Nothing Succeeds Like Success(Factors) - Part 3

Part 1 of this series introduced SuccessFactors, a public provider of software as a service (SaaS) talent management solutions. The article first analyzed the vendor’s evolution from its traditional People Performance realm to the seemingly more opportune Business Execution (BizX) province.

Then the article talked about SuccessFactors’ diverse product editions (tailored to satisfy companies of all sizes) and detailed the two core modules of the SuccessFactors BizX suite of applications: Performance Management and Goal Management. These two modules serve as the foundation for the BizX application suite, since visibility into employee performance and organizational goals form the necessary basis for other talent management activities.

Part 2 then analyzed additional BizX modules (i.e., recruiting, learning & development, compensation, and succession planning), some nice-to-have capabilities, and the most recent developments, such as the 2010 tuck-in acquisitions of Inform, CubeTree, and YouCalc

What Have Been SuccessFactors’, Well, Success Factors?

From its early days, the vendor understood the following simple fact: that its success depends on its customers' success. SuccessFactors still believes that it can contribute to its customers' success by providing them with applications and metrics for managing talent strategically. The vendor has built an on-demand, easy-to-use, and modular set of applications available over the Web (or via mobile devices) that incorporate industry best practices and provide dashboards and actionable reports.

SuccessFactors monitors internally the stock performance of its several selected customers and is happy to point out that their average stock performance has done rather better than the averages of renowned global stock markets. The SuccessFactors "Return on Execution Portfolio" (SF ROX) explores the performance of SuccessFactors customers of all types that use the BizX Suite heavily and strategically, and compares them to the market average across the NASDAQ, S&P 500, and DOW stock markets. From October 2008 to September 2010, the SF ROX Portfolio has maintained a strong performance lead at 24 percent while the aforementioned index averages have managed just 8 percent, negative 4 percent, and negative 3 percent, respectively.

As compared to traditional approaches, the BizX solution suite customarily offers customers rapid benefits and return on investment (ROI) for the following reasons:

SuccessFactors asserts that its commitment to the customer shines through in everything the company does, and it is constantly striving to improve the SuccessFactors user experience. In fact, this commitment is the vendor’s first founding principle (mentioned in Part 1).

SuccessFactors offers a diverse range of software that, combined with its cloud computing model, allows the vendor to differentiate itself from larger legacy-based competitors. With its fully scalable solution and support for 35 languages across 185 countries, SuccessFactors can be tailored to fit the needs of basically any organization. Being a true multi-tenant software as a service (SaaS) offering, the solution is quite configurable, allowing customers to tailor their deployment to reflect their identity, business processes, and existing forms and templates.

SuccessFactors’ implementation consultants are experienced performance management and human resource (HR) professionals, rather than computer programmers, and many of them hold PhDs, MBAs, and other advanced business degrees. Most of their projects are priced on a fixed-fee basis, which reduces the risk of the implementation cost overruns often associated with on-premise software packages. The vendor also provides follow-on services as required, including end-user training and business transformation services.

Continuous Customer-Driven Development

Furthermore, when customers ask, SuccessFactors delivers by continually introducing new products and innovations to BizX, by answering and even anticipating customer needs. This customer-centric development focus, bolstered by the on-demand model, has enabled SuccessFactors to release significant enhancements every month for the past decade (nearly 120 releases).

A few years ago, the vendor aptly named the release of its performance and talent management suite “ULTRA.” The catchy acronym stood for the key benefits of the release as follows: User delight, Leading-edge innovation, Technology-agnostic, Results focused, and Advanced integration.

In the Fall 2010 update to the BizX Suite, SuccessFactors announced over 100 product releases to-date and over 400 enhancements and additions to the BizX Suite, as just another example of the vendor’s commitment to its customers' success. As mentioned in Part 2, the Fall 2010 release features the Single Sign On (SSO) for integrated CubeTree capabilities, which are free for all 8 million SuccessFactors users (with a premium option also available for a fee). There is automatic synchronization and integrated cloud infrastructure between BizX and CubeTree.

The Role of BizX's Product Architecture

Lite its peers, Taleo, and NetSuite, SuccessFactors’ solution has been architected from the outset to be multi-tenant, cloud-based, scalable, secure, configurable, and at high performance levels (rapid response times during heavy usage), in order to rapidly deliver value to its customers (via a standard Web browser without requiring any changes in their network or IT infrastructure). In addition to including extensive roles and permissions capabilities and audit histories of transactions, BizX’s architecture segregates each customer’s data from other customers’ data. This data segregation also allows the solution to easily scale horizontally at the database level by load balancing customer instances across database servers.

But in contrast to, NetSuite, and Oracle, SuccessFactors is not in a platform as a service (PaaS) play per se. The underlying architecture is just a means to the end of delivery of BizX as a service. SuccessFactors has standardized on the Java Platform Enterprise Edition (Java EE) technology stack with the majority of its software written in industry-standard software programming languages, such as Java.

The vendor also makes extensive use of Web 2.0 technologies, such as AJAX and Adobe Flash, for improved usability and performance and to deliver a Rich Internet Application (RIA) and interactive experience. SuccessFactors supports the recent versions of major Web browsers on major operating systems.

Moreover, the vendor uses a hybrid approach to its multi-tenant database architecture, which it believes is unique compared to other multi-tenant cloud-based applications. While the core of the approach is multi- tenant with identical database table schemas for each customer, SuccessFactors leverages the self-describing attributes of extensible markup language (XML) to abstract many of the unique customer data requirements into an object model.

Moreover, while all of the data is stored in a standard relational database management system (RDBMS), the table structure itself is simplified, with all of the core entity data self-described within an XML-based object model. This approach enables a configurable user experience, allowing customers to provide their users with a web-based performance and talent management system that is familiar and easy to adopt because it can mimic the layout of a prior paper-based system.

Users can also enter goals, tasks, targets and milestones into different goal plan templates and layouts, all while leveraging a common permission control model for access to public and private goals within their organization. This approach also allows SuccessFactors to interface with services across a service oriented architecture (SOA) environment.

Another key feature of BizX’s application architecture is its ability to understand the hierarchical structure of employee relationships within an organization. This is essential for a performance and talent management application, but difficult to accomplish using traditional flat table-based database software applications. Traditional databases must traverse the entire employee hierarchy in order to effectively query across the dataset using standard (and pesky) Structured Query Language (SQL).

SuccessFactors’ proprietary implementation of a “Left/Right Algorithm” allows its solution to optimize these queries and quickly search and retrieve hierarchical data. This approach allows managers to cascade goals to team members and allows each team member to personalize these goals for their particular goal plan, all while the system seamlessly maintains the relationship between the original and cascaded goals in the employee hierarchy.

What Might Still Be Stifling SuccessFactors?

SuccessFactors is in great shape with regards to the principal competitive factors in its industry.  These factors are as follows: relatively low total cost of ownership (TCO), breadth and depth of its product functionality (i.e., employee performance management with integrated succession planning and compensation), brand awareness and reputation, ease of deployment and use of solutions, level of integration, configurability, security, scalability, and reliability of its solutions, the ability to innovate and respond to customer needs rapidly, the size of customer base, the level of user adoption, and the ability to integrate with third-party applications.

Still, the vendor’s challenges should not be overlooked. Namely, the overall market for business execution and talent management solutions is nascent and thus fragmented, rapidly evolving, and highly competitive, with relatively low barriers to entry in some segments. Within the still evolving business execution market, the most common type of competitive solution consists of rudimentary manual and paper-based processes, or desktop software tools that are not specifically designed for performance and talent management.

SuccessFactors also faces competition from custom-built software that is designed to support the needs of a single organization, and from a plethora of HR and talent management application providers. These software vendors include Authoria (including PeopleClick), Cornerstone OnDemand, Halogen Software, Kenexa (including, Oracle, Plateau Systems, Saba, SAP, Softscape, StepStone Solutions, SumTotal Systems, Taleo, Ultimate Software, Workscape, and Workday.

We expect that the competitive landscape will change as the market for HR and talent management software and services further consolidates and matures. See my colleague Sherry Fox’ recent blog posts on this past year-end's spate of acquisitions in the space.

Moreover, some of SuccessFactors’ competitors and potential competitors have substantially greater name recognition, longer operating histories, larger marketing budgets and significantly greater resources. They may be able to devote greater resources to the development, promotion, and sale of their products and services than SuccessFactors can, which could allow them to respond more quickly and effectively to new technologies and changes in customer needs.

Some of the principal competitors offer their products or services at a lower price, which has resulted in pricing pressures. Many of the aforementioned software vendors could bundle their HR and talent management products or offer them at a lower price as part of a larger product sale. In addition, some competitors may offer software that addresses one or a limited number of strategic HR functions at lower prices or with greater depth than the BizX suite.

Furthermore, some potential customers, particularly large enterprises, may elect to develop their own internal solutions or ask the software vendor (and its partners) to develop a heavily customized (one-off) solution. Thus, in such instances, some competitors may offer or develop products or services that are superior to BizX’ out-of-the-box capabilities. In addition, many of SuccessFactors’ competitors have established marketing relationships, access to larger customer bases, and major distribution agreements with renowned consultants, system integrators (SI’s), and resellers.

In fact, many of the aforementioned competitors have better-rounded HR and talent management product suites than SuccessFactors, which leads the field in the realm of performance management only. Conversely, some competitors can open doors with their recruitment (e.g., Taleo), learning (e.g., Saba), benefits content management (e.g., Authoria), compensation (e.g., Kenexa), or general HR offerings (e.g., SAP, Oracle, Workday, Ultimate Software, etc.) while still having competitive performance management modules.

Is the Business Execution Market For Real?

In addition, the business execution solutions market is an emerging market, and therefore, its ultimate size and any share of this new market that SuccessFactors might obtain is inherently unpredictable. The market size will likely be impacted by, among other factors, the breadth and depth of available SuccessFactors solutions, the productivity enhancements realized by customers using these solutions, and emergence of competitive solutions. It is possible that the vendor’s assumptions and estimates as to the market size (i.e., US$35.6 billion, as mentioned in Part 1) could be utterly incorrect and inaccurate, or otherwise not come to fruition.

In any of these possible cases, SuccessFactors may not realize the benefits of this anticipated market opportunity. Adding salt to the wound, the company has a history of losses and may not achieve or sustain profitability in the future. In fact, the company has incurred significant losses in every fiscal period since its inception in 2001. The losses and accumulated deficit have been due to the substantial investments SuccessFactors has made to grow its business and acquire customers.

Despite a recent moderation in spending, the company still expects to incur significant operating expenses in the future due to its hefty investment in sales and marketing, ongoing research and development (R&D) expenses, and operations costs. There are also sizeable expenses related to stock-based compensation and acquisition-related charges arising from the recent purchases of Inform, CubeTree, and YouCalc (mentioned in Part 2).

Therefore, recurring losses will likely continue for the foreseeable future, while in pursuing acquisitions, it is also likely that SuccessFactors’ operating expenses will increase. Furthermore, in spite of successfully increasing its customer base, the company could also incur increased losses because costs associated with generating on-demand customer agreements are generally incurred upfront, while subscription revenue is generally recognized ratably over the term of the agreement.

The company’s meteoric rise is both a blessing and a curse. Namely, continued growth and size, bundled with its need to become profitable eventually, might reach the point when the company might lose its cultural DNA and depart from the aforementioned touchy-feely founding principles. Corporate cultures of entrepreneurial startups and established large corporations are hardly ever comparable.

In terms of features, some other human capital management (HCM) products might have an edge due to enabling experiences in a user’s natural work space, such as Microsoft Outlook (e.g., to synchronize meetings, events, and reminders with their calendars), HR self-service, and corporate intranets (e.g., to publish predefined talent information via an RSS feed). Until recently, some companies have not been that impressed with SuccessFactors’ ad-hoc querying and reporting capabilities and compensation planning for variable payment plans, but we might want to wait and see how new product releases and recent acquisitions might help in these regards.

For any of the above reasons, SuccessFactors may not be able to compete successfully against its current and future competitors in the long term. Still, the company is currently quite far from running out of steam, and not many vendors have grown so rapidly while touting easy user adoption these days.

For the first nine months of 2010, the company’s revenue grew by 32 percent, headcount grew 44 percent, while the European operations grew over 50 percent. The year saw a success for the entire BizX suite, whereby only 24 percent of revenue came from core Performance and Goal Management modules. In 2010, SuccessFactors launched the following six new solutions: Goal Execution, BizX Insights, Workforce Analytics, Workforce Planning, Cubetree, and Calibration, the latter being the fastest growing solution yet.

At the end of the day, dear readers, your comments, thoughts, suggestions, or individual experiences with Successfactors and other talent management tools are more than welcome. What do you think about the vendor’s business execution approach and how it compares to other competitive solutions? How do you handle your talent management and execution processes? Manually? In an automated way? Or somewhere between (where only some processes and metrics are automated)?
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