SAP may be one of the world's largest providers of business software installed "on premises"—on customer computers. But the company has struggled to translate that success to the fast-growing software-as-a-service model for human capital management applications. And that was a concern for executives.
So SAP did what big tech companies do best in these situations—it acquired the expertise it lacked. In December, 2011, SAP agreed to pay $3.4 billion for SuccessFactors Inc., one of the top software-as-a-service human resources software players in the market. To some, the move gives the German conglomerate immediate credibility in SaaS—also known as cloud computing.
"It's a good acquisition for SAP," says Ray Wang, an analyst at Constellation Research. "It gives them the cloud DNA that is so important to SAP right now."
But not everyone sees the deal in a positive light. "At first blush, the acquisition reflects well on SAP," says Peter Goldmacher, managing director and analyst at financial services firm Cowen Group. "It gives them a positive halo effect. But when you dig into the details, there's not a lot of value there."
SuccessFactors has been on a rapid growth trajectory, expanding by more than 50 percent in the first nine months of 2011, he notes. "When you have that kind of growth, you are not generating a lot of cash value, and the business becomes a money-suck."
By "money-suck," Goldmacher refers to the way SuccessFactors has pumped large amounts of cash into marketing and sales to acquire customers. This effort built up its client list, but at the cost of profitiability. In 2011, its revenue rose 59 percent to $328 million, yet its net loss widened from $12.5 million to $36 million.
Although opinions are mixed about the wisdom of the deal, all observers agree that SAP faced a challenge in catching up with the cloud. SAP's Business ByDesign software and its OnDemand product suite follow a multi-tenant SaaS model, meaning that many clients can efficiently use the same "instance" of the software akin to the way an apartment building houses many tenants. But experts say neither of those SAP products offers the functionality, usability or strong analytics that smaller, more innovative SaaS-based HCM vendors, such as Workday, provide.
And those smaller providers are the ones seeing the most growth and attention, says Constellation's Wang. "I can't think of a single on-premises software company that received venture capital last year."
SuccessFactors also has a global footprint and deep experience building SaaS-based products that touch everyone in the company through such activities as goal-setting and performance reviews. "HR people need tools to do real work, and SAP's acquisition of SuccessFactors is a validation of that," Wang says.
He believes SuccessFactors customers and stakeholders will be well-served by the acquisition—assuming SAP continues to support SuccessFactors' core HR products. And by all accounts that's already happening. Within days of closing the deal in February, the two companies announced a unified product direction for human capital management, or HCM, products, one that combines SuccessFactors' Business Execution, or BizX, Suite with SAP software to provide a more comprehensive HCM offering to all of its customers.
"This unified product direction for our BizX Suite … demonstrate[s] our agility and the power of our combined people, know-how and technologies," Lars Dalgaard, founder and CEO of SuccessFactors said in a news release. "We cannot wait to share more of what we'll offer our customers in the next few months."
Communicating that value proposition is exactly what the SuccessFactors team has been doing since the deal was announced, says Jeff Kristick, vice president, global product management for SuccessFactors. "Our biggest concern right now is showing customers what the acquisition means going forward, and how we are going to leverage the resources of SAP."
Such communication will help ease the worries of customers such as Monique d'Almeida, director, talent acquisition for military technologies provider DRS Defense Solutions. "Our concern is ensuring that our company, one of the first to purchase SuccessFactors' Recruiting module, doesn't get lost in the larger organization," she says.
On the other hand, d'Almeida is excited about the potential opportunities the acquisition brings to the product line. "It is our hope that this acquisition will better enable SuccessFactors to roll out system improvements and further enhance its products on a much faster timeline," she says.
She's also interested in seeing whether the SuccessFactors team will stay intact. And she's not alone. Many worry that the colorful CEO Dalgaard, who gained notoriety for making "No assholes" one of his company's five guiding principles, may have a tough time fitting into SAP's corporate environment.
Cowen's Goldmacher predicts Dalgaard will jump ship as soon as his contract runs out, but Wang is more optimistic. "Lars is the right guy for this job," he says. "He's a fire starter, and if he gets a seat on the board he'll stick around."
Indeed, in April, Dalgaard did get that seat.
"We see a good culture fit with SuccessFactors, and Lars is a part of that," says Sven Denecken, vice president, cloud strategy and co-innovation at SAP. He points to the rapid delivery of a unified product development plan for HCM products as proof of the two firms' compatibility. "In one week we were able to make quick decisions, come up with a plan, and communicate that plan to the market," he says. "We couldn't have done that if we weren't aligned."
Sarah Fister Gale is a freelance writer based in the Chicago area. To comment, email firstname.lastname@example.org.