Here is the summary note from CIBC’s U.S. enterprise software research team on the HR Tech Conference:
Checks at 10th Annual HR Tech Conference yield continued confidence in the broader trends driving the HCM sub-segment in enterprise software. Key takeaways from our conversations with customers and HCM vendors include continued migration toward suite-oriented purchases, growing demand for performance management applications, and the pace of consolidation being expected to remain brisk. Combined with other ongoing trends, including the emergence of SaaS (software as a service), employee self-service, changing demographics, increased regulatory & compliance issues, and globalization, we expect the HCM space to sustain double-digit growth for the foreseeable future. We further expect the market leaders to outpace the broader market growth rate, driven by a combination of share gains and acquisitions.
Commentary & Analysis
We believe our bullish thesis remains intact following our attendance at the annual HR Tech Conference in Chicago, widely viewed as the annual “marquee” event in HCM. We found some of the key concepts which we view as primary drivers prevalent there, including the migration to suites, the rise of performance management and vendor consolidation. In our view, these themes should continue to help the industry maintain its double digit growth for the foreseeable future. Within our coverage universe, we expect Sector Outperformer-rated HireRight, Kenexa and Taleo to continue to benefit from these broader trends, as well as Sector Performer-rated Ultimate Software.
Below, we’ve highlighted a couple of takeaways as it relates to each of these broader HCM concepts:
Company-Specific Takeaways: We had the chance to spend time with employees of a handful of key HCM vendors while at the show. We’ve highlighted some interesting takeaways from our conversations with each vendor below:
Migration to the suite:Our conversations with both customers and vendors clearly showed that the market continues its move toward the suite approach to talent management. Customers are no longer satisfied with purchasing point solutions (i.e., single products) from a host of vendors. Customers are increasingly realizing the benefit of having a suite of solutions (i.e., recruiting, performance management, succession planning and compensation management) sharing a common repository. Interestingly, one of the main competitors in HCM admitted that, broadly speaking, technology still needs to catch up to customer demand. On a related note, one customer told us it planned on dropping its applicant tracking system [ATS] provider in favor of the ATS solution offered by its performance management vendor because of the level of satisfaction garnered from the PM solution. We believe this raises the point that merely having a rounded-out HCM suite may not be an adequate strategy for customer retention. HCM vendors will have to continue to innovate to retain their clients.
Rise of performance management:Although most customers we spoke with last year were focused on investing in recruiting solutions, more of this year’s attendees were interested in learning about performance management. In our view, the heightened interest in performance management indicates the market is beginning to mature, with customers looking beyond solely optimizing their hiring practices. With many vendors either introducing new performance management suites or working on refreshing their existing ones, we believe this segment within HCM will provide one of the next legs of organic growth.
Consolidation:While this year’s HR Tech Conference has yet to bear witness to any large M&A transaction announcements (a la Kenexa’s acquisition of BrassRing last year), we believe Taleo’s tuck-in purchase of WetFeet (a retailfocused ATS provider) highlights that consolidation momentum in the HCM space remains robust. Given its nascent and fragmented nature, we expect the larger vendors in the segment to continue to purchase tuck-in players as a means of filling in holes in their suite offerings or to bolster their existing capabilities. Of note, one company contact shared our view of consolidation in the space, stating that he believes there will only be five significant, pure-play, talent management companies over time.
Kenexa: Consistent with prior comments from management, our contact from Kenexa indicated it planned on continuing to support all three of its ATS platforms indefinitely, in the interest of maintaining its client relationships on each of those platforms. However, our contact also indicated that a key issue was integrating the ATS platforms with the other applications in its suite. Of note, the BrassRing ATS is already integrated with KNXA’s legacy assessments offerings, and management is currently working on integrating it with its performance management offerings. When asked when customers could expect a refreshed version of Kenexa’s performance management, we were told to “stay tuned” over the next few weeks.
Taleo: Initial customer feedback regarding Taleo’s upcoming performance management suite has been very positive, according to the company rep with which we spoke, noting that the user interface is like no other PM suite currently available on the market. While some competitive offerings utilize the “baseball card” org chart user interface (UI), none enable the access of data via the simple card flip. In addition, while other solutions offer some integration with Outlook in terms of reminders or providing links to a given PM solution, Taleo’s PM solution is the only one that enables a user to execute performance reviews from inside Outlook, without the actual PM suite being launched.
So far, Taleo is in the process of implementing the beta version with one enterprise customer, with another one on deck. The company also indicated that demonstrating the solution to prospects is driving opportunities and re-opening doors with prior prospects that held off on acquiring the company’s recruiting platform (Taleo Enterprise Edition, or TEE), though it is too soon to say if it has in fact generated any TEE sales in anticipation of a later PM suite sale. That being said, our contact expects the solution to be well received by green-field customers, with potential uptake of the solution outside of the Taleo install base to occur sooner than management has previously stated.
Ultimate Software: Although our time was limited with the company, our contact shed some light on add-on offerings. Of note, the company’s performance management and e-recruiting solutions have gained solid traction with existing customers. ULTI is in the process of developing a succession planning add-on as well, which should be released soon. The company also indicated that its “Workplace” offering, targeted at below-1,000-employee-sized organizations, is also gaining momentum. Finally, our contact said the company is beginning to see early sign of interest in its newly released Canada solution, having signed up 6 customers in the market.
Authoria: The privately held vendor was very bullish on overall demand for its solutions, noting that its win rates in the recruiting space have increased significantly since launching the new version of its ATS in 1Q07. This is the first of its 3-product suite to be rewritten on top of the company’s new repository, with an updated version of its performance management offering set for release in mid-08. Authoria believes that moving to a common repository is the best way to properly address a customer’s ultimate demand from its talent management suite—that is to help drive business results. It appears the company’s message and efforts are resonating with customers, as most of its 3Q07 wins were suite deals.”