SuccessFactors vs. Taleo – The Gorillas for 2010

As we recap 2009 and look ahead to 2010 in the market for talent management software, two gorillas have emerged:  Taleo and SuccessFactors.   While together these companies make up less than 20% of the total market, their size and growth has made them companies to watch as this market continues to grow and mature.

In October, SuccessFactors announced plans to raise an additional $180 Million through public sale of stock at a price around $15 per share.  Not to be outdone, in November, Taleo announced plans to raise over $140 Million on the public market by selling shares at around $20 each.    Clearly both companies are on the warpath:  they expect to hire more people, acquire more technology, and expand globally.  And both are taking advantage of a runup in the stock market:  Taleo is now valued at $900 Million and SuccessFactors is valued at over $1.2 Billion. (Taleo is priced at nearly 4X sales, and SuccessFactors at over 8X sales – multiples that remind me of the .com boom.)

A few comments and thoughts on these two companies and why they continue to grow:

*  Both these companies are headquartered in the San Francisco Bay Area, so they each have access to a tremendous wealth of talent.   I had a conversation with another talent management company last week and one of the things I told them was that at this point in the market “depth of leadership team” is one of the most important elements of success.  Both Taleo and SuccessFactors have attracted senior leadership team with a wealth of experience at Oracle, PeopleSoft, Siebel, and other highly successful Bay Area enterprise software companies.  I think in 2010, as the market heats up again, the war for talent will differentiate high-performing vs. lower-performing talent management software companies.

* Each company comes from a different core.  Taleo’s history as a recruiting and applicant tracking software company positions it very well for 2010, when companies will again start hiring again and will see an increased need for recruitment automation.  Taleo’s Release 10 and its Taleo Anywhere, Taleo Grid strategy, and new Performance Management offering will appeal to the thousands of existing Taleo customers as the economy improves.

* SuccessFactors, by contrast, has built its core business around performance management software.  This area of talent management, while one of the hottest and fastest growing areas, is actually becoming more commoditized every quarter.  Organizations can now purchase software for goal alignment and performance management from almost any one of their HR systems providers, forcing SuccessFactors to move “upstream.”  The company has responded to this by focusing its marketing efforts on both building out the rest of the suite (SuccessFactors now has a highly competitive recruiting products) and rebranding itself as Business Execution Software.  (Read more on this topic here.)

* Taleo is profitable, SuccessFactors is not.  Taleo has managed to grow profitably while acquiring two companies in 2009 (Vurv and Worldwide Compensation), while SuccessFactors is now cash-flow positive but still not profitable.  The main reason for this difference is that SuccessFactors is still using a “scorched earth” strategy by spending 51% of its revenues on sales and marketing.  Taleo, by contrast, only spent 32% of revenue on sales and marketing in Q3 of 2009.

This strategy of “growth at any cost” pays off early in the market – as SuccessFactors now appears as a player on almost all RFPs and in most channel and reseller relationships.  The downside of this approach is that (A) many of the sales and marketing people hired by SuccessFactors will not stay very long, so the company actually tends to train people who then move on to other companies, and (B) buyers now know a lot about SuccessFactors and many have told me that they no longer consider the company’s products as strategic as they were originally positioned.

I am not a big fan of the “business execution software” positioning, because essentially what SuccessFactors sells is software to help HR and line managers do their jobs of better managing people.  Time will tell whether this marketing approach truly brings SuccessFactors into the board room.

* SuccessFactors continues to grow at a faster rate than Taleo, but not by much.  Taleo, which is running at about a $200 Million annual revenue runrate, grew its total revenue by 3.3% in Q3 and SuccessFactors, which is running at about a $160M run rate grew at around 4.7%.    Taleo’s total revenue and backlog grew by 11% in Q3 and SuccessFactors total revenue and backlog grew by 22%.  Clearly the public market loves this growth – giving SuccessFactors almost twice the multiple of sales over Taleo.   Over time I would expect SuccessFactors’ market valuation to come in line with Taleo, Ultimate, and the other more established players in the market.

* Both companies have yet to enter the LMS market (which is close to a $Billion market).  Taleo recently announced its own employee development product and signed a reseller partnership with Learn.com.  SuccessFactors has had a similar relationship with GeoLearning for the last few years.  In 2010 I would expect both these companies to make a bigger play into this part of the market, which is a natural extension for their current product portfolios.

* Both companies have effectively expanded their offerings into mid-market as well as global enterprises.  Despite this, however, each company has very different “core markets.”   In our recently released Talent Management Systems Customer Satisfaction research, Taleo’s average customer size was nearly twice that of SuccessFactors – showing Taleo’s deep experience serving very large companies.  While both companies appear to serve companies from small to mid to large, Taleo’s experience with large global enterprises is deeper.

*  Both companies have built excellent client support and service organizations.  While we position SuccessFactors as a company in the mid-enterprise market and Taleo as a vendor in the global enterprise market, both achieved leadership positions in many of the customer satisfaction indexes we studied this year.

* Both companies have a lack of experience and focus on the core HRMS part of enterprise software.  While today this particular area has not become a major focus of talent management software, we clearly see the writing on the wall:  todays’ “talent management” software will rapidly become “people management” software which will eventually collide with the corporate HRMS.  Most larger companies are not ready to replace their legacy HRMS systems, yet more and more viable alternatives are now available.  (Workday, Silkroad, Salary.com, Softscape, Ultimate, Oracle, PeopleSoft, Lawson, and SAP are all releasing major HRMS upgrades this year.)  I think 2010 will not only force both companies to strongly review their strategies for the LMS market, but will also force them to think seriously about offering a more complete “single system of record” for their mid-market clients.

I do not mean to use the word “gorilla” in a negative way – in fact the emergence of these two companies as leaders has been very positive for this entire marketplace.  Taleo and SuccessFactors are both very well run companies with a deep bench of senior leaders.   Their emergence as gorillas has been very positive for the entire market:  investors have great confidence in this space;  other vendors use Taleo and SuccessFactors as models to emulate;  customers now understand the role of talent management software and can cost-justify the acquisition;  and many engineers, sales people, consultants, and service people are now well trained in this market and these people can go out and support clients.

And while Taleo and SuccessFactors now have the scale and war chest to throw their weight around, there are still many fast-growing, innovative companies in this space which will be around for years to come.  The space is still highly competitive and many of the private companies have reached revenue rates of $50 Million and greater and continue to deliver outstanding customer value and client satisfaction.

For more information on this vitally important market, we encourage you to read our comprehensive analysis of the vendors, market dynamics, and customer satisfaction:  Talent Management Systems 2010.

And mark your calendars for April 6-8, 2010 to join us at our annual research conference:  IMPACT 2010:  The Business of Talent®.  This is our third research conference and we will have many active discussions between vendors, buyers, and senior HR leaders about the changing role of talent management systems in total business strategy.  I encourage you to bring your team to gain a comprehensive perspective on the latest best-practices, trends, and solutions in enterprise learning and talent management.

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  • Matt Shacklady

    A well written analysis Josh. Thanks.

  • Jim

    Currently using Success Factors recruiting software and it is an absolute disaster. This software suite is not the least bit useful and is extremely labor intensive. Run don’t walk the other direction!