The battle lines were to be drawn by Oracle rolling out its next generation Fusion applications, while Software-as-a-Service specialist Workday continued its attempts to steal away customers with ageing PeopleSoft systems from under Oracle’s nose.
 
But last week, the stakes were upped significantly and the battle for the hearts, minds and wallets of HR directors everywhere took another turn when German software giant SAP swooped on SaaS-based HCM and talent management supplier SuccessFactors in a $3.4 billion takeover bid that changes…well, everything.
 
HCM applications have been installed in HR departments for a long time now, with PeopleSoft being the dominant provider. But the vendor was taken over by Oracle way back in 2005 and, although SAP has made some inroads with its own HCM offering since then, the market has remained relatively stable.
 
What has started to change the status quo somewhat, however, is cloud computing. Cloud in the form of SaaS – whereby organisations access functionality over the internet and pay for it as they need it rather than forking out for a software licence upfront – has already revolutionised the customer relationship management market. And now it appears to be HR’s turn.

 

Workday and SuccessFactors, which both use a SaaS delivery model, have along with Taleo been posing some serious challenges to the HCM software old guard, which comprises Oracle and SAP. Workday is essentially controlled by the old PeopleSoft management team reborn and, as such, started life by targeting names in its old contact book.

 

Two years ago, meanwhile, SuccessFactors stunned the market by stealing SAP’s global HCM contract with Siemens out from under its nose.
 
But both Oracle and SAP have now entered the SaaS sector themselves and this week’s bid by SAP for SuccessFactors makes it plain that HRDs are going to hear a lot about cloud computing and HCM over the coming months.

 

 

But is this a good thing and are cloud systems any more likely than on premise offerings to provide HRDs with systems that they’d actually want to use? Moreover, which vendor horse should they be backing in what is likely to become a vicious marketing battle?
 
Ray Wang, founder of Constellation Research, believes that the rationale behind SAP’s bid is clear. “SAP believes the combination of SuccessFactors and SAP will create a comprehensive HCM solution, marrying strength in enterprise applications with people-focused cloud applications,” he notes. “SAP has 15,000 HCM deployments (not customers) that could benefit from one-stop shopping.”

Nonetheless, it was important that the vendor did something to freshen up its portfolio, Wang observes.

 

“Many customers left SAP to go to SuccessFactors to accelerate innovation in the talent space. The rise of Taleo, Workday, and Ultimate Software comes from the lack of general innovation in the HCM space by legacy vendors such as Oracle, PeopleSoft, and SAP,” he explains.

 

But notes Angela Eager of IT research firm TechMarketView, simply purchasing SuccessFactors and adding it to its portfolio won’t be enough in itself to guarantee SAP success.

 

“There’s a big difference between acquiring assets and making a success of them. But the acquisition will boost its SaaS credentials and bring some much needed expertise in how to run a cloud services business,” she observes.
 
While the acquisition will boost SAP’s SaaS portfolio, it “does call the future of SAP’s own planned SaaS HR products into question”, however, Eager adds.

Thomas Otter, vice president at rival research firm Gartner, is somewhat more upbeat. “The acquisition of SuccessFactors will give SAP a leading talent management suite. This addition will also help SAP defend its venerable core human resource management system product and create significant cross-selling opportunities,” he says.
 
But Otter also notes the acquisition’s premium price tag, pointing out that “$3.4 billion is more than 10 times SuccessFactors’ annual revenue and is a steep price to fill a niche in SAP’s human capital management portfolio”. This is not least because the total revenue generated by the talent management market during 2011 was roughly $3.5 billion.
 

 

But Otter does agree with Eager that SAP now has to make some decisions about what its HCM strategy will look like. “SAP will need to be decisive with product rationalisation as it now has at least five competing HCM architectures,” he says.

 

In terms of talent management applications, the roadmap is expected to focus on SuccessFactors. But dealing with the core HRMS will be more “challenging”, Otter believes.

 

“SAP has a strong, but aging, core HRMS offering, and SuccessFactors Employee Central is still evolving. What SAP chooses to do here will be key as it competes with HCM SaaS vendors such as Workday and Ultimate Software as well as with Oracle Fusion HCM,” he explains.
 
Ultimately, however, Otter’s advice to customers and prospects is simple: “Lock in terms and conditions now as SAP tends to raise prices post-acquisition. Expect some turbulence in the 2012 road map as politics delay decision-making. Don’t commit to Employee Central until you see a clear road map commitment from SAP,” he warns.

For talent management customers, meanwhile, the message seems to be ‘look before you leap’. “Do not expect significant enhancements in ERP talent management functionality beyond SAP ERP HCM 6.0 Enhancement Pack. Assess SuccessFactors on your timescale. Just because SAP plans to buy SuccessFactors, that doesn’t mean you have to,” Otter cautions.
 
But he believes that there may also be some limited short-term disruption for existing SAP HCM software users. “It will take time to work out whether Employee Central will be a long-term replacement for core HRMS. But there are viable alternatives for both core HRMS and talent management options available from other vendors,” Otter notes.”
 
Thus, the overall analyst message appears simple enough: the HCM applications market is bracing itself for a long-overdue shake-up and HRDs are likely to be inundated by vendors keen to win them over to their respective causes.

 

This means, on the one hand, that it should be a good time to get a bargain. But it also means, on the other, that, now as much as ever, it will definitely be a case of ‘buyer beware’.