5 min read

Should SAP + SuccessFactors Worry

Co-CEO Bill McDermott tells InformationWeek deal will vault SAP to No. 1 in software-as-a-service subscribers and No. 2 in SaaS revenue.
SAP has announced its intention to acquire software-as-a-service-based HR apps specialist SuccessFactors for $3.4 billion. As for the ambition behind the deal, SAP co-CEO Bill McDermott makes it abundantly clear.

"We will become the No. 1 business software company in the world in the cloud," McDermott tells InformationWeek. "It's only a question of what year."

SAP is making a huge bet in the cloud not just on SuccessFactor's products, but also on its leadership. SuccessFactors CEO Lars Dalgaard will assume control of all SAP's cloud strategy -- including direction of existing SAP cloud apps such as Business ByDesign and SAP BusinessObjects OnDemand.

SuccessFactors is already the No. 1 SaaS vendor in terms of sheer number of users, with more than 3,500 customer companies subscribing to 15 million seats. has more than 87,000 customers, but according to SAP they subscribe to only 3 million seats. In terms of revenue, however, SuccessFactors, which expects to take in $332 million this year, is far smaller than, which is No. 1 and on track to surpass $2.2 billion in cloud business apps revenue in its current fiscal year.

[ Want more on human capital management? Read SuccessFactors Update Streamlines HR Management. ]

SAP is bidding $40 per share for SuccessFactors, a 52% premium over its Friday close price, in hopes of tapping the company's fast growth. SuccessFactors grew 50% through the first nine months of this year, and it's the leading SaaS player in the human capital management (HCM) market, competing with specialists Taleo and Kenexa. It also competes with HCM capabilities offered as part of larger SaaS ERP suites from vendors including NetSuite, Workday and Oracle, with the last offering an on-demand talent-management app as part of its new Fusion apps suite.

Of course, SAP also hopes to greatly accelerate SuccessFactor's growth by offering SaaS-based HCM to 176,000 SAP customers (the companies say there's a modest 14% overlap between the two customer bases). SAP will retain its existing on-premise human capital management apps, but analyst figures show that most of the demand in that market is shifting to the cloud.

Before this deal, SAP talked up a big commitment to providing cloud software--making it one piece of its five-point growth strategy--but hasn't backed it up with big subscription growth for its Business ByDesign business apps suite or SAP BusinessObjects BI OnDemand suite. McDermott says the company SAP is doing well on the other four points--gaining market share in its on-premise applications, business analytics, mobile apps, and in-memory computing-- and the SuccessFactors deal will effectively "complete" the cloud story.

Between's fast growth and Oracle's October $1.5 billion acquisition of SaaS CRM vendor RightNow, SAP has been falling behind in the cloud. Just last month, McDermott told InformationWeek, that SAP was preparing a "comprehensive, strategic direction" that would step up the company's cloud computing initiatives considerably. "We're ready to unleash the tiger and go for the SAP Cloud in a big way," McDermott said then. "You'll see that the SAP cloud will be an important focus for us, and it will be a broad, comprehensive cloud strategy."

What SAP also expects to gain through the deal is a management team that is seasoned in the cloud computing market, led by Dalgaard. "As evidenced by the fact that [chairman] Hasso Plattner expects Lars to become an executive board member, that speaks for itself that we believe in him, we are going to fully empower him and we know that he's the right guy to make [our cloud] decisions," McDermott said.

SuccessFactors' got its start in employee performance management, a lightweight HR review app that employers large and small tend to provide to every employee, which explains SuccessFactor's big subscriber base. Global industrial giant Siemens, for instance, subscribes to more than 400,000 seats. But SuccessFactors has greatly expanded its portfolio of workforce management apps through acquisitions and organic brand extensions.

The company's BizX suite now includes options for recruiting, variable pay, compensation management, learning management, strategy management, goal execution, succession, workforce planning, and collaboration. There are 19 applications in all, and Dalgaard says SuccessFactors' expertise in delivering multiple apps and handling sensitive data with intricate role- and user-based access privileges across those apps will benefit SAP's cloud offerings.

Doing his own due diligence on the deal, Dalgaard says he personally investigated SAP's planned cloud applications and capabilities and sees huge promise. "Sales OnDemand, Travel and Expense OnDemand, and General Ledger in the cloud -- these are all new applications that are going to be a real pain to every existing cloud competitor out there," he says. "We're very lucky to be a part of it."

Given the recent consolidation wave, NetSuite, Workday and Taleo might become more attractive acquisition targets for larger companies looking to ramp up their cloud initiatives. It would take a real giant to acquire HP, for one, has longed for more relevance in the cloud and business apps spaces. But Meg Whitman, HP's new CEO, recently ruled out any near-term acquisitions that would cost much more than $1 billion. Having paid more than $10 billion for Autonomy, a company that was on track for $1 billion in annual revenue, HP or, indeed, any suitor would have to make a huge financial stretch to buy Salesforce.

What's more, cloud apps vendors earn notoriously slim margins. SAP had to reassure financial analysts that cost synergies and growing scale driven by cross selling would improve SuccessFactor's profit picture. The company lost $12.5 million on $205.9 million in revenue last year.