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Saturday, December 17, 2011

Real crime, fake justice: Chirac gets 2-year suspended jail sentence - UPDATED Feb. 2019

After 25 years of obfuscation,
legal maneuverings and turning a
blind eye, a French court has finally
said it out loud: Between 1995 and
2002 France was ruled by a criminal.
But if you think you will see him behind
bars, don't hold your breath: the
French political class is making sure
that one of its most  (in)famous
members is shielded from such a fate
This week's ruling by a French court seems at first of quite earth-shattering importance: for the first time since World War II, a former French head of state is convicted of committing crimes (in this case misuse of public funds) and is sentenced to two years in jail. But look more closely and you realize that this judicial decision is as connected to justice as Alaska is to Madagascar.

The facts go back a good quarter century when Jacques Chirac was not yet president of France, just mayor of Paris (but considering how Paris is actually a midsize version of France, he was for all intents and purposes almost president.) In his Etat dans l'Etat which was his Paris fief, Chirac behaved like a medieval baron, hiring (especially for phoney jobs known in French as emplois fictifs where town hall positions were used to pay people who never carried out a single task for the city, but many for Chirac and friends), firing, using public funds as he saw fit with scant regard to rules and regulations. Why should he? He felt above such mundane things as the law. And subsequent events proved him right. It took decades for the law to close in on him, because the whole legal system in our Western pseudo-democracies is designed to punish harshly the small fry, while members of the elite remain scot-free. Among the examples used to shield Chirac from justice: while president, he made sure a new law on presidential immunity was voted so that he could remain literally above the law, even for crimes committed before he became president - and we make fun of Berlusconi who engineered laws to protect himself from zealous judges.

After Chirac left office in 2002, the Sarkozy government made sure his predecessor was left alone. Now, we all know that there is little love lost between the two men: Chirac tried every trick in the book to prevent Sarkzoy's ascent, as revenge for the "Dwarf" backing his opponent, Balladur, in a previous election. So why would Sarkozy care about Chirac's fate? If anything he should be happy to see Chirac in jail. Not really. These guys are smart, they know when it is better to put their rivalry on hold and think about higher things. Sarkozy has no interest in a judicial precedent, of having a former French president prosecuted and, God forbid, even convicted, since he knows he would then be the next one (read my blog on Sarko's own abuse of his position.)

So Sarkozy did everything he could to protect Chirac. First, he made sure that the case would drag as long as possible after Chirac left office (five years). Then,  and this is one of the more shocking aspects of the Chirac case, the public prosecutor (who in this pseudo-democracy acts on order from the government - no prize for guessing whose orders) decided to drop all charges against Chirac. Now, that was too much in light of the overwhelming evidence as gathered by all the files seized and the witnesses heard. So, a seemingly courageous judge, egged on by pro-justice militants, said, "I don't care that you drop the charges, Mr Prosecutor, there is enough in this case to convict Mr Chirac." And so he did, to two years in jail. But, and here's the rub, he made sure it was a suspended sentence meaning Chirac would not actually have to go to jail.

Yes, you have heard right. If you are lowly riff raff and get caught stealing, you can be sure you will end up as a guest of the French Republic for a few years. But if you belong to the elite, no such worry. And then you wonder why people laugh derisively at the lofty motto of the state, Liberty, Equality and Fraternity. In France, as in all other pseudo-democracies, Lady Justice is far from blind: she has one eye open to recognize VIP's and be lenient towards them. And yet, one of the first decisions of the French Revolution was to abolish all privileges that the mighty had. Two centuries on, privileges for the elite still live on. Now you understand why the "system" made sure the case dragged for how long as possible, so that even if he were to be convicted, Chirac could claim to be too old and sick to serve his sentence. And yet, read the French papers and watch television, and the whole French political class is cheering and saying, "See, we have truly independent justice." They are elated that they have managed to protect one of theirs from the same fate most of them should know: jail.

The great French fable writer, La Fontaine, wrote in the 17th century that:

Selon que vous serez puissant ou misérable, 
Les jugements de cour vous rendront blanc ou noir. 

(Depending on whether you are rich or poor
Court rulings will acquit or condemn you)
Jean de La Fontaine, Les Animaux malades de la peste, 1678.

Lest you believe that my native country is the only one where double standards apply when it comes to justice, I have some enlightening news for you: the same thing happens in other Western mock-demcoracies where the rule of law is supposed to apply. In addition to Italy's already mentioned and notorious  Silvio Berlusconi, Britain's Tony Blair and former US president George W. Bush should be in jail now for war crimes: didn't they wage a war which was found to be completely illegal (says the UN) and unjustified (say themselves after no weapons of mass destruction were found) but killed 100,000 innocent Iraqis (not to mention 4,500 American servicemen)?  Shouldn't these two men, along with a host of Israeli prime ministers and generals, be now in the dock of the International Criminal Court in The Hague? No way, only Arab, Latin American, Asian and African rulers commit crimes, not Western ones. Funny, isn't it, that when it comes to individuals we find in all countries the same proportion of criminals, but not when we deal with politicians. In the West, politicians are angels. Yeah, right!

When Juppé, one of Chirac's underlings, took the rap
for his master, a judge sentenced him to jail. But
the two-tier justice system we have in France and
other mock democracies meant that instead
of spending a single day behind bars Mr. Juppé
went to teach in a Canadian university for a
year (I didn't know Canada accepted criminals as
visiting professors) and after returning to France
he claimed back BOTH his old jobs as mayor
of Bordeaux and foreign minister. Whoever
created politicians left the shame gene out of them.
And as for us citizens who allow this to happen,
well, we have the rulers we deserve.
When Sarkozy succeeded Chirac one of his first announcements was that his administration would be "beyond reproach." A whiff of wrongdoing and you're out, he said to his ministers. Revolutionary, you'd think. Think again. Suffice it to say that the current Foreign Minister, Alain Juppé, a close aide to...Chirac, whose prime minister he even was at one point in time, was found guilty of the same crimes as his mentor in 2004 and given a (again suspended!) jail sentence of 14 months. Yes, we currently have a criminal as a foreign minister.  Even in the United States, hardly an exemplary country when it comes to the rule of law (think Guantanamo) and democracy (remember W's "election" in 2000?) any evidence (let alone court ruling) of wrongdoing  would be enough to end a politician's career. Not in France, where the political class wears its proof of corruption as a badge of honor.
Feb. 2019 update: President Macron just nominated Juppé to the highest court in the land, the Constitutional Court. Yes, your eyes aren't playing tricks on you: he who is going to ensure people uphold the country's top law is himself a convicted felon.

Speaking of America, remember that even there where the rule of law is supposed to prevail, Nixon was found to have committed crimes which led to his having to resign in shame and yet he was never bothered. His successor, Gerald Ford, in a behavior similar to what Sarkozy is doing now for Chirac, pardoned the Criminal-in-Chief thus ensuring he could spend the rest of his life enjoying the spoils of his crimes, in peace.  Well, Ford owed it to Nixon who made him president. And I am not speaking here metaphorically: it was Nixon who made Ford president, not the American people since, as few people remember, Ford was NEVER elected either as president or as vice president: he was appointed by Nixon to replace his previous VP, Agnew, after the latter resigned over (already!) a corruption scandal. The fish rots at the head, as they say.

Interestingly, Ford's outrageous act came at the same time when Chirac became mayor of Paris and was starting to put in place the intricate web of patronage, corruption, phoney jobs (but real salaries and cost to taxpayers.) If he ever worried about whether he might be held accountable one day, he just looked across the pond and the unedifying example of the White House shenanigans, and just shrugged his shoulders saying to himself, "Nothing to worry about."

For a quarter century he was right.  The wheels of justice grind slowly, if at all, when we are dealing with the elite. And yet, had justice done its job in a timely fashion, Chirac would have been caught in the 1980's and jailed (I doubt he could have claimed old age and bad health then) and we would have been spared his presidency which, by all accounts, was an utter failure. There are indeed many advantages to having an efficient justice system rather than the two-tiered parody of justice we currently have.

The struggle for equality, the rule of law, the principle that NO ONE should be be above the law, for a truly blind justice, continues.

Saturday, December 10, 2011

Sailing away: Time for Britain to leave the European Union

I haven't read the British press following last week's milestone decision by European Union (EU) leaders to move towards a more federal system with financial and budgetary convergence between their countries in order to solve the debt-induced crisis, but I wouldn't be surprised to see the following headline: "Europe isolated as Britain votes NO to treaty changes." Once again, and probably more radically than ever, Britain stands alone with 26 countries (using the euro and outside the eurozone) forging ahead on a new pact, and she standing in splendid isolation, the cornerstone of her policy towards Europe for a couple of centuries. Except, of course, that as a middle-sized power Britain cannot afford it any longer

To understand the current situation, just imagine that your friends have recommended you to the neighborhood club and upon joining it you requested a few privileges. First, that you be allowed to bring not only one guest but two. Then, that your dues should be only half of what other members pay. Plus a couple of other such exemptions which, considering how important you are to your friends, they all accepted to get you in. Then, as time goes by, you start making more and more demands, for instance that the club be open longer hours to accommodate your personal schedule; that you be allowed to bring your own caterer as the food served does not please your palate and a couple more requests of the same ilk. At that point, the other members rightly fed up join in unison with a rude expletive, the meaning of which is that everybody would be better off with you outside the club than inside.

This is exactly where Britain and the European Union find themselves now. Facing the admittedly worst crisis the Union has had since its inception 60 years ago, when all bandied together to come up with a solution, Britain said, "If I don't get my own, deal I won't sign to this one." The answer from the rest of the Club was to politely ignore Britain and move ahead with their agreement, anyway.

Are we surprised? Not really. Ever since the European Union was born, Britain had pooh-poohed it, when not tried outright sabotage. First, when it was set up (as the European Community) in the 1950's, Britain refused to join. Then, when it saw how successful the club was, it begged to join and did so in 1973 as a beggar,  rather than a founder, which meant it had to accept less good terms. Throughout the following decades, Britain kept on behaving in a most un-European way: Thatcher asked for a contribution rebate (the famous "I want my money back"); then they got exemptions on social issues; and, more pointedly when the single currency was formed, they refused to join. And last week, they asked for the unacceptable: exemption from financial rules. Considering that the current crisis is the consequence of lax regulations of financial institutions, this demand is completely crazy. Cameron claims that he wants to maintain the preeminent status of the City (London's financial district) which under the new rules might lose out to Frankfurt and Paris. This is a lot of hogwash: since Paris and Frankfurt will be subjected to the same rules as London, then we are talking about a level playing field. If London loses, then it means it wasn't competitive to start with, something the Tories, super-champion of competition should accept - but as we know they only accept competition when they are guaranteed to win. Also, last time I checked I thought Europe was operating as part of a single market (which the British always defend.) Now, Let David Cameron explain how we can have a single market without a single set of rules (never mind a single currency.) The truth of the matter is that the Tories are nothing more than the bankers' party and are determined to fight tooth and nail to protect the interest of their (pay)masters, even at a high cost to their own people and the rest of Europe.

With this latest rejection, the British have reached a crossroads. Their position will soon be untenable since at every EU summit, you'll have one set of meetings with 26 members making decisions and then calling the other EU member who will have little choice but accept, especially when it is about decisions where unanimity is no longer the rule. Britain's worst nightmare will become reality: there will be a two-tier Europe, a Tier 1 with all other EU members and a Tier 2 with Britain (unless in their self-delusion the British think that on their own they can be Tier 1, and all the rest Tier 2!) Permanently isolated an outvoted, Britain will find itself having to comply with rules it has had no say in their creation. How long will she put up with it?

I lived in Britain in the 1980s and since then have been a frequent visitor either on business or vacation and can claim to know the country pretty well. And one thing that still has not changed is their island mentality. I still hear many Britons when crossing the Channel saying "We're going to Europe," or "We in the UK do it this way, but in Europe they do it that way." The British have clearly psychologically never felt European. Will they ever?

So it is time the British (or, to be more accurate, the English) made up they mind. They have played obstructionist in Europe for too long, which is fine, if they have such a radically different view from Europe from all other 26 countries. I'm not saying their views are better or worse, right or wrong, but different. Then, David Cameron should do something that the so-called mother of democracies hates to do, ask the British people, in a referendum, what they want: be part and parcel of the European Union, not a mere free-trade area, with all that that implies, or keep their own views, maintain their sovereignty (or what remains of it) and therefore leave and make other arrangements.

These arrangements could entail:

- Negotiating a free-trade or special-partnership pact with the European Union (maybe like what is being offered to Turkey)

- Move closer to the US and Canada (maybe in a North Atlantic free-trade area) since they feel so much in sync with their "cousins" from across the pond

- Decide to focus on what Britain does best (media, culture) and become  a high-value-add export oriented country which will allow it to survive alone outside the European Union.

Of course, there are risks involved. Britain trades more with the EU than any other country or bloc, so a realignment is not easy to achieve. At home, if the UK leaves the EU, it is almost certain that Scotland will split and apply for readmission as an independent nation, which would mean the end of the United Kingdom. The EU will also suffer a bit, as it loses an important economy and important population, but considering it has 500 million people, a 12% loss and corresponding reduction in GDP will not be insurmountable and anyway will be replaced by the arrival of new countries such as Croatia in 2013 and subsequent ones. An EU-less Britain is likely to suffer way more than a Britain-less EU.

Whatever the solution, it is crunch time for the British. Since EU rules do not consider ejection, please do us and yourself a favor and make up your mind, which you seem to have already done, and leave. It is always sad when a marriage comes to an end, but it is always preferable to end it sooner, and on amicable terms, than later and bitterly, especially when the house is on fire.  

Sunday, December 4, 2011

Acquisition #13: SAP's $3-billion cloud(y) adventure

PARIS (UPDATED Feb. 27, 2012)
Unless you are superstitious (which I am not since my grandmother always told me it brought bad luck to be superstitious) you will  be thrilled with the news that the biggest HR software company in the world  decided last weekend to buy SuccessFactors (SFSF), one of the up-and-coming web-based vendors, in this year's 13th M&A deal. Well, you might be thrilled at this acquisition until you start looking at the details. 

Context and rationale of the acquisition
Although SAP is hardly a novice at acquiring other software companies (Business Objects is one such prominent example), their product and customer strategy has always been mainly of the organic variety until it showed its limits. And limits it has shown in two respects, the enterprise area and the newish cloud-computing business. 

First, the enterprise area: SAP created the enterprise software and it therefore is quite embarassing that in one of the fastest growing enterprise areas, talent management, it has failed. Global companies running SAP as their HR system of record have repeatedly gone for the likes of SFSF and Taleo, deemed more in line with their talent needs than their incumbent HR vendor (Oracle and PeopleSoft do not fare any better in that respect, by the way. ) And many companies, such as US-based Kimberly-Clark, have simply moved the whole HR suite, if not their financials applications as well, to cloud-based Workday. This is bad for SAP (and the two members of the "SOP" triptych) since every customer that jumps ships means less high-margin maintenance revenue. And when you know that maintenance now makes up the lion's share of traditional ERP vendors' bottom line, it is not hard to understand the future is not very bright. 

Second, the reason why corporate customers have been adopting best-of-breed systems is that they provide the needed functionality in a radically new way: on the web, rather than the good old implementation within their company's walls, with a new way of licensing, maintaining and upgrading the system (see my blog comparing the two approaches, "Old Versus New".)  Like the other software dinosaurs as I call them, SAP could see the market changing tacks and had to do something to prevent the coming customer hemorrhage and its market irrelevance. So, taking a leaf from the book of its nemesis, serial acquirer Oracle, it decided that  "if we can't beat'em, let's buy 'em."

Third, SAP's own efforts at building a web-based offering, Business ByDesign, has been, to put it charitably, far from successful. It has taken inordinately long to develop and customers have not been exactly running in a  stampede to buy it.

Why SuccessFactors?
A good question to start with is "why SFSF?" There are other vendors in the HR space, even with a product footprint similar to SFSF's. Taleo is the most obvious name, but as a European company why didn't SAP look at vendors closer home? As I showed in my blog on M&A activities in HR technology, American vendors tend to buy other American companies and European software makers their counterparts from the same region, if not the same country. SAP could have acquired UK-based Lumesse or France-based TalentSoft (with their own issues of being privately owned,) or (also privately owned) Swiss vendor Umantis which brings the double advantage of being in the German-speaking area SAP dominates as well as the talent management partner of SAP's Business ByDesign offering.  

But clearly SAP wanted a vendor that would not compete too much with its own HCM solution while being global and large enough to help it increase its market share meaningfully. That left only two vendors of more or less equal size, Taleo and SFSF. Since Taleo had grown more organically than SFSF (even if it has acquired a couple of companies of its own) it was a closer fit to SAP's culture. However, when I looked at my HR customer database (what I call the WOW database -Who Owns What) I saw that there are more SAP HR customers running Taleo than SFSF. It therefore makes more sense to go after the company with fewer joint customers since it offers more cross-selling opportunities.  The fact that SFSF was founded by Lars Dalgaard, a Dane, was an added bonus as SAP felt  that a European senior executive would fit more easily in Walldorf. Only time will tell whether they were right on this point.

A more intriguing question is why SuccessFactors management was keen to sell (out?) Apart from the nice premium for shareholders, why would Lars Dalgaard want to become a mere senior executive at unexciting SAP when he was top dog with the company he founded? The answer is that with the number of acquisitions, and in a short period of time, SFSF bit off more than it could chew and found itself overwhelmed with the task of integrating disparate systems. With SAP it can find the people and financial resources to fix the integration issues which were threatening to bring down the company. Not to mention that now that it is part of a large and profitable company, SFSF's losses can be diluted in SAP's balance sheet with no need to answer the recurring, embarrassing question: "When will you become profitable?"

Overpaying for...
The acquisition is already starting with the wrong foot. In a volatile market, SAP could have bought SuccessFactors at a much better (i.e., lower) price than a whopping 16 times revenue. When Oracle bought PeopleSoft (PSFT) in the mid-2000's, an operation I was involved with, it initially offered $6bn, that's just twice what SAP has offered for SFSF. And yet, PeopleSoft had ten times more customers  than SFSF (and I'm talking here only about PSFT HCM, to avoid being accused of comparing apples with oranges.) PSFT was profitable when SFSF is still losing money. PSFT was the undisputed #1 in HCM, and #2 in ERP, a global vendor when SFSF's global reach is limited, a leader in just a segment of HCM, and even in Talent Management it faces strong competition from Taleo. Oh, and we are talking about 2003 dollars, which means the deal's value in inflation-adjusted currency is even higher. If you want a more recent acquisition as a comparison point, Taleo's purchase of Jobpartners last June was at a reasonable 2x revenues (more information on the wave of consolidations in the above mentioned blog.) No matter how you slice and dice it, the amount paid by SAP is hard to justify and is evidence of how desperate SAP is to "do something."

...too many issues... 
Once you start at looking at what SAP bought there is no way you can escape the fact that it will create more problems than it is likely to solve.

The pros: Let's start on a positive note. Now, SAP can claim with a straight face that it has a SaaS talent management offering, something they knew Career OnDemand was NOT (see my comments following the demo I attended at the HR Technology Conference in Las Vegas last October.) But looked at from a customer's perspective, what has changed? Customers will still have to interface SFSF with the HR admin features in SAP, regardless of who the owner is: the work will still have to be done until there is an off-the-shelf integration.

The cons: Integration nightmare. Even when there is full compatibility (meaning no feature/module overlap between the two offerings) creating a "seamless" integration (data, process, user experience) takes years. In this case, the complexity is compounded by the fact that:

(1) SFSF is itself busy integrating the various pieces it has bought since last year (For details see my above-mentioned post, "2010-2011: Two momentous years of consolidation in the HR space")  

(2) What will happen to the still-unproven HR admin piece (Employee Central) SFSF had developed to compete with...SAP, among others? There are only three possible options:
- Will SAP kill it? Then how can it say it is moving to a cloud model?

-Will it keep it (maybe integrating it within its Business ByDesign cloud solution) and then compete with itself? That would be shooting itself in the foot as the cloud offering cannibalizes the old one.

- Will it then kill the old, on-premise SAP offering and move to the SFSF/Plateau offering? Unthinkable when you know there are thousands of customers on the on-premise offering, who have spent years and (for some of them) hundreds of millions of dollars to  implement it. Moving them will not be easy, if at all feasible.

(3) the issue of overlapping offerings such as the Career OnDemand module I mentioned earlier or SAP's reporting functionality (HANA) which will compete with the one SFSF has bought from Inform, not to mention the two Learning applications both have (see below graph on the product overlap of the three vendors: SAP, SFSF and Plateau acquired last April by SFSF.)  I am willing to bet the best sauerkraut in all Germany that come April 2012 when Career OnDemand is supposed to be released, nothing will come our way, and it will be quietly buried, acknowledging SAP's failure to evolve towards a true, organically grown SaaS model. 

Contrary to SAP's claims, there is quite a lot of duplication in its new offering.
Sorting it out will be a big challenge for which SAP has little experience.
(For simplicity's sake I am  identifying the major offerings based on
where they currently sit, SFSF or Plateau)

Sales/marketing issues: Integration between the two companies goes way beyond products. As experience shows, people buy from people. If SAP hasn't been able to make a killing in the TM space, it wasn't only because its offering wasn't on a par with the best-of-breed solutions, but also because SAP sales reps sell what they know best: traditional SAP software by stressing its engineering prowess. SFSF's culture is more start-up-like and its sales people know how to make the SaaS pitch which is different from the on-premise one. It reminds me of when Oracle moved from the database business into applications and couldn't understand why it wasn't as successful. Only when it realized that business applications are sold to CFOs and heads of HR and not CIOs, and that  you have to talk business value and processes  and not about the beauty of data clustering, did they start making some inroads. SFSF's marketing organization is also more attuned to the market's needs than SAP's gigantic machine. Expect some significant attrition from the SFSF ranks, especially when the jobs market improve.

...and little return
You might say in SAP's favor that since many of their customers were moving to SFSF, well, they might as well have the company in SAP's fold so that the revenue comes to SAP. First, considering the price SAP has paid, it will take at least 6-8 years for the transaction to be financially profitable. Second, this overlooks two facts: customer behavior and Talent Management (TM) as part of ERP.

Customer sentiment: many customers selected SFSF or Taleo, among others, because they wanted to move away from all the issues involved with what I call the software dinosaurs (see my blog from earlier this year, "Can software dinosaurs reinvent themselves as web-based vendors".) Now that SuccessFactors is being SAP-ized, customers may think twice before selecting that particular vendor (of course, SAP's hope is that the market will believe that the opposite is going to happen, that it is SAP which will be SuccessFactor-ized - but just look at the asymetry in size and you will have the answer to your doubts.) Actually, I already know of two companies (one of them a client) running SAP HCM and who were looking for a TM system; they had shortlisted SFSF and are now dropping it from the shortlist. Of course, two anecdotes do not a trend make, but it is worrying.  It is far from assured that this move will protected SAP's installed base but one thing is already clear: non-SAP customers will be less inclined to adopt a TM system highly interlocked with a competing HR system.
This is talent management, not ERP: Considering SAP's $16-billion overall revenues, SFSF's $200 million  are so puny that one can wonder how it will make any difference to the company's bottom line. In all fairness, compared to just SAP's HCM revenues, SFSF will add a not insignificant 20%, thus pushing Oracle further down the league table, but again at what price, assuming customers are not put off; and if SAP wants to become a SaaS vendor it will have to look beyond HCM. Even by adding SFSF's revenue to SAP's subscription revenue, it barely grows to a paltry 5% and of course you are mixing true SaaS with non-SaaS in a catch-all "cloud" category.

Even if SAP were to discard its traditional Jurassic-era HCM offering in favor of SFSF, which is as likely to happen as is Christmas to become a national holiday in Iran, SAP will need to keep on making many more and bigger acquisitions of SaaS vendors. I wonder whether there are enough companies out there and how SAP will be able to execute on so many acquisitions and integrations to become credible. At best it will become a dual-offering company, with all the cultural, strategic, and product schizophrenia associated with such a hybrid model. This muddying of the software waters is bound to create much confusion in the market (in addition, remember that SFSF comes with its own hybrid issues with the on-premise customer base from the legacy Plateau offering.) At least Oracle did the right thing after it bought all those different companies: it rationalized them all on the successor product, Fusion. What Oracle lacked in execution, it made up for (partially) in clarity. No such clarity is coming from SAP. 

The only strategy that is likely to pay off in the long-term is to develop/acquire a true SaaS product (and not that half-baked on-premise + hosted offering) and then start moving customers to it. For example, build all new talent management + additional countries on this new SaaS product (SFSF -based or other) and tell customers that if they want to use the new features they have to move towards the cloud. Not only will that give customers an incentive to do so, but by reducing the numbers of customers SAP has to support on the on-premise solution, makes the business more profitable. This of course entails doing it not only for HR but for the whole ERP offering, a difficult, even risky, move fraught with many dangers, but some software companies (such as Ultimate in the HR space) have done it, so it is not a completely outlandish idea. So far, however, the noise from Walldorf does not seem to countenance such a move.

And the winner is...Workday, so far the only true SaaS company in the ERP+HR space, which sees a serious competitor taken out of the equation (even with SFSF, SAP's core HR offering remains an on-premise one, not in the cloud) as well as its SaaS-based approach vindicated by the day. Worse, the biggest strategic failure of SAP (and also Oracle) is that they don't seem to get that SaaS is not just a functional hole to be plugged with an acquisition: it is a radical departure from the old ERP business model. In the olden days, you were missing a decent CRM system? No problem, just buy Vantive or Siebel. If what you were looking for was a winning HR system, well, just buy PSFT. But you can't buy your way into the SaaS world: the culture, product architecture, selling, maintenance, upgrade, absence of need for hardware, it all is so different. You need to reinvent yourself completely. Somebody explain to me how giant SAP will do that by buying tiny SFSF.

SFSF, customers and the wider industry, would have been better off had SFSF been left to continue to develop as an independent company. It was on its way to a bright future. With its new HR admin module, and provided it integrated well the different pieces it had bought,  it could have competed with Workday for the trophy of successor to PeopleSoft as HR vendor leader. Sadly, this was not to be. As the Jesuits' motto goes, Sic transit gloria mundi ("How the glory of the world passes.") For those more cinematically inclined, I am reminded of Marlon Brando's memorable line in the 1950s movie The Waterfront, where he expresses his frustration and disillusion at the prizefighter career that could have been his: "I coulda been a contender."

Most studies find that at least half of acquisitions fail to deliver tangible results and a decent ROI. Based on the above there is little doubt in my mind which half this acquisition belongs to. The only people that would gain from this acquisition (and are on cloud 9, if you'll allow me an easy pun) are SFSF stockholders who get an incredible 52% premium and advisors JP Morgan and Morgan Stanley who, as is their wont, encouraged the premium price, knowing that the higher the price paid, the higher their fees. 

I would go further and say that, barring the swift adoption and execution on the from-on-premise-to-cloud strategy I outlined above, the only M&A operation involving SAP which would make sense is one where it is not the predator, but either the prey or an equal partner with one of the three following companies: IBM, HP or Microsoft. That may well be the only way SAP can credibly stand up to the Oracle threat. Everything else smacks of desperation, is evidence of limited strategic view and is more likely to fail than succeed. 

UPDATE: Feb. 27, 2012

I know that several of SAP's top executives have read my blog, whether that has had any impact on their thinking and decision-making process, I do not know. But for the first time in years SAP has blown my mind away, with the Feb. 22 announcement that SFSF will become the basis of SAP's HR cloud offering and that, while continuing to invest in the traditional on-premise product (the R/3 product line now known as SAP ERP HCM), customers will be encouraged to move to the true SaaS product. I had to pinch myself and rub my eyes several times to make sure I wasn't dreaming. Could it be true? Yes, SAP finally is getting it. Unlike Oracle, which is still touting a mongrel on-premise + hosted product and slapping the SaaS label on it, SAP is finally showing it understands what being a true cloud vendor means and following (or at least mirroring) the advice I gave in this very blog post. Some of the product direction seems almost taken literally from my analysis. 

On EmployeeCentral, I wrote "Will SAP kill it? Then how can it say it is moving to a cloud model?" SAP decided to keep it and expand it

"...the market will believe that ...it is SAP which will be SuccessFactor-ized": that is happening to a larger extent than I thought with the SFSF team, product being retained and its SaaS culture emphasized

"The only strategy that is likely to pay off in the long-term is to develop/acquire a true SaaS product (and not that half-baked on-premise + hosted offering) and then start moving customers to it." This is exactly what SAP has announced.

I further gave an example of how SAP could do that: "Build all new talent management + additional countries on this new SaaS product (SFSF -based or other) and tell customers that if they want to use the new features they have to move towards the cloud. Not only will that give customers an incentive to do so, but by reducing the numbers of customers SAP has to support on the on-premise solution, makes the business more profitable." Again, largely what SAP has decided to do. 

I then added that this strategy was unlikely to happen since "So far, however, the noise from Walldorf does not seem to countenance such a move." I wrote that on Dec. 4: two months and a half later Walldorf changed its tune and embraced the strategy I devised for them.

Should I ask SAP for royalties based on this unacknowledged picking of my brain?  Of course, this strategy could be derailed at the execution stage but considering how clear, detailed and compelling  the product direction is, I'll give them the benefit of the doubt. Seems that there is still fire in the old dinosaur, after all.

Compare this with Oracle's own hastily put-together webcast announcement on their plans with Taleo two days later (they are clearly feeling the pressure from SAP)  where the presence of President Mark Hurd, Taleo CEO  Michael Gregoire and Product Development Thomas Kurian could not hide the fuzziness of the "plan" (if there is such a thing). Also, whereas SAP put the SFSF talent firmly in charge of the new business, Oracle who suffers acutely from NIHS (Not Invented Here Syndrome) gave no indication what Michael Gregoire's role will be (once the acquisition is completed, you can expect him to quietly depart.) The only clarity was that Oracle continues, against all market momentum, to stick to its hybrid model, refusing to bow to the inevitable: that true SaaS is here to stay, and instead of rejecting it they should embrace it. Oracle will probably come round to it at one point in time, but by then SAP will have stolen a march on them. 

Monday, November 7, 2011

Error 404: Oracle Fusion not found

As any experienced observer of our industry knows, the weaker the message a software company has on offer, the higher in the corporate hierarchy it has to go to deliver it. Oracle did not fail the tradition as a posse of vice-presidential bigwigs led by the head of its HCM development organization, descended a couple of weeks ago upon the City of Light (the home of yours truly) as part of their Fusion global roadshow.

The stakes are high. As soon as Oracle finalized its acquisition of PeopleSoft in 2005, it announced it was starting work on the successor product. Although I was among many chagrined by the demise of the jewel in our industry, I couldn't really blame Oracle: from a purely business perspective it didn't make sense to keep having several parallel products. Four years later, in 2009, there was still no Fusion on the horizon but Larry Ellison, rarely detracted by reality, famously announced that Fusion was going to be the SuccessFactors and Workday killer. More than two years later (almost six years after first announced) and with scores of Oracle and PeopleSoft customers defecting to SuccessFactors and Workday, where is Fusion?

When it was demoed at the HR Technology Conference in Chicago a year ago (see my post on it) release was announced for early 2011. Then it was pushed to the second quarter of 2011 and only in the summer was "something" finally made available.

First comment: the product is available for download, putting to rest any notion that it is SaaS-based. As anybody with a modicum of interest and knowledge in the matter knows, if you can install it on your server then it is NOT SaaS. Call it a hosted solution and the vendor an ASP or whatever alphabet soup you feel comfortable with, but SaaS it sure ain't. Also, the price list for Fusion is only available for the on-premise implementation, not the "cloud" variant which Oracle claims it has: another proof of how fuzzy and half-baked this mock-SaaS offering is.

Second, if I used "something" to describe the scope of what is available, it is not to belittle the hard work that went into it (and I know that many people did work hard on it), but it is an honest description of the functionality which is mainly based on compensation, one component of talent management, itself just one part of any overall HCM offering. Where is recruiting? (Wouldn't Fusion have been a great opportunity for Oracle to fix the double failure of its Oracle iRecruit and PeopleSoft eRecruit products?) And Learning/development? and Succession planning?

Who in their right mind would believe for a second that SuccessFactor has anything to fear from a product with such limitations? And as for Workday, it started work on their ground-breaking product at the same time as Fusion with $100 mn in seed money (Oracle makes profits in the billions), and a few dozen employees (Oracle has a cast of thousands working on Fusion - and, as few people know, this was supplemented by resources from Indian IT giant Infosys). As of today, Workday has not only delivered an entirely new HR system of record, two payrolls, strong talent functionality (even if missing some key parts), but also a financial management system. Where are Fusion's country localizations? The HR Admin, Payroll, Benefits modules may look good in demos (but what product doesn't?) but no company has selected them (let alone is running them) which is very suspicious.

To call Fusion half-baked would be very, very charitable. Rarely, if ever, in the history of software making have so many taken so long to produce so little. In less the time it took Oracle to present us with a Fusion embryo, Alexander the Great conquered the world. Now, that's perspective.

At last month's HR Technology Conference in Las Vegas, I ran into a senior Europe-based Fusion executive whom I had known for over a decade. As those who attended the event know, the South Pacific section of the conference grounds has many nooks and crannies. So, cornering my old Fusion pal into one of them, I managed to extract a confession from him.

"How many European Fusion early adopters do you have?" I asked.

"Larry will announce them tomorrow at Open World," came the less-than-assured reply.

"Come on, don't give me that marketing crap. We go back a long time. If anybody should know, it's you. For God's sake, you're based out of  Europe. So, spit it out." For those who know me, I am nothing if not tenacious. All I got, though, was an embarrassed smile.Of course, the next day at Oracle's annual jamboree Larry in an uncharacteristically lackluster performance was long on vague customer numbers, but short on actual names, and none of them from Europe.

The Paris event, a few weeks later, didn't bring any new names either. Software vendors are rarely shy about trumpeting their customer wins, especially when attached to new products to which they lend the credibility needed to succeed on the market. Sometime they even overdo it - in Europe, think of SuccessFactors and Siemens, or Workday and Aviva, to use the two competitors Larry Ellison had singled out. If Oracle, which nobody by any stretch of the imagination would call a shy, timid or bashful company, cannot produce any European customer, then you and I can only come to a single conclusion: there isn't any.

I can't say this came as a surprise to me. The dozens of Oracle and PeopleSoft customers I have asked in Europe are all unanimous: we will not touch Fusion with a ten-foot pole. Can you really blame them? Functionality that is so limited that it verges on the absurd, the less-than-glorious development and customer-support track record, the realization that Fusion apps, and HCM within them, are just a tiny part of Oracle's portfolio and, even more seriously, the doubts about the strategy behind it.

As I said earlier, the strategy to rationalize all of Oracle's acquisitions into one single product made business sense. But does this strategy devised in the first half of the past decade make sense now when much nimbler vendors  whose products have deeper functionality are churning out new releases on a  quarterly basis and five years on we are still waiting for Fusion 1.0? Does buying Sun to provide hardware and software together (as Oracle's great slogan goes) make sense when companies are increasingly going to be renting rather than buying their software needs and will therefore no longer require any servers within their corporate walls?

Fusion, and Oracle, look increasingly like today's solution to yesterday's problems. The market has moved on but the big ocean-liner is proving hard to turn around. Actually, considering that Fusion is barely here, it would be more accurate to say that Oracle and Fusion represent tomorrow's solution to yesterday's problems. 

A major French bank, BNP Paribas (160,000 employees worldwide), after pulling the plug on PeopleSoft said, "Fusion? Thanks, but no, thanks." Then, adding insult to injury, BNP went to their pre-PeopleSoft vendor, HR Access. It is worrying for Oracle to have its next-generation product rejected in favor of one based on older technology. (With SAP also being used.)

And France is not the only European country where Oracle customers are dumping Oracle, rejecting Fusion and moving to Workday. In a  recent interview in ComputerWeekly, the head of HR of UK-based insurance company Aviva, explained why he eliminated Oracle HR and selected Workday: "[with Oracle] when the CEO asked me how many staff we had in Europe, I could not tell him. It took weeks to find out. Now [with Workday] I can do that in 30 minutes." He then goes on to explain why he did not choose Fusion: "The technology was not there, Fusion was not ready, and its software-as-a-service model was not a true SaaS model." He also echoed a common complaint of Oracle customers that "communicating with Oracle was very difficult."

In several forums, I predicted that Fusion would not make any significant traction before 2015. So far, I have seen nothing to amend my analysis. And as for Mr. Ellison's claim of burying Workday or SuccessFactors, even after taking into account the typical hyperbole-prone statements so much favored by our industry, it is simply preposterous and betrays the fear that the reverse may well happen.

Friday, October 21, 2011

The jobs crisis hits home ― literally

Rio de Janeiro police about to enter a favela?
No, their Parisian counterparts entering  my
apartment building to confront a hostage taker
For someone whose main activity deals with workforce management, the surreal situation I found myself in this week couldn't have brought any closer the  main HR issue facing Europe and the United States: high and increasing unemployment figures.

Last Tuesday, close to 12 noon. I was in my home office, expecting a courier bringing me documents from a client when the phone rang.

"Sir," the courier's voice sounded stressed out, " I can't get to your apartment building, it's been cordoned off by the police."

"What? Why?" I asked, wondering if he got the address wrong.

"They say that some people have been taken hostages in the Pôle emploi office."

The Pôle emploi is the French government agency dealing with (un)employment and the local jobs center is indeed housed in my apartment building, a mainly residential complex that occupies a large block north of the Bastille area (see map below.) I had been working from my home office the whole morning and just like a cheated husband is the last one to find out about his situation, I had no idea something was amiss in my building.  I put a jacket on and went downstairs.

At the main gate I saw several cops who asked me the way to the concierge. I explained they needed a special key to get there but I, as a resident had one, so I'd let them through. "But the concierge is not available now, it's her break from noon to 2:00 pm. What is that you want?" They explained that there was one man, clearly a desperate jobless fellow, keeping some people hostages (the things one would do to get a job) and they were wondering if there wasn't another way to get to the Pôle Emploi offices (they had amassed their forces at the main entrance, on Rue Pelée.

The quiet and peace of Rue Pelée, just a stone's throw
away from the Bastille, shattered as an armed unemployed
man takes hostages in the jobs center office located
in my apartment building

"Oh yes, " I replied. "There is an entrance from Rue Amelot, but they don't use it anymore, so you guys can force your way through there." And the good law-abiding citizen I am took them there (# 2 on the map) and then retraced my steps back to the main gate on Rue Pelée (# A on the map). As soon as I came out I felt as if I I had stepped onto a movie set. The street swarmed with cops, elite forces clad like Robocop, it was closed all the way to the Boulevard Richard Lenoir and one of the cops said, "Sir, if  you leave the area you won't be able to come back." I called the courier who was stuck beyond the police lines. Since I needed the documents urgently to prepare for a client meeting, I took the chance. Once I got the delivery from the courier I stood mesmerized by the BFM reporter describing what was happening within my building. There were other reporters and press photographers. (# 3, on the map)

"You know," I said to the BFM TV reporter Rachid Mbarki, "there's another way closer to the building, and the cops haven't closed it, why don't you go there?" I was stunned to hear the reply: he was happy to cover the news from a safe distance. Some other reporters, including one from AFP (Agence France Presse) though, overheard me and asked me to lead them. So I did my second good deed of the day, this time in favor of the free (if not courageous) press, and walked with them down boulevard Richar Lenoir towards Bastille and then right on Allée Verte which runs parallel to Rue Pelée. Right in front of my building there is a passage which allows the two streets to communicate and, although a policeman was stationed there not allowing access to Rue Pelée, at least you had a nice vantage point of the entrance to Pôle emploi to see all the action from up close. (# 4 on the map) At the same time the other BFM TV guy was at least several hundred yards away.

Since I couldn't enter my building from the Rue Pelée entrance, I decided to check whether the one on Rue Amelot, which runs along the Boulevard Beaumarchais was free. So I turned into Rue Amelot, walked up and miracle of miracles, no cops, the entrance (# 2 on the map) was wide open, even more surprising since it leads straight to one of the Pôle emploi side entrances where I found the cops I had led to still there. They looked scary in their Robocop attire ready to barge in should the phone negotiations with the hostage taker fail, or things go nasty. I passed them and entered my building from the inside thus allowing me to go back to my apartment.

I switched the TV on and it felt so surreal to see my street and building making the headlines. The hostage taker was an unemployed fellow who said he was desperate and was ready to use his gun if attacked. It felt like being in a movie, except that the movie was real and taking place right where I live. Well, I didn't have much time to muse further since I had to leave for a meeting at 2 pm. So I left from where I entered, the Rue Amelot entrance, once more passing Robocop & Co., but this time the police had finally realized there was a weak link and had stationed two officers at the entrance who gave me the same warning I was given two hours ago at the Rue Pelée entrance: "If you leave you won't be able to come back." When asked how much longer this circus was going to last, one of them shook his head seriously and said, "We've had situations where it lasted two days." Two days without entering my building! They must be joking. Well, I managed to fool them once, I'm sure I'll manage a second time, I thought.

When I returned after 3:00 pm, the standoff was still on. The whole two-block area was cordoned off , all the way to where the boulevards Richard Lenoir and Voltaire meet (top right angle on the map.) I had only one thing on my mind - how to get back into my apartment? Suddenly a stroke of genius hit me. The underground parking garage. Since the gate is locked and only opens when cars come in or out, maybe there won't be any cops there. I walked to Rue Amelot, and saw that the street had inexplicably not been closed, and apart from the two cops I saw on my out, there was nobody in front of the parking entrance (# 1 on the map.) A few minutes later, a car came out and before the gates closed I slipped in. From inside the bowels of the building I went to the basement area and from there one of the elevators took me to my apartment. I felt particularly proud of myself to have fooled the police security system twice in as many hours.

The drama stage. The double red lines indicate access closed by
police. Strangely enough, they closed all the way up where
Bd Richard Lenoir meets Rue St-Sébastien, but not much closer,
the Rue Amelot, from where I managed to enter and leave
unimpeded more than once 

An hour later, the hostage taker surrendered. It turned out his weapon was a toy, "without even bullets" as my neighbor said. He just wanted to draw the attention of the nation on the plight of the unemployed, he claimed as he was being led away.

What to make of all of this? Three comments:

1. The economic crisis which is leading to such acts of desperation is not letting up as governments are unable to fix the debt crisis (see my post on it last March) and try to resort to misguided so-called labor reform policies (see another post on this topic from July 2010- nothing has changed since then.) Expect to see more of this kind of behavior, but please do it somewhere else, not in my building, or at least not when I'm in residence.

2. The police action showed a lot of incompetence (my fooling their security scheme twice is ample proof of that) and overkill. 150 men armed as if they were about to land on Tripoli for just one crazy fellow? Come on! And, just look at the map above: what sense is there in blocking traffic (and people access to their homes) two blocks away when at the same time Rue Amelot which has a direct entrance to Pôle Emploi is left completely free? Illogical!

3. The press didn't fare any better with that reporter from BFM TV insisting on remaining as far from the action as possible. Watch a video of him "reporting" from a safe distance. Now I understand the meaning of "armchair journalism".

4. For someone who spends part of the year in violence-ridden Rio de Janeiro, which I have known for eight years now, the whole affair was quite ironic:  I never experienced in the Marvelous City anything remotely  comparable to what I saw in the City of Light this week. Sometimes true violence happens where you least expect it.

Friday, October 7, 2011

Notes from a good conference in a tacky town

Can you tell the original one (which I can
see from my Paris home) from the fake one
which graced the view from my Mandalay
Bay hotel room? 
In my book High-Tech Planet  I called a chapter “The tackiest town on earth” because most of the action took place in Dubai.  Now that I have been to Las Vegas I have to revise my judgment: Sin City wins top honors (at least the runner up for the title has the Persian Gulf as an exotic background.) Thankfully I was too busy inside the Mandalay Bay Hotel complex with the 14th HR Technology Conference  to  wonder  about the meaning (if any) of creating a surreal city in the middle of the desert  or, to make an easy pun, wander about either.

One of the most eagerly awaited presentations was SAP’s debuting of its SaaS offering, Career On-Demand, the German software company’s reply to the smaller talent management vendors who have been eating its lunch in that market segment for the past half decade (but not available until Apr. 2012.)  Although there was no doubt that its user experience was an improvement on R/3 (in itself not an insurmountable task), I felt underwhelmed by what I saw. Even the Fusion features which Oracle demoed at its booth looked better. (By the way, anybody saw  the many Vegas cabs sporting “Oracle-#1 HCM” ads?) The LinkedIn import function in the new SAP product is good (but then other talent management vendors already offer it.) SAP is still playing catch up and it shows.  On the last day, Merck  explained in their presentation why they decided on Lumesse’s ETWeb system for their  100,000- strong merged companies’ performance management rather than SAP which they use as their HR system of record. Nothing I have seen so far is going to reverse the trend.

Speaking of Lumesse, on Day 1 of the conference, they announced their acquisition of Edvantage, a Norway-based Learning  vendor (acquisisition #11  this year in my count.) This makes them the fifth talent management -TM) vendor to offer the full gamut of TM functions, and so far the only European vendor to do so. Another European vendor that attracted quite some attention was Meta4 which many people had already buried regarding the American market, and who is staging a comeback, or at least attempt #2. Considering  their strengths there are few vendors who really deserve to  succeed the second time round in the land of the second chance.

Workday was again the vendor that attracted the most attention. Unsure, though, whether that was due to the fun dance they performed in their booth. In my two decades in the HR system business I  sure never thought that software updates  would make great lyrics nor make bodies gyrate to a catchy tune. (You can watch here the video.)  Their announcement of an alliance with NorthgateArinso (NGA) on multi-country payrolls was of more direct consequence to our business, though. Since many global customers are hesitating whether  to replace their current HCM vendor with one that only covers two countries, and all of them in North America, this alliance was only a question of time before it was announced. After all, the only other possible suitors were Oracle or SAP, direct competitors to Workday. NGA is a good compromise: its SAP-based offering (whether hosted, on-premise or outsourced) offers more  payroll localizations than any other vendor and the only issue now is the extent to which either vendor offers a decent out-of-the box connector to the other’s product (HR admin for Workday and the various payrolls for NGA).  Let’s watch closely how their first joint customer AIG fares under this arrangement.

I was more than gratified by the 100-120 who attended my session on Expanding to Europe. Based on the number of HR executives who came to talk to me or contacted me afterwards, going global is increasingly becoming  part and parcel of many HR projects. 

No HR  Technology Conference is complete without the vendor-sponsored parties. In spite of my 9-hour jetlag, I managed to drag myself to some of them on Monday night. I found the SilkRoad party quite cool, and the Cornerstone one friendly and fun (and quite young –some of their executives were not even born when some major products were launched.) I passed on the late evening’s big bash since by then all life had deserted me, and I barely managed to crawl back to my room.  

One last word on the location: in comparison with Chicago the facilities were better, and the fact that we could stay on the premises was an advantage. On the down side, the Mandalay Bay has all the charm of a crowded mall, with the most dreadful hotel-elevator experience I have ever had (one day there was a long line stretching back into the lobby.) And, of course, Chicago is an amazing place with great architecture, culture and a true lake to breathe some fresh air. It is also more easily reachable for most US-based attendees and even more so for the many Europeans who came. After this interesting experiment in Sin City I definitely vote for the conference to go back to the Windy City. 

(The original Eiffel Tower is the one on the left-hand side.) 

Monday, September 26, 2011

2010-2011: Two momentous years of consolidation in the HR space

My interest and experience in M&A activities in the HR services and technology space go back to Oracle's long, hostile and headline-grabbing acquisition of PeopleSoft in 2003. I was involved in the transaction, especially with the preparation of the case before the European Commission which had tried to block the acquisition on anti-trust grounds. (For those interested, this episode was the inspiration for some chapters in my book, High-Tech Planet: Secrets of an IT Road Warrior.)

Small wonder then that since I went solo two years ago I have been asked to track the mating rituals of the companies that make up the supply side of our profession and some of my findings can be found here. Sure, we are still a quarter shy of the end of 2011 and many choice morsels have already been gobbled up and are being digested. But, after the summer lull, there could well be some interesting activity, as evidenced by last week's acquisition by ADP of Asparity Decision Solutions. After all, many software companies are awash with cash and the stockmarket drubbing we are seeing means that many target companies are particularly inexpensive. This being said I do not expect any new acquisitions through the end of the year to significantly alter my findings. Should that happen, I would post an update in January.

Data and methodology
I have tracked all the acquisitions in the HR services and software industry since January 2010 where either the acquiring company or the target were based in the United States or in Europe (the only exception was SuccessFactors' purchase of Australia's Inform.) Although I also have data on other regions of the world, I have restricted myself to these two regions since they represent the lion's share of the worldwide HCM  market and M&A activity. The number of such deals was a neat 25, until ADP's latest move last week.

The first, general, comment that one can make is the surprising lack of any hostile operation. Apart from UK-based Sage and Dutch-based Unit4 slugging it out in early 2010 for the control of Polish ERP/HR vendor Teta, all acquisitions have been consensual affairs. The nasty PeopleSoft takeover by Oracle seems to be a thing of the past.

The average number of deals has been at least one per month (reaching in April 2011 a high-water mark with no less than 4 acquisitions announced in the same month, two of them by SuccessFactors). For this year we are already reaching 11 deals for just 9 months.

HR vendors are heeding Cole Porter's famous song Let's Do It and almost everybody is getting in on the act. Some, though, seem to relish it more than others especially SuccessFactors (2010's first acquisition was also the company's first in its history) and ADP. Apart from the latter, all are talent management vendors, providing further proof if necessary that this is still the hottest HCM market segment. (Actually some of ADP's transactions were aimed squarely at the talent management space.)

Number of acquisitions by vendor, 2010-2011
Source: Ahmed Limam

As befits the size of its home market, US companies are by far the most likely to engage in takeovers: 88% of the 26 acquisitions originated from a US-based corporation. However, when one looks at the nationality of target companies, European vendors are more likely to engage in cross-border acquisitions than their American counterparts, even if those are still in Europe (the only American company acquired by a European vendor in this period was Convergys by UK-based NorthgateArinso.) Of course, in absolute terms there are more European companies bought by US vendors than non-national companies by European acquirers (ADP and SuccessFactors with 3 and 2 cross-border purchases respectively are the most global of acquirers.)

A worrying development, probably due to the uncertain economic climate in 2011, this year has so far seen only 2 cross-border acquisitions versus 7 in 2010 which is hard to understand: the dollar may be weaker than many other currencies, but then it means that any investment will pay off handsomely and faster since the revenue will be booked in the stronger target company's currency. So why are American vendors so reluctant to engage in cross-border acquisitions? I can think of several European vendors who are just waiting to be snapped up, providing the acquiring company with, if not cutting-edge technology, at least a large market share and steady revenue stream. Asia and South America also have strongly established HR vendors who, in their fast growing markets, can deliver returns US (and European) companies are no longer used to.

A closer look at the average deal size shows little impact of the financial crisis, though. On the contrary, when we remove the unusually high value of Aon's Hewitt acquisition ($4.9 bn) which would skew the results and the transactions that included HR but went beyond (such as Infor's purchase of Lawson) we find that the average deal value almost doubled up from $66 mn in 2011 to $117mn. Two caveats are in order: many vendors (such as ADP) do not disclose the financial terms of their transactions and the 2011 figure is boosted by the $290 mn value of the SuccessFactors-Plateau linkup (other disclosed deals were way below the $100 mn mark.) The last quarter's performance will be crucial in either confirming this trend or reversing it.

Deals include ERP transactions where HR was one component
but undisclosed deals are not included.
Source: Ahmed Limam 
Looking at the scope of the M&A transactions, we find that the three most  popular HR areas or processes covered are: analytics, learning and core HR. The first two reflect talent management vendors expanding their offering from their niche offering to the full gamut of TM, while the latter (Core HR) shows that some talent management vendors are moving up the value chain and want to be considered as full-fledged HCM vendors. For comparative purposes I have separated out the various components of the talent management function: otherwise the TM function represents almost half of the full scope.

Source: Ahmed Limam

Finally, I found it worthwhile to study the rationale for the M&A activities. My definition may well be controversial since there are always several reasons why a vendor decides to go down the acquisition route rather than the organic one, and I may not necessarily share the official reasons offered or I may give them a different weight.  There are usually five main reasons which of course tend to overlap (when ADP bought Byte in Italy last November  it was to increase its European footprint at the same time as increase its number of customers in a key outsourcing market.)

  1. to deepen vendor's offering: I include intelligence and social here, since these are not separate HR domains
  2. to broaden it: case of Taleo buying Learn.com to add a new HR function which it did not have
  3. to expand a vendor's country footprint (globalize)
  4. to go full HR: I am including here private equity firms or ERP vendors wanting to expand their portfolio
  5. to increase market share/customer base.

Major reasons for vendors to
acquire another HR vendor.
Source: Ahmed Limam

As the following graph shows, vendors are first and foremost interested in deepening their offering, that is adding higher-value features to their products, before broadening it. With one out of three deals involving two separate countries, it is hardly surprising that the second most important reason is to expand abroad. Although its pace is slowing down in 2011, globalization is still an unmistakable fact of the HR market and will continue in 2012. The question is whether it will be as strong as in 2010 or rather along the lines of 2011.

Another interesting question about 2012 has to do with Workday. Will the most scrutinized of HR vendors finally decide to enter the M&A fray (with the help of its freshly minted IPO) to buy its way into the recruiting or learning space or will it continue to look disdainfully on the whole exercize and carry on with its organic-growth strategy?

(Ahmed Limam will be in Las Vegas next week to attend the HR Technology Conference where he will present a session comparing  the US and Europe in terms of HR and technology.)

Friday, August 19, 2011

Brazil Rising: Thoughts on HR, technology and an emerging giant

This sprawling city of concrete and steel, the largest in all the Americas as well as the southern hemisphere, not to mention being Brazil's business center, is also home to one of the most congested roads in the world. In comparison, Los Angeles residents live in traffic heaven. The situation is such that many senior executives are whisked to work by helicopter (many skyscraper rooftops in São Paulo double up as helipads.) Attending CONARH, Latin America's largest HR event where I moderated a workshop on HR system usage, since my expenses policy did not include helicopter commuting, I decided to stay near the Transamérica Expo convention center where the conference took place thus allowing me to spend more time with Latin America's HR movers and shakers.

And what a difference it makes to be talking with Brazilian heads of HR versus their Northern Hemisphere counterparts. Whereas in the "rich" world (I wonder how much longer we'll be able to call ourselves such a thing)  the talk is depressingly about crisis, uncertainty and layoffs with European and American HR directors behaving like rabbits caught in the headlights, here you would think you are on a different planet.

Last month Brazil created 144,000 jobs, higher than the 114,000 jobs created in the US whose population is 30%  bigger than Brazil. And, even bigger difference, those Brazilian jobs were net hires, whereas the US had job losses of 60,000.  Small wonder that whereas the unemployment rate in Europe and the US has been hovering  around 9-10%, in Brazil it is down to a historically low 6%. And when you realize that in the US only less than 30% of companies are planning on hiring, in Brazil the figure is an astonishing 80%.

 On most economic indicators the United States has been trailing Brazil
for the past few years and will be doing so in the foreseeable future

These figures were borne out by all the HR leaders I met. I do not recall a single one of them saying that they would keep their workforce at the same level this year and next, let alone downsize: every one was busy adding capacity. And that is the unofficial theme at the conference: labor shortages. Retail, manufacturing, services, banking (HSBC is laying offs tens of thousands of  employees in the "rich" world but hiring several thousand in Brazil), hotels (Rio de Janeiro is trying to squeeze thousands of new hotel rooms in the narrow strips between mountain and sea before the 2014 Soccer World Cup and 2016 Olympics), oil and gas. Every head of HR in every industry is wringing their hands that they cannot find all the people they need, and when they do they lose them to the competition. This Brazilian War for Talent inevitably creates other issues: turnover with its attendant salary rises.

Traditionally, salary rises in Brazil have been dictated by government and unions through across-the-board rises to take inflation into account. While this still exists, it has been dwarfed by market realities: with demand outpacing supply, many employees go the highest bidder with Brazilian CEOs drawing now the highest salaries in all the Americas. At the lower end of the spectrum, the strong growth of he economy as well as cash transfers by the government (Bolsa Familia program) and major infrastructure projects has meant that for several years now, every month has seen tens of thousands of Brazilian employees joining the formal workforce.

The upshot of this virtuous circle is that payroll vendors are having a boon. And when I say payroll vendors that is what the Brazilian HR market has traditionally been largely about: Payroll and HR admin, functions whose complexities local vendors have learned to manage for decades when it was a reserved market. And God knows what a complex domain Brazilian labor laws are.  In my experience, Brazilian payroll is among the most complex in the world (in the same league as Italy for instance); the list of standard reports and documents to produce or track is huge: employee contract, medical document, signing and stamping several others such as an alphabet soup of CTPS, CPF (for tax purposes), the national ID card (RG), voter's card, a social program called PIS. Some can be validated via an algorithm in the software, others cannot. In a recent World Bank report it was calculated that on average Brazilian companies spend 2,600 hours per month just to comply with regulatory requirements.

The potential for HR electronic filing is huge since many processes such as CTPS registering for new hires are still manual ones (Brazilians have an amazing love for paper; whether it is settling your hotel account or pay a restaurant bill, you will be flabbergasted by the number of forms and receipts that change hands, are signed, checked, calculated on before the process is over.) Things are changing, though, as there are currently discussions to automate many processes ("click contracts" for e-labor contracts.)  Time tracking, known in Portuguese as ponto eletrônico, was mandated by law meaning that almost 400,000 Brazilian companies will have to change this year both the hardware and software used to track when employees clock in and out (even for lunch) and create the relevant interfaces with HR systems of record.

When it comes to benefits, Brazilian companies are in a league of their own, with some benefits departments managed as full-fledged businesses. Mining giant Vale, for instance, has marketing executives in its benefits department whose role is to sell benefits and other plans to employee dependents. (In case you are curious, Vale uses PeopleSoft as its HR system of record.) Another interesting feature of the employee-employer relationship is that Brazilian companies oblige their employees to open an account in the bank of the employer's choice where their salaries are paid via direct deposit. This has the advantage of securing more decent banking fees for the employee, but it is obvious that when a company with tens of thousands of employees comes knocking on the door of, say, HSBC Brazil, they get good benefits themselves. (This cozy situation reminds me of Belgium where payroll services providers make a big part of their money by leveraging the time - and therefore interest paid- between the date when they receive funds from employers and the date when they pay salaries into employee accounts.)

As in Spain, health and safety is a big issue in Brazil with a higher rate of  workplace accidents than in the US. An HR manager for Petrobras, the Brazilian oil giant (whose IPO last year became, at $67bn,  the world's largest) told me an anecdote about the accident rate on their platforms (2 or 3 major accidents per week!) He had a hard time when visiting one of their oil rigs to talk employees out of organizing a churrasco or barbecue, knowing Brazilians' love for grilled meat. Having accurate statistics and providing training are key to bringing the accident rate down to more manageable levels. (Another issue they have in the oil and gas industry is, of course, labor shortages, especially of technical staff.)

Faced with such complexities, but also due to the fact that for a long time  Brazil operated as a closed economy and to a certain extent this continent-sized country still feels quite unique (it is the only country in the Americas to have its own language)  it is small wonder that the HR software market has traditionally been the preserve of local vendors. The major ones are:

  • Totus: Brazil's answer to SAP, it has more revenues than many US software companies (should hit US$1 billion this year) and is even expanding abroad (Mexico and Portugal);
  • LG Sistemas (the largest HR vendor with a customer list which is a roll call of the best-known Brazilian companies, many global multinationals interfacing SAP HR to LG's flagship FPW payroll); 
  • Senior (Vetorh product line) with a strong loyal customer base.

As mentioned earlier, the booming nature of the Brazilian economy is making recruiting an HR leader's daily headache. You might think that this is par for the course for emerging economies. Actually labor shortages are more acute in Brazil with 64% of employees reporting difficulty in filling vacancies versus only 40% in China and 16% in India, according to a Manpower survey. This situation is compounded by the fact that, because Brazilian employees tend to be loyal to their companies, luring them away can only be done by offering them higher salaries, which some are happy to take because companies are happy to offer them.

These developments have led the traditional payroll-cum-HR admin market to give way to an emerging talent management market segment. Salary cost escalation means that if you cannot continue to compete on salary alone, you will have to offer your employees something else to base their loyalty on. Enter career-development plans to give Brazilian employees a stake in both their company and their own professional life.  Many HR managers who have been working on competency models have embraced whole-heartedly the various aspects of talent management, launching career-management and competency programs in their companies. Brazilians, who are among the most social and communicative people on earth, have taken to social media enthusiastically (with Orkut rivaling Facebook) showing that it is just a matter of time before tens of millions of consumers of social, mobile HR appear on the map.

The issue is that HR vendors are still slow in providing the relevant tools for that. (For Portuguese readers, I wrote an article on this issue last January and it was published by a Brazilian HR portal) Brazilian vendors, although beefing up their talent management functionality, are still caught in a payroll-HR admin time warp. Strong web-based vendors  are yet to emerge. What about global vendors? you might wonder.

Global vendors SAP, Oracle, PeopleSoft, and ADP tend to be used by subsidiaries of  (mainly US) multinationals, although the burgeoning number of Brazilian multinationals is also going with these vendors (note that they still tend to favor LG or Totus for their payroll, in spite of SAP having a Brazilian payroll.) Talent vendors such as Taleo or  SuccessFactors have a token presence, usually through a local partner, and, like their ERP competitors, are happy to just work on extending the contract to local subsidiaries. At the conference I did not see a single representative from the global vendors, which makes you wonder about their business expansion plans. Considering the current economic climate in the the US and Europe, how can HR technology vendors ignore such a large, growing market as Brazil? With the Brazilian currency, the real,  relentlessly appreciating versus the dollar (when I first came to Brazil seven years ago US$1 was worth over R$3, now it has come down to R$1.5, having lost half its value) this means that every customer in Brazil can now add significantly to a global vendor's bottom line.  And starting in October,  payroll taxes on certain industries such as software, will come down 20% (a move our deficit-ridden "rich" countries can only dream of.)

Every light is blinking green, an inviting green. The land of the four S's (samba, soccer, sun and sex) has every potential to add a four S (software) to its suit. What are global vendors waiting for? For a long time Brazil was known as the country of the future. It has finally become the country of the present, and it is a global vendor's market to lose.

(Ahmed Limam keeps a second home in Rio de Janeiro from where he monitors the Latin American market and provides consulting/advisory services in the region. When the blogger is not in residence, his penthouse can be rented. Check out the Airbnb listing, also available on TripAdvisor/Flipkey and Homeaway. You can also rent it straight from the blogger))