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John Stokdyk



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HR software consolidation: Does size really matter?


Fitting the pieces togetherLast year’s HRSS preview invited readers to guess which of the exhibitors was likely to get swallowed up before this year’s event. How many of you picked ASR and KCS, asks John Stokdyk.

Consolidation continues to stalk the HR software industry. Just prior to last year’s HR Software Show, Northgate bought a majority stake in international outsourcing company Arinso; and Sage bought Snowdrop. The 12 months that followed witnessed further consolidations:

  • Sage bought KCS in October 2007

  • Agresso put in a £158m offer for financial software house CODA in January 2008; and

  • COA acquired ASR in April 2008.

HR is clearly set to follow the lead of other software sectors and will slowly coalesce into a small number of major camps.

Sage is the UK software industry’s most voracious consolidator. When it added KCS to a portfolio that already contained Snowdrop, it pushed its share of the integrated HR software market up to roughly 15%. Even though it’s still too early to see the full flowering of the integration, Snowdrop sales executive William Davidson says that being part of the larger group means that he can offer a much broader selection to potential clients.

Add to that the smaller companies who are taking up Sage 50 HR and we are beginning to see the emergence of a specialist powerhouse running in parallel to Sage’s accounting software business, where it dominates the UK market with more than 200,000+ companies.

Davidson says the Snowdrop team is already seeing an improvement to its sales pipeline. “Sage 50 HR works both ways. We are already starting to hear from prospects who find Sage 50 HR too restrictive and see Snowdrop as the next step. And while we don’t sell the Sage 50 product, if we’re out of their price range we can refer them to our small business colleagues, so Sage doesn’t lose the business.”

But COA has something to say about Sage’s powerplay, and claims to be the fastest-growing supplier in HR’s mid-market. ASR, which won the 2007 Business Software Satisfaction Award for integrated HR, accounted for a 10% share of the survey sample. Combined with OpenPeople’s share of the market (under 5%), COA is building up a holding to rival Sage. The company now claims that more than 1,000,000 people are licensed to use its applications and over 4% of the entire UK working population tap into one or more of its HR management products.

Acquisitions shaping the industry

COA strategy and planning director Mark Lane predicts that acquisitions will continue to shape the industry. “With the diversity of HR activities, very few suppliers can do everything themselves. Where we don’t have all the functionality our customers need, we have to look at how we can extend the story.”

COA could have invested in developing core functionality on its own, but that would have taken the company too long to get where it wanted to be. “We needed to be quicker, so acquisition was the way to go,” says Lane.

“The fundamentals driving acqusition are consistent across the software industry. As you get to a certain level of maturity, getting growth becomes tougher and tougher. When in you get to the situation where you’re experiencing low single digit growth – acquisition can turn that on its head,” he explains.

The cost of developing products and winning customers in the software business is so high that acquisition represents a relatively inexpensive way to bring new customers on board. “The way you can drive organic growth is through cross-selling into your new customer base. And that’s not going to change.”

“With the diversity of HR activities, very few suppliers can do everything themselves.”

Mark Lane, COA

Cezanne marketing manager Tony Flanagan has some first hand views of consolidation, having previously worked in a similar role for ASR. He notes that there is always uncertainty during the transition period when decisions are made on which products will be developed further and which will be discontinued. Often customers are disappointed as the software purchases they considered very carefully can be cast by the wayside.

Even if this doesn’t happen, customers that were used to direct relationships with the software developers can find that they don’t have as much say about the products’ direction. “The personal touch can be lost and difficulties often arise when there is a problem and the one person that you have always spoken with is no longer there,” says Flanagan.

But the common view from software houses is that size does matter. Talent management software house Taleo, for example, recently took over one of its rivals, Vurv. Size matters, explains marketing manager Claire Grove, because it ensures that a vendor has enough money to invest in developing new functionality and products.

But it is not just about size, she adds. You also need skilled people who have expertise in your sector – which is where the big combines can fall short. “They have substantial resources but they are spread across so many different areas that they lack the depth of a specialist vendor,” Grove argues.

Talent management is an emerging field that brings together several areas of HR – learning and development, compensation management, performance, and succession planning, notes Plateau marketing vice president Jeff Kristick. Even in this specialist area, developers are faced with the same ‘build or buy’ choice that COA’s Mark Lane identified. Kristick points out that acquisition does carry risks around being able to integrate acquired applications, but adds, “that is a trade-off for growth”.

Taking a moment to comment on Taleo’s move for Vurv, Kristick said this was less a case of acquiring technology it didn’t already have and was “more of a market share move”.

Deals driven by both technical and commercial imperatives will continue to happen, forcing both suppliers and their customers to make difficult transitions and technology choices.

Nevertheless, Kristick concludes that acquisitions and consolidations are ultimately good for the industry and for customers. Larger software hosues will be able to deliver more integrated solutions, on a scale that will make the customer more comfortable with their investment, he says.

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John Stokdyk


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