SAP and SuccessFactors Acquisition Q&A

This Saturday SAP announced its $3.4B acquisition of SuccessFactors and even though in the recent months they had dropped some hints they were looking to make an acquisition very few had SuccessFactors being the likely candidate.  I would expect a lot more information and clarity to come out in the coming months but thought I would take a first stab at some important questions and  answers.

1.       Tell me some information about SuccessFactors

SuccessFactors was founded in 2001 and is a leading SaaS performance, compensation, learning, and talent management vendor based in San Mateo, California with 1450 employees. They have over 15 million subscription users from 3,500 customers across 168 countries. SuccessFactors is growing rapidly, recording 77 percent revenue growth year-over-year in the third quarter 2011 and is predicted to have $502 million in revenue in 2013, up from $332 million this year. Their customer list boasts some very large companies such as Hilton, Siemens AG, Comcast, Advanced Micro Devices, and Wal-Mart.

2.       Why did SAP acquire SuccessFactors?

SAP’s cloud strategy has been very slow to come to market, losing several key executives along the way, and its core on-premise performance management, succession management and learning management have struggled against best of breed vendors such as SuccessFactors, Cornerstone OnDemand and Taleo. I believe that SAP came to the realization that they were not going to able build out their OnDemand LOB talent applications quick enough to capture a meaningfully share of the growing SaaS/cloud market.

I also feel this was a defensive move to protect the SAP HCM On-Premise base and better compete for new customers with Workday who has become an extremely strong competitor in the HCM space. Earlier this year I wrote an article call  Why Workday is a Major Threat to SAP and this acquisitions tells me the SAP senior management were well aware of the threat.

3.       Is the combination of SuccessFactors and SAP now a cloud powerhouse as mentioned by Bill McDermott?

This acquisition will give SAP some great new cloud leadership and experience as well as confirms they are serious about the cloud but being a “cloud powerhouse” is still a long ways away. One of the reasons is SuccessFactors does not offer a full HCM solution as they are very strong in performance, compensation, learning, and talent management but have core HR system called Employee Central which has limited adoption and nothing in the area of Payroll or Benefits. Per Naomi Bloom an HR industry thought leader “Employee Central IMO isn’t built on a robust enough object model/architecture to be the next generation for the on premise/larger market folks”.

Realistically SAP would need to develop new offerings for the HR Core, Benefits and Payroll before you could consider SuccessFactors having a full SaaS based HCM suite. My guess is that SAP will use their on-premise HR/Payroll solution to be the core for the interim but longer term my hope is they continue to build out their SaaS product offering and turn it into a complete standalone HCM suite.

4.       Did SAP overpay for SuccessFactors?

SAP paid a substantial premium of 52 percent to acquire SuccessFactors which compares to a premium of 56 percent for Sybase and 20 percent for Business Objects. Some good insight from Gartner analyst Thomas Otter “The talent management market will probably be worth about $3.5 billion this year,” Otter said. “SAP has essentially spent what the whole market will be worth this year in one swoop. It is a lot to pay for a niche in their portfolio, but human resources technology is a hot space.”

Forrester Research analyst Paul Hammerman wrote a very good article called SAP’s Acquisition Re –Engergizes its HCM and SaaS Strategy that provides some great insight on the cost SAP paid  but like any acquisition it is better to have this discussion 3-4 years down the road.  .

5.       Is there a lot of overlap between SuccessFactors and SAP Customers?

According to the call I attended on Saturday there is only a small overlap as only 14% of SuccessFactors customer currently use SAP. This is a great opportunity for SAP to cross-sell to their roughly 13,000 HCM customers that might embrace an integrated more robust product offering from a single vendor. That said you also have to keep in mind that many large PeopleSoft or Oracle customers who are currently using SuccessFactors or Plateau will think twice about their investment given the SuccessFactors will be under the SAP umbrella.

6.       Is there a lot of overlap between SuccessFactors and SAP product offerings?

In the press release SAP said “SuccessFactors’ solutions are highly complementary to SAP’s core HCM offerings as well as SAP’s strong cloud assets” but this is not exactly true. SAP has invested heavily over the last 8-10 years increasing the functionality in their on-premise offerings around LSO, Performance Management, Enterprise Compensation Management and partnering with Nakisa for Talent Management. There is also some overlap with Strategic Workforce Planning and the Inform product line and Streamworks with the CubeTree offering

In the SaaS space SAP has spent a lot of time and effort on Career OnDemand which was target to be released in May 2012 and had several other HCM LOB apps on the roadmap. SAP has also built HR functionality within Business ByDesign with some slight overlaps to Professional and Express Edition of SuccesFactors

SAP is going to have to quickly make a lot of important decisions on which products they move forward with. My guess is that SAP will initially focus on the integration between Core HCM OnPremise and SuccessFactors which is extremely important and not add much new functionality to the on-premise offerings that overlap with SuccessFactors as well as eventually end their partnership with Nakisa.

7.       Do you expect SAP to release Career OnDemand and continue to build other LOB OnDemand HCM apps?

All signs are pointing towards Career OnDemand not being launched as it was telling that Jim Hagemann Snabe specifically mentioned all the other OnDemand solutions but Career OnDemand on the recent analyst call. SAP already offers two on-premise performance management solutions (Flexible/Pre-Defined) and having two in the SaaS space (Career OnDemand/SuccessFactors) would be too confusing for SAP to market to customers. I have a lot of respect for the individuals on the Career OnDemand team and they generally seem excited as they see SAP’s commitment to the cloud, they should have key roles in the new organization, and the most important is that their 12 months of working with customers will given them the opportunity to infuse SuccessFactors with all the learning’s to help execute better, faster and smarter moving forward.

8.       How will the SAP HCM Portfolio look after the acquisition?

Ray Wang wrote a strong article called SAP Buys SuccessFactors for $3.4B Signals SAP’s Commitment To Cloud, HCM, and Social and in it noted

“SAP will have five different software architectures from ByD, Career OnDemand, Plateau, and Business Suite 7.  Without harmonizing the architectures, SAP will inherit a technical deficit.  Lars first task must be how to integrate such a cacophony of technologies including how to fit Sybase Mobile onto the SuccessFactors architecture.  The Streamworks team will also face challenges with integrating the social business assets of CubeTree which include wikis, blogs, polls, file sharing, link sharing, search, and other consumer tech features.”

I think we can all agree that five different human resource management architectures is probably 3-4 to many and it is important to understand thetechnical debt of these as well. Naomi Bloom has a very good article called SAP/SuccessFactors – Help Me Count The HRM Codebases which I would recommend you read to get a deeper understanding of the combined offering.

9.       Does the SuccessFactors purchase indicate that SAP’s will stop developing Business ByDesign?

I would be extremely surprised as HCM functionality only makes up a small portion of the overall ByD solution.  It was pretty clear from Jim Hagemann Snabe, on the recent call that ByDesign would be their integrated SaaS solution for the SME market but my guess is that everything will be open for discussion.

10.    Is there “Seamless” Integration between SAP and SuccessFactors?

Given that there is a 14% overlap with customers some have assumed that SAP and SuccessFactors already works well together and on the investor calls there was talk about “seamless” integration. Unfortunately this is not the case and SAP has a huge work effort in front of it to integrate SAP and SuccessFactor. Jon Reed provided some very good insight in a G+ post called Quick thoughts on SAP’s acquisition of SuccessFactors on some of the integration areas:

1. Integration with on-premise solutions – SuccessFactors has a history of integrating with SAP ERP on-premise so that’s the easiest going forward.
2. Integrating HR/HCM functionality and assets across the board – probably the biggest challenge with SuccessFactors remaining an independently-run unit.
3. Integrating with SAP’s existing on-demand architecture for development purposes may not be as imposing as it sounds. As Vishal Sikka noted on the call today, SuccessFactors is a Java-based platform, in theory this may fit into SAP’s Java-based “Edge on Demand” architecture often referred to as NetWeaver Neo/River (no official name as yet).

The bottom Line is this is probably the most important area and something I would expect SAP to start working on Day 1 as customers will rightful expect to be buying a fully integrated solution.

11.    Could SAP use Gateway to help integrate SAP and SuccessFactors?

This would make a lot of sense and it is a topic that Dennis Howlett mention in his recent article SAP acquires SuccessFactors.

“SAP has many technology platforms but will find ways of bringing them together where it makes sense. It is conceivable that SAP will now promote its Gateway technology as a way of hiding the inevitable complexity that will come as a result of different interfaces and technologies. I can for example well imagine Gateway as a method by which SuccessFactors existing integrations to things like Google/Salesforce.com from its CubeTree acquisition being used to push forward a slew of mobile applications.”

12.    Who will lead the cloud division at SAP?

SAP announced that SuccessFactors CEO Lars Dalgaard will become the EVP of cloud at SAP and join the Executive Board of Directors which is good news as he is well respected and has done a great job building SuccessFactors.  Dennis Howlett had an interesting observation

“The development teams in SAP’s Walldorf operation wield considerable power and have already managed to account for the departure of one high profile cloud executive. The addition of SuccessFactors does not bring with it enough revenue clout for their management to have the impact one might imagine. On the flipside, SAP co-CEO Jim Snabe and SuccessFactors CEO Lars Dalgaard share a common heritage in that both are Danish. That makes Snabe and Dalgaard natural allies at a time when Snabe is being widely credited for repairing the damage wrought by past management”

The differences in culture is an area that concerns me but I believe that given the size of the investment, importance the leadership team, and the knowledge SuccessFactors brings to the table that SAP will give them the necessary room to operate.

13.    What is Lars Dalgaard “No Jerks” Policy?

Lars has a “No Jerks” policy at SuccessFactors which was outlined in this interesting article called How Dad’s Yelling Can Spawn an Office Tyrant. Let hope SAP doesn’t have any jerks or this could get interesting

14.    Will SuccessFactors become part of SAP?

It was announced that SuccessFactors will continue to operate as an independent entity called “SuccessFactors, an SAP company” which I believe is a very smart move.  Dennis Howlett had an interesting observation

“it is interesting to see that SAP Americas is the vehicle through which SuccessFactors is being acquired. SAP’s financial structure has a direct impact on how the business is run and where the power lays. For too long, restrictive German trading and labor laws have prevented what would be easy when operating under US governance. If SAP is able to take advantage of this acquisition method, I can see a lot of developer gripes evaporating. We will have to wait and see how this shakes out but my initial take is net positive”

The bottom line is given SAP’s long history of on-premise software and dependence on maintenance revenue having a separate cloud division is a very good thing.

15.    Is this news good for SAP Customers?

 On the surface this is good news for SAP customers but it will be important they have a clear understanding of the product SAP roadmap and licensing structure of all new offerings. Yvette Cameron provided some solid insights for SAP customers in her article called HCM Powerhouse SuccessFactors to be Acquired by SAP

1. SAP HR/Payroll customers who have not deployed SAP Talent Management modules may want to consider the SuccessFactors suite for solution competitiveness as well as the long-term benefits of single-vendor support
2. SAP customers who have deployed SAP talent and/or learning management modules will want to seek clarification on roadmap investments in that product line and continue to monitor the integration plans between the SAP and SuccessFactors solutions.

The bottom line is SAP must be flawless in their communication as customers have complained they were already confused by SAP’s cloud offerings and roadmaps and things are about to become even more complex. My recommendation would be for customers to wait until they get firm commitment on the direction SAP is headed before they start any new projects in the many areas where there is overlap between SAP and SuccessFactors.

16. Is SAP and Enterprise Software boring?

This all started when TechCrunch posted the article SAP Will Buy SuccessFactors For $3.4 Billion and in it claimed

“I think this means that it provides enterprise software for human resources, but you can never be too sure with these incredibly dull companies. I am too bored to Google it. In fact, I am literally bored to tears writing this, like I am seriously crying here in my local coffee shop”

SAP Mentor John Appleby jumped in with a great article called Why TechCrunch is boring, SAP is not, and the world has gone mad and set the record straight that SAP is anything but boring. He followed it up with a deeper article callled Why does the tech community hate Enterprise IT?

17.    What are the industy analysts and thought leaders saying about acquisition?

There has been a lot written about the SAP and SuccessFactors merger and enclosed is a sampling:

Gartner - SAP to Buy Into Software as a Service with SuccessFactors Deal

IDC - SAP Acquires SuccessFactors for 3.4 Billion

Forrester - SAP’s Acquisition Of SuccessFactors Re-engergizes Its HCM And SaaS Strategy

Bersin & Associates - SAP To Buy SuccessFactors: Major Shift In Talent Management Market

Ventana Research - SAP Spends Big on SuccessFactors for Cloud Computing and Talent Management

Dennis Howlett - SAP acquires SuccessFactors: a first take

Ray Wang - SAP Buys SuccessFactors for $3.4B Signals SAP’s Commitment To Cloud, HCM, and Social

Naomi Bloom - SAP/SuccessFactors — Help Me Count The HRM Codebases

Joshua Greenbaum - SAP’s M&A Strategy: the Key to a Successful SuccessFactors Acquisition

Jon Reed - Quick thoughts on SAP’s acquisition of SuccessFactors

Mark Ingram - The SuccessFactors Acquisition

Courtney Bjorlin - SAP-SuccessFactors: Good News, But Integration, Roadmap Concerns Remain

Phil Wainewright - Can it be third time lucky for SAP?

Phil Fersht - SAP + SuccessFactors = Great for SAP, but could restrict growth potential for the HR services industry

Holger Kisker - SAP Acquires SuccessFactors – A Look At The Deal

Luke Marson - SAP and SuccessFactors – what does the future hold for Nakisa?

Oliver Marks - Buying into the cloud while supporting the past

Richard Hirsch - Unwrapping SuccessFactors’ Cloud Architecture – An unconventional treasure hunt 

Richard Hirsh - Scenarios for the Merged Cloud Architectures of SAP and SuccessFactors

Bill Kutik –  New Words on SAP, SuccessFactors!?

Conclusion

The merging of SAP who has the largest share of the global payroll and HR solutions market and SuccessFactors known as the top talent management suite is very exciting. SAP has committed to providing a clear roadmap in the months that follow the close of the merger and I would expect we will be hearing alot about it at the upcoming 2012 Sapphire in Orlando. The fact that SAP has spent 3.4 billion dollars tells you how serious they are about the cloud and shortly the real work will begin for the two executive teams to quickly make decsions without slowing down inovation.