The Talent Management Software Slump
We have been carefully looking at the Talent Management Software market over the last few weeks, and the first quarter of 2009 was a bit of a disaster. The market for performance and succession management software, which we believe finished 2008 around $520M in size and is expected to grow to $655M in 2009, had a fairly bad Q1 (this does not include software for recruiting and learning management systems).
The recession clearly forced most corporate and government buyers to postpone their purchases. We believe the whole market saw “new software sales” of less than $30-40M in new talent management tools in the quarter (this does not include applicant tracking software and learning management systems, which are both larger markets). This shows growth of around 5.5% growth over 2008, which is positive but way behind the 26% growth we project for the year. Later this quarter we will update our annual forecast for the talent management systems market.
Some specific examples of performance in Q1:
SuccessFactors, one of the largest providers of performance and succession management software, grew revenues at only 6.7% but their total growth rate, including new revenue and backlog, is 23% lower than the prior quarter.
SumTotal Systems, the industry’s leading learning management systems provider, saw a reduction in total revenue by 34%, primarily due to a big dropoff in licensed revenue. The company is in the middle of a bidding war between two private equity firms who have bid up the company’s value to 1.3 X sales. SumTotal continues to win new LMS business but had a hard time gaining traction in performance management software.
Taleo, the leading provider of recruitment management applications, which is now moving into the integrated talent management market, grew at only 1% over the prior quarter, which shows some growth in their mid-market and talent management business, but mostly offset by slowdown in the recruiting market.
Stepstone ASA, one of the largest public talent management software companies in Europe who is entering the US market, saw its revenues drop by 7%, led largely by a reduction in job postings. The company’s talent management software business was flat over the prior quarter.
Despite this difficult Q1, we believe the market is going to come roaring back in Q2 or Q3 of 2009. Most of the private companies we talk with (Plateau, CornerstoneOnDemand, Learn.com, GeoLearning, Halogen, and others) tell us that while they had a weak Q1, they have seen tremendous growth opportunities in Q2. The activity from private equity firms (Workday, Cornerstone, SumTotal, and others are all receiving new venture money) shows increasing confidence in this market by the financial community.
We see several major factors which affect the growth and health of these companies.
First, the mid-market and small enterprise segment of talent management is starting to grow rapidly. While large companies are shopping for new integrated talent management solutions, mid-market firms will buy at a rapid rate as the economy improves. As with most recessions, smaller companies will recover first.
Second, we are reaching a point in this market where “integration” is more important than “functionality.” What this means is that businesses who buy talent management software (recruiting, learning, performance management) can get many of the features they need from a wide variety of vendors. The real issues they must now consider is how they can implement an “integrated” solution. The days of having one island of software for learning management, another for performance management, and a third for recruiting, are slowly going away – and most mid-market and more and more large companies are now heavily leaning toward “full suite” solutions.
Third, the LMS and recruiting markets continue to be “legacy” software markets now undergoing rebirth. The LMS market, which is nearly $800 Million in size, is going through a rebirth as companies replace their first-generation systems and look for modern, YouTube-like LMS systems. Ditto on the applicant tracking market: our upcoming research on that market is showing that most companies use an ATS but aren’t that thrilled with it. They expect these systems to turn into CRM and social networking tools. Taleo’s new Monarch product is moving in this direction.
Fourth, there is still tremendous demand for talent management software. In today’s rapidly changing workforce (from layoffs to restructuring to rapid growth), the value of this set of software is greater than ever. While Q1 was tough for vendors, most buyers only postponed their purchases – giving themselves more time to evaluate options and improve their own businesses. In Q2, Q3, and Q4 these companies will buy these systems.
I would consider the last few months a small rainstorm along the road toward a very bright and sunny future.