Earlier this year, Central Dupage Hospital in Winfield, Illinois, was looking for a new talent management system. The HR team compiled a short list of possible vendors that included Taleo, a growing software-as-a-service HR software company. Then in the middle of the final review process, Taleo Corp. was acquired by Oracle Corp.
"The acquisition didn't determine our final decision, but it did give us pause," says Shawn Fitzgerald, director of HR operations for the hospital. "We wanted the right software, but we also wanted a culture fit, so we needed to consider the look and feel of that parent organization before we could make a decision."
Ultimately, the hospital went with Cornerstone OnDemand, one of the few remaining independent HR software vendors left. And while the decision had more to do with Cornerstone's history of working in the health care industry than its independent status, Fitzgerald worries what will happen if the company is acquired.
"We saw its independent status as a negative," she admits. "We saw what happened to Taleo and SuccessFactors, but we don't know if Cornerstone will be acquired."
She's not alone. A few years ago, dozens of independent HCM vendors offered a variety of products. But over the past year, business software giants have cleared the field, making a series of acquisitions that leave just a handful of independent vendors in their wake.
In the past 12 months or so, Infor acquired Lawson Software Inc., SAP acquired SuccessFactors Inc., Salesforce.com Inc. bought Rypple, Oracle acquired Taleo, and Saba Software acquired Human Concepts.
This sudden acquisition frenzy should be no surprise to anyone, says Ray Wang, a Constellation Research analyst. "It's the natural progression of the marketplace."
Like many industries, HR software went through a period of rapid growth and innovation, which led to a crop of startups offering the option of HR applications delivered via the software-as-a-service method—in which clients rent software over the Internet instead of installing products on internal computers. Once those startups started to show promise, the larger legacy software companies—such as SAP and Oracle—decided they were ready to get into the game.
"After trying and failing to build their own offerings, they started acquiring the innovators and assimilating them into their own products suites," Wang says. "In the end, a few companies in the pure-play HCM space survived, and they will continue to consolidate and expand," he adds in reference to human capital management.
This transformation is giving remaining vendors such as Kenexa and Cornerstone OnDemand, an opportunity to push innovation forward while the acquirers focus on integration. That could be a draw for a certain type of buyer, Wang notes. "The independent vendors will continue to be nimble, early adopters, which is appealing to companies interested in innovation."
But it's also forcing customers to ask themselves whether they want to work a vendor who may be the next one to go.
"No vendor can give you an absolute guarantee that they won't be acquired," says Peter Reeves, HR process and technology manager at engineering giant Bechtel Corp. "That's why everyone is paying attention to these acquisitions."
Bechtel was a client of SuccessFactors when it was purchased by SAP last year. That acquisition was fortunate for Bechtel because it was also a customer of SAP. "However if SuccessFactors had been purchased by Oracle, that would have been troubling," Reeves says.
And therein lies the dilemma. Companies want a vendor with a viable business model. But if there's a chance they may be acquired, that adds risk. The acquiring firm may dump your favorite features, or reprioritize development of HR functionality. Or they might not be a good culture or technology fit.
On the other hand, there is the concern that an independent vendor won't remain viable for the long run without the backing of a larger firm, says Fitzgerald. "Bigger organizations have more resources, which makes them a lower risk."
Ultimately, customers need to decide if the fear of acquisition is worth the reward of independence.
"The answer depends on what you are trying to do," Wang says. If innovation is important, independent vendors may be more attractive because they have the flexibility and freedom to focus on delivering HR products that are purely cloud-based—that is, delivered over the Internet via the SaaS model. Independent vendors also can also offer customers more clout in influencing HR product direction and the chance to participate in beta projects because human capital management is their top priority.
If, however, longevity, standardization, and integration are more important, the larger software companies may be more appealing, particularly for big customers that have already invested in these legacy business systems.
There is a trade-off, says Rudy Karsan, CEO of Kenexa, one of the remaining independent HCM providers. "You lose your ability to impact the HR road map if you go with a larger vendor and your voice disappears," he says. "But you can assume they will still be around in 10 years."
In the end, the choice usually comes down to who owns the system, says Adam Miller, president and CEO of Cornerstone OnDemand. "If the IT department drives decision-making, the ERP company will win," Miller says. ERP stands for enterprise resource planning software, another term for the soup-to-nuts business software provided by vendors such as Infor and Oracle. Miller adds: "If the HR department chooses, they tend to go with best of breed HCM providers."
And, regardless of which vendor a customer chooses, buyers can be comforted by the fact that, in the world of SaaS, if a relationship doesn't work out, you can extract yourself fairly easily. "It's a license agreement, not a hardware purchase," Fitzgerald says. "You still have to make a three-year commitment, but if a vendor isn't meeting your needs after that, you can just move on."
Whether an HCM tool is being offered by an independent vendor or a software giant, customers must now think about what new features will make these products even better in the future, Wang says. "There are a lot of basic needs in this field that still aren't being met."
He predicts that in the near term, vendors will focus on developing cloud-based social recruiting tools, and adding predictive analytics and advanced performance management features. "The convergence of these trends will eventually lead to more innovative business processes that meet the needs of employees from 'hire to retire.' "
Sarah Fister Gale is a writer based in the Chicago area. Comment below or email email@example.com.