An HR Software Revolution

July 24, 2008

SuccessFactors chief executive Lars Dalgaard is fast becoming a tech-world celebrity.

    If Bill Gates, Larry Ellison and Steve Jobs make up the industry’s old guard of big personalities, the new class of larger-than-life leaders includes Marc Benioff of and Dalgaard.

    He sits atop one of the fastest-growing firms in one of the fastest-growing corners of the software industry—the talent management market. Dalgaard pulled off an initial public stock offering last year that raised $124 million. And the 40-year-old native of Denmark has matched these financial feats with an audacious leadership style befitting a descendant of Vikings.

    His company has butted heads with established software players, including Dalgaard caught the attention of the HR software industry by inviting business icon Jack Welch to SuccessFactors’ annual conference last year and laying claim to Welch’s legacy of performance management leadership. Dalgaard also can imagine his software supplanting the basic personnel management systems now typically provided by larger vendors such as Oracle and SAP.

    But Dalgaard is thinking bigger picture. Beyond toppling the titans of HR software, SuccessFactors aims to improve worldwide productivity by 50 percent even as it helps make employees happier.

    SuccessFactors is about more than a product, Dalgaard told attendees at this year’s annual conference in San Francisco in June. "This is a revolution," he said. "Let’s go and make this a very different world to work in."

    But it remains to be seen whether Dalgaard and his grand vision for SuccessFactors will translate into a sustainable business.

    The company is locked in litigation with rival talent management software vendor Softscape, a tussle that may be hurting SuccessFactors. Overall, the competitive terrain in talent management is tricky, given that it includes both niche players and business software giants Oracle and SAP. And amid massive spending on marketing and sales, SuccessFactors continues to lose money.

    What’s more, CEO bombast can backfire. If the vision seems unattainable, credibility can suffer, says Jim Holincheck, an analyst with research firm Gartner.

    "People will start taking you a little less seriously," he says.

Starting up didn’t come easy
    When Dalgaard founded SuccessFactors in 2001, he was used to not being taken seriously. A Danish transplant drawn to the American spirit of doing the impossible, Dalgaard gave up a top executive post at consumer products giant Unilever to start his own firm. He was rejected more than 70 times by investors who doubted his vision of providing performance management software via the Web as a service.

    "When I started this company, people literally thought I was a complete idiot," he says.

    But David Strohm, a partner with Silicon Valley venture capital firm Greylock Partners, helped get Dalgaard’s company off the ground with a $1 million investment. Later, Greylock put more money into SuccessFactors, as did other investors including TPG Ventures (now TPG Growth, of Fort Worth, Texas).

    SuccessFactors now sells a variety of applications, including tools for employee performance management, compensation management and recruiting. These applications are among those typically referred to as talent management software. Vendors like SuccessFactors tend to pitch their wares as integrated "suites" of software, which can allow organizations to gain greater insight into their workforce and reduce the complexity of their software systems.

    Thanks partly to fears about the retirement of many baby boomers, HR software has become one of the fastest-growing segments of business software, with talent management tools generating particularly strong sales. Research firm Bersin & Associates estimates spending on talent management software will rise 20 percent in 2008 to $2.3 billion.

    SuccessFactors has been growing quicker still. For the quarter that ended in March, the company’s revenue hit $23.5 million, up 89 percent from the same period last year. Its revenue for 2007 jumped 95 percent, to $63.4 million.

    On the other hand, SuccessFactors’ net loss more than doubled last year, from $32 million in 2006 to $75 million in 2007. For the quarter ended March 31, SuccessFactors posted a loss of $19.3 million. Company losses stem largely from investments in sales in marketing. Dalgaard and crew recorded sales and marketing operating expenses of $71 million in 2007, up from $32 million in 2006. Jason Corsello, an executive with consulting firm Knowledge Infusion, has described SuccessFactors’ strategy as a "cold war" approach to the market, "focused on outspending the competition."

    To go with the big spending is a big vision. While other vendors often limit their rhetoric to just saying that they help clients improve the bottom line, Dalgaard talks about improving the world.

    "We will increase worldwide productivity by 50 percent and help change the world by making it a more accountable and a more meritocratic place to work, where promotion and pay is based on performance, not politics," reads one of Dalgaard’s founding principles from 2001.

No question who is the face of SuccessFactors
    The number of SuccessFactors employees nearly doubled from 2006 to 2007, to 736. Headcount dipped to 694 at the end of the first quarter of 2008, but the company says it is "aggressively hiring."

    Although his organization espouses an egalitarian philosophy, Dalgaard clearly comes across as the face of the firm. His central role was captured in the tagline of the conference last year that featured Jack Welch: "Jack pioneered it, Lars advanced it, SuccessFactors delivers it."

    Gartner’s Holincheck sees similarities between Dalgaard and Benioff, who founded customer relationship management software firm in 1999 and has made a splash by delivering applications over the Web. Benioff’s "No software" motto helped popularize the break from the traditional approach of installing applications on customer computers, which typically involves higher upfront costs and significant maintenance and upgrade burdens.

    Both Benioff and Dalgaard have big egos and strong convictions, Holincheck says. "They use big, outrageous goals to galvanize the troops," he says.

    The military analogy is fitting, because Benioff and Dalgaard have battled each other. As Dalgaard tells the story, last year became upset when SuccessFactors hired away "a lot" of people from Benioff’s company then warned SuccessFactors to stop the poaching, threatening to cut off its customer relationship management service.

    "To me, that’s blackmail," Dalgaard says.

    In response, Dalgaard switched to software from Oracle.

    A representative from declined to comment on the matter.

    The spat isn’t the only time Dalgaard and his firm have scuffled with others in the software industry.

    Last year,, which provides software for managing pay and performance, sued a former employee who joined SuccessFactors. The suit claims the person violated noncompetition obligations by accepting employment with Dalgaard’s company.

    SuccessFactors says it considers the lawsuit "to be without merit."

    In addition, for several years now SuccessFactors has been wrangling with rival Softscape in a series of lawsuits.

    In the legal arena, SuccessFactors scored a win this year. A judge issued a preliminary injunction that bars Softscape from disseminating or "affirming the purported truth or accuracy of" a PowerPoint presentation critical of SuccessFactors.

    But it’s not clear the litigation is helping SuccessFactors in the marketplace. Daniel Miller, vice president of HR systems and technology at SuccessFactors customer Dow Jones & Co., says legal disputes among vendors don’t do customers any good.

    "Nobody wants to be around that drama," he says.

    On the other hand, customers like to influence their vendors. And SuccessFactors works hard to solicit customer opinions. It has set up multiple ways for clients to propose ideas for the software, including a customer community Web site.

    Miller, who attended SuccessFactors’ conference in San Francisco in June, says SuccessFactors does a great job with customer outreach. But, he says, the company doesn’t respond to suggestions at the same rate it asks for them. Dow Jones & Co., a unit of media giant News Corp., has been waiting a year for a change that will give it greater control over permissions—the rules defining who can see and do what in the software. That upgrade is due in August.

    "They’ve whipped us into this frenzy of ‘feedback, feedback, feedback,’ " Miller says. As a result, he argues, SuccessFactors now has customers with very high expectations. "The danger for them is, they’ve got a client base that wants instant gratification and is never satisfied."

Facing competition and pressure
    Pressure to respond to the wishes of a growing number of customers—more than 1,950 at last count—is one of many challenges facing Dalgaard and SuccessFactors. The company also confronts stiff and uncertain competition.

    The trend to outsource some or all human resource functions potentially threatens SuccessFactors and other software vendors. A host of talent management software specialists including Taleo, Kenexa and Saba are vying with SuccessFactors for deals. Workday and Lawson recently built new on-demand HR software with talent management capabilities. And big guns Oracle and SAP continue to improve their talent management offerings.

    There’s been speculation that the bigger business software vendors eventually will develop a "good enough" integrated set of talent management tools to snuff out specialists like SuccessFactors. Part of this argument concerns the way many companies rely on a human resources management system—the "system of record" containing basic data such as employee name, title and salary—from Oracle or SAP. Today’s talent management tools typically require data to be swapped with those core HR systems.

    Dalgaard says traditional core HR systems have become obsolete. "HRMS is dead," he says.

    Dalgaard’s alternative centers on SuccessFactors’ Employee Profile software, which creates a Web page for each employee containing a variety of data, including skills and performance ratings. Dalgaard calls this application "Facebook for the enterprise," and, among other things, it allows employees to contribute to and update their profiles. According to Dalgaard, customers are seeing this more interactive approach to employee data as a substitute for traditional core HR systems.

    "Our customers are saying the employees use it more, which was the major issue with the HRMS systems," Dalgaard says. "Nobody was using it."

    Another concern is the firm’s finances.

    SuccessFactors highlighted improved cash flow during the most recent quarter, noting that it used $4 million of cash for operating activities, down from $12.3 million in the last quarter of 2007. But Gartner’s Holincheck says the company hasn’t achieved a sound cost structure. "There is still risk there about viability," he says.

    Dalgaard says the company "can be profitable tomorrow" if it wanted. "SuccessFactors has chosen to continue investment as long as the opportunity is rewarding," he says.

    Dalgaard’s strategy of spending heavily to gain customers amounts to a big bet. And Wall Street appears to view the gamble warily. SuccessFactors shares fell 15.2 percent between their November 20 debut and June 20, while the broad S&P 500 index slipped just 8.5 percent.

    Thanks to its IPO success, SuccessFactors has some breathing room. The company had nearly $69 million in cash and cash equivalents as of March 31. And it expects to take in more than $100 million in revenue this year.

A ‘leader’ in its field
    SuccessFactors conceded in a statement that its goal to lift worldwide productivity by 50 percent is "more of an esoteric, rather than pragmatic goal that can be measured absolutely." The company said it doesn’t have metrics to track clients’ productivity, but instead considers "our customer's financial performance to be the ultimate measure of productivity." SuccessFactors points to a study by research firm Saugatuck Technology finding that the vendor’s customers appear to achieve, on average, 2 percent higher annual revenue growth within three years of deployment compared with the norm for their industry.

    SuccessFactors did not pay to commission the study, but paid to have its logo branded on the report and for distribution rights.

    Although Holincheck warns against unrealistic goals, he says SuccessFactors has a good track record with its actual products. He gave the company a "positive" rating last year in his report on software for performance management, compensation and succession management. No vendor surpassed SuccessFactors, but 13 others received the same positive rating.

    SuccessFactors got a more glowing report from Forrester Research last year. The study of 10 integrated performance and compensation management products ranked SuccessFactors as one of just four "leaders," along with Plateau Systems, Softscape and Authoria.

    SuccessFactors customer Gen-Probe also gives Dalgaard and crew high marks. In conjunction with a training program to improve conversations on performance issues, SuccessFactors helped the San Diego-based biotechnology firm boost the retention rate of its top performers from 84 percent in 2006 to 92 percent in 2007, says Diana De Walt, senior vice president of human resources at Gen-Probe. At the same time, Gen-Probe’s retention of low performers fell to 27 percent from 43 percent.

    De Walt says she had heard that Dalgaard had a large ego. But at a roundtable discussion of customer executives at the company’s conference in San Francisco, she observed a humble leader. "He was listening more than he was talking," De Walt says. "That style of behavior with customers is probably what has allowed them to build a product that is so in tune with the customer’s need."

    Miller of Dow Jones says Dalgaard can continue to be larger than life as long as he’s smart enough to staff SuccessFactors with a strong team. "The top floor can only be as heavy as the floors that support it," he says.

    Dalgaard rejects the idea that he’s full of hubris.

    "I don’t think I have a big ego at all. I just have strong opinions," he says.

    That’s a hard line to swallow completely, coming from a man who has dreamed of becoming the first non-U.S.-born president of the United States. Still, it’s clear Dalgaard tempers his ambition with respect for others. He worries that American business forgets to treat people well and says Danes have learned to lead by persuasion rather than raw power. If he’s got some Viking in him, he’s also got a soft side.

    "I can execute harder than anybody—trust me, you cannot keep up with me," Dalgaard says. "But I’m just not trying to be an asshole about it."

    Dalgaard put his money where his mouth was by inviting Stanford University professor Robert Sutton—author of the acclaimed book The No Asshole Rule—to the San Francisco customer conference and paying for a night’s hotel stay.

    Whether customers continue to flock to SuccessFactors—and whether Dalgaard becomes as famous as Ellison, Gates and Jobs—remains to be seen. But it seems likely that SuccessFactors and its high-profile founder aren’t going to fade away anytime soon.

    "It’s been the opinion of this company that I’m an asset to the company," Dalgaard says, "that I have a passion and a vision for how people should work more productively together. And we’ve proven some things around that."

Workforce Management Online, July 2008 -- Register Now!

This article has been revised to reflect the following correction:

Correction: June 17, 2009

Because of a miscommunication with research firm Bersin & Associates, Workforce Management reported that spending on integrated talent management suites would grow 20 percent in 2008 and would reach $2.3 billion last year. In fact, the estimates for 20 percent growth and a $2.3 billion market were for talent management software spending generally—including purchases of separate talent management components such as performance management software.

This article has been revised to reflect the following correction:

Correction: October 15, 2008

Forrester’s 2007 study of 10 integrated performance and compensation management software products initially concluded there were three leaders: Authoria, Softscape and SuccessFactors. Later, Forrester corrected its report, saying there were four leaders: Authoria, Plateau Systems, Softscape and SuccessFactors. This story did not reflect the conclusion of the updated report.