SAP acquires SuccessFactors: a first take

Larry Dignan reports that SAP has acquired SuccessFactors, suggesting this is the first step in a cloud rollup game. I'm not so sure but I do have a specific take on this. In Larry's analysis he says:

• SAP now has five different human resource management architectures.
• Will Dalgaard be able to navigate SAP’s culture and hierarchy to drive the cloud business? If Dalgaard can make all of SAP cloud friendly he’s a CEO candidate.
• Does the SuccessFactors purchase indicate that SAP’s Business ByDesign experiment is done?

These are good questions of which the first and third are inter-related. I'll come back to the second. On the first:

SAP has many technology platforms but will find ways of bringing them together where it makes sense. It is conceivable that SAP will now promote its Gateway technology as a way of hiding the inevitable complexity that will come as a result of different interfaces and technologies. I can for example well imagine Gateway as a method by which SuccessFactors existing integrations to things like Google/Salesforce.com from its CubeTree acquisition being used to push forward a slew of mobile applications. Even so, SAP will need to think through how SuccessFactors will be presented to users. From what I hear, SuccessFactors UI is not exactly well liked by users but the fact it is not a core product means that users rarely have to touch it on a day to day basis.

SAP has publicly said on several occasions that ByDesign's technology represents the core of where it is going with cloud apps. I am going to assume that SAP did enough due diligence to figure out how that will merge with SuccessFactors but the chances of ByDesign's underlying architecture surviving long term must now be in doubt. What gets ported to what will be telling but the fact SAP plans to keep SuccessFactors a separate operating unit does not bode well for BYD and puts in doubt what happens next with the Talent OnDemand line of business application, slated for release in Q2 2012.

That being said, Lars Dalgaard, who takes on responsibility for all SAP cloud offerings will have to look hard at the spaghetti soup he finds along with considering how to pull all that AND Sybase together for mobile. Streamwork, another platform upon which SAP has been betting the social farm will also come into play. Rationalising what is becoming a sprawling portfolio will be a significant effort.

Returning to Larry's second point is probably more important in the short to medium term than any considerations around technology direction.

Keeping SuccessFactors separate is a very smart move because it keeps the on-premise and cloud businesses in their own worlds. Mostly. Nevertheless, such structures bring challenges. The development teams in SAP's Walldorf operation wield considerable power and have already managed to account for the departure of one high profile cloud executive. The addition of SuccessFactors does not bring with it enough revenue clout for their management to have the impact one might imagine. On the flipside, SAP co-CEO Jim Snabe and SuccessFactors CEO Lars Dalgaard share a common heritage in that both are Danish. That makes Snabe and Dalgaard natural allies at a time when Snabe is being widely credited for repairing the damage wrought by past management.

As a side note, it is interesting to see that SAP Americas is the vehicle through which SuccessFactors is being acquired. SAP's financial structure has a direct impact on how the business is run and where the power lays. For too long, restrictive German trading and labor laws have prevented what would be easy when operating under US governance. If SAP is able to take advantage of this acquisition method, I can see a lot of developer gripes evaporating. We will have to wait and see how this shakes out but my initial take is net positive.

From a buyer's perspective, SAP re-acquires customers like Siemens which it lost to SuccessFactors a few years ago. This is a two edged sword. On the one hand it gets SAP used to cloud pricing, but will SAP seek to hike prices as it did with BusinessObjects? Right now, buyers should seek to establish where they can lock in price advantage for the future and prior to the acquisition close. Given we're in the 25 days of the year end scramble for deals, customers should be careful they do not over estimate their commitment needs but should aggressively negotiate discounts for enlarged contracts or extended terms.

Buyers are going to increasingly find themselves swamped with sales people wearing SAP badges but selling technology that brings integration challenges. Buyers will therefore need assurances at a time when the cloud is anticipated to simplify technical landscapes. Early assurances backed by examples from the new team will go a long way towards assuaging fears.

The good news is that buyers will at last see some genuine innovation from SAP that is available now and not a hyped pipe dream for the future. That should provide welcome relief to customers who see themselves being pulled away from their strategy of having a one stop shop approach to the transactional systems. It still leaves the CRM end of the accounting, HR, CRM ERP trilogy as problematic but at least one major area of functionality has now been boxed off.

This is good news for Workday. In acquiring SuccessFactors, SAP has demonstrated just how fearful it is that Workday will do an end run around the HR space exactly as Salesforce.com has already done in the CRM market. Workday is already putting $300 million in bookings as its 2012 target and I can easily see them reaching $1 billion by 2014-15. In paying a whopping 52% premium over the share price close, SAP has demonstrated a certain desperate need to protect itself. I can only imagine the smiles on Workday co-CEOs Dave Duffield and Aneel Bhusri's faces as they move towards an IPO some time in 2012.