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With Cornerstone IPO, SaaS Deepens Hold in the Learning Market

April 22, 2011
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Related Topics: Basic Skills Training, Training Technology, Human Resources Management Systems (HRMS/HRIS), Featured Article
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Cornerstone OnDemand Inc.’s eye-popping initial public offering in March underscores the growing importance of learning software delivered as a service.

Despite a jittery market, Cornerstone netted $136.5 million in proceeds when its stock began trading on the Nasdaq last month. The Santa Monica, California-based company had filed with the U.S. Securities and Exchange Commission to sell 7.5 million shares at $9 to $11 a share, or about $115 million. Instead, investors gobbled up 10.5 million shares, which priced at $13 and bounced above $19 within the first day of trading.

Cornerstone IPO

The huge one-day pop armed Cornerstone in the competitive, consolidating human resources software market. It also marked the latest show of strength for software as a service, also known as SaaS, which refers to applications that are accessed remotely over the Internet on a subscription basis. SaaS stands in contrast to the traditional “on premises” approach, where companies pay license and annual maintenance fees for the software and the applications are installed on their corporate computer servers. Many companies say they have found the upstart approach appealing for its lower costs, faster implementations and reduced technology headaches.

Cornerstone taps the SaaS method for selling its learning management system as well as other tools such as employee performance, compensation and succession management. The company has posted rapid revenue growth by setting itself apart from vendors that sell licensed software, says Josh Bersin, president and CEO of Bersin & Associates in Oakland, California, a research firm that tracks the corporate learning sector.

“Cornerstone OnDemand has a really good angle now in that they have a really good learning management system with far more functionality than competitors. And now they have a bunch of money to hire new salespeople, do more marketing, build more partnerships, and open offices all around the world,” Bersin says

According to its March 16 security filing, Cornerstone has seen its business grow each year during the past 10 years. Bookings have grown from $24.9 million in 2008 to $60.9 million in 2010. Net revenue likewise grew from $19.6 million in 2008 to $43.7 million in 2010.

The company has more than 480 clients, including Barclays Bank, Flextronics International USA Inc. and Kelly Services Inc.

Cornerstone declined to comment for this story, citing the U.S. Securities and Exchange Commission’s post-IPO “quiet period.”

Learning management systems refer to applications for assigning and tracking employee coursework. On-premises learning software isn’t likely to disappear altogether, but will become less attractive as SaaS gains prominence, says Lisa Rowan, an analyst with research firm International Data Corp. in Framingham, Massachusetts. She says the emergence of SaaS-based learning tools reflects a natural evolution within talent management.

Companies only recently have begun demanding that the traditional pillars of talent management—recruiting, performance management and compensation—be expanded to include a focus on learning. Rowan says 40 percent to 60 percent of customers now expect a learning component to be part of their talent management package.

Such an arrangement enables organizations to better tie learning activities to each individual’s specific development, and subsequently connect those development goals to larger organizational objectives. “Up until recently, that’s been the missing link,” Rowan says.

Organizations moving to SaaS-based platforms are anticipating big things. The state of Nebraska is about a year and a half into an enterprisewide rollout of Cornerstone’s SaaS-based modules, and early returns appear promising, says Carlos Castillo, the state’s administrative services director. One concrete example: as it began implementing SaaS across different agencies, the state realized it had 12 to 15 different contracts with service providers for teaching CPR classes.

“Frankly, we didn’t realize that was happening, but it was a result of a decentralized approach to learning,” Castillo says.

Implementing SaaS-based modules should help streamline employee training. “We think it’s going to have huge implications by enabling agencies to provide more consistent training faster and easier,” Castillo says. “And if we do a better job of training, we’ll probably realize benefits in terms of higher retention” and reduced recruiting costs.

Cornerstone isn’t the only learning management software vendor to embrace SaaS. Vendors that made their name selling on-premises, licensed software are gravitating to the SaaS model, as well. Saba Software Inc., for example, is shifting to SaaS, which is sometimes referred to “cloud computing.” Redwood Shores, California-based Saba’s revenue grew to $30.8 million through November 2010, up 14 percent year over year from $27.1 million. Sales of Saba’s licenses—long the staple of its revenue—fell 26 –percent during that time and reflects customers’ “growing preference to use our cloud-based subscription services rather than to purchase perpetual licenses,” according to a Saba quarterly SEC filing.

And in January, Gainesville, Florida-based SumTotal Systems Inc. added to its SaaS capabilities by acquiring GeoLearning.

HR software vendors without a legacy in learning management also are focusing on SaaS as they add learning applications. In late April, San Mateo, California-based SuccessFactors Inc. announced it was acquiring learning management software provider Plateau Systems, which touts SaaS delivery. That deal followed on the heels of SuccessFactors buying social-learning company Jambok Inc., whose software enables users to create and share multimedia content. Jambok is an SaaS-based tool.

And last September, Dublin, California-based Taleo Corp. purchased privately held SaaS provider Learn.com for $125 million. Bersin says Learn.com’s learning management system complements Taleo’s software for recruiting, performance management and compensation.

Flush with the new money, Cornerstone is poised to be an acquirer, as well. IDC’s Rowan says companies should pay attention to the merger activity, especially those planning to purchase or upgrade their learning management systems or SaaS tools. As with any consolidation, the shakeout raises some concerns about services and integration issues. “The only bit of advice would be to go with a vendor that has been acquiring—rather than one that may be a target of acquisition,” she says.

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