capital management has entered the realm of "mission critical" in many companies. Over the next few years we will experience integration and growing pains for sure, but the time has finally arrived for human capital to be viewed as equally important as any other capital an organization manages.