CornerstoneOnDemand: Momentum Rising
CornerstoneOnDemand is one of the most successful cloud vendors in the market for integrated talent and learning management software. The company was founded in 1999 and over the last 20 years has steadily built a global business providing end-to-end HR software to meet the needs of large and mid-sized companies.
The company competes with a wide variety of vendors: Workday, SAP, Oracle, ADP, and hundreds of smaller companies provide corporate learning, recruiting, career management and related tools. But what Cornerstone has done effectively over the years is continue to market, build, and sell a completely integrated suite – one that lets companies of almost any size provide easy to use learning and HR software to better engage their employees.
Today the company is one of the larger cloud HR vendors in the market: the company has more than 36 million users (out of a market which is well over 500 million potential) and over 3,200 mid to large organizations as customers. (This is comparable with Workday or Oracle’s Human Capital Management customer base, albeit at a lower price per customer.)
The company has also emerged from a 20 year battle with dozens of learning management systems companies as the #1 provider of LMS (learning management system) software, a category which is over $5 billion in size. Not only is this a $300 M recurring revenue business on its own (roughly half of Cornerstone’s revenues come from learning), it means the company has a huge presence among corporate employees. In 2017 CSOD delivered 392 million course registrations (3,140 every minute of the year) which makes this system mission-critical for many global organizations.
Shift from Services to Recurring Revenue
Despite this growth, over the past two years CSOD’s stock price languished. This was partly driven by competition from Workday and SAP SuccessFactors (both now offer learning platforms (Workday’s is not a full-fledged LMS yet) but more significantly because of the company’s focus on professional services. From its very early days Cornerstone focused on “client success” through a fee-based consulting organization, and over time this lower margin part of the company started to become fairly big ($100M in the last year). While this made sense when the company was small, it became a drag on earnings and analysts concluded that Cornerstone needed to improve its margins to reach profitability.
The company looked hard at this problem, and late last near announced a strategy to jettison its services business (essentially turning it over to consultants and other service firms) in an attempt to become a pure-play recurring revenue cloud company.
The financial results are clearly working. Cornerstone’s margins have increased and the company’s partner channel is excited. Deloitte, for example, is now a major partner, as is IBM and a variety of fast-growing mid-sized integrators. These companies recommend and design HR and talent solutions around the world, giving Cornerstone more feet on the street. Building an ecosystem of partners is now a well known strategy for cloud companies (Salesforce’s ecosystem is massive, as is Oracle’s and SAP’s), and Cornerstone is now moving in this direction aggressively.
More significantly, however, Cornerstone’s product strategy is entering a new phase of innovation. The HCM (human capital management) market is highly competitive and brutal to vendors who don’t keep up.
Today HR software (it is well over a $15 billion industry) is being totally redesigned to focus on continuous performance management, real-time employee engagement, team management, and the use of analytics and AI to help managers improve productivity. Recruitment, which itself is a $200 billion marketplace of advertisements, job boards, recruiters, and tools, is on fire. With the unemployment rate at near record lows, companies are arming up with recruitment tools and Cornerstone has over 600 customers in this segment alone. Cornerstone’s updated recruiting product is competitive and the company has re-engineered its user experience to handle ever-growing lists of job candidates and the complex career portals companies are building.
In the corporate learning market, Cornerstone recently introduced its Learning Experience Platform, (LEP), a front-end tool that lets employees browse for training and skills development materials in a Netflix-like interface. While the product is new, it’s highly competitive and I believe it will reposition Cornerstone as a next-generation solution. Workday and SAP have similar products but neither is as complete or well integrated as CSOD today, so the company is now competing directly with some of the hot new vendors in that market (Degreed, Pathgather, Edcast, Fuse, Skillsoft, Fuel50, Axonify, and many others).
In that space, the incumbent vendors Degreed, Pathgather, Edcast, Fuse are nearly two years ahead of Cornerstone so we cannot yet be sure how competitive Cornerstone’s product will be. But the company is pouring resources into this space so I believe they will catch these vendors over time. Plus they are now offering it at no additional charge.
The market for learning platforms, by the way, is very dynamic and I expect it to grow massively in the next few years as companies retool their infrastructure for employee development, training, and career management. Skillsoft, Oracle, SAP, Workday, LinkedIn, and dozens of smaller companies are introducing next generation platforms and all the content providers (LinkedIn, Udacity, EdX, NovoEd, Skillsoft, Udemy) and many others are doing the same. Corporate learning buyers are like kids in a candy store: there are so many exciting new things to buy. (Click here to read more on the new learning landscape.)
The more interesting development at Cornerstone, however, is the company’s new focus on learning content. The learning content business (which encompasses billions of dollars of training, video learning, e-learning, books, articles, and other forms of education), is highly fragmented and ever-changing. I just finished two calls with vendors of sexual harassment training (a hot topic right now) who are using virtual reality and peer-to-peer assessment. Corporations spend approximately $180 billion per year on all these different types of content, and right now most HR departments don’t even know what they have. CSOD’s strategy is to aggregate, integrate, and resell such content, giving people a “Netflix-like” subscription to all the content they need.
Energized Focus on Learning Content
The vision is masterful, and the company is working hard to make it work. In reality it’s going to be quite difficult, because there are so many vendors and many of them may not let CSOD resell their solutions. But even given those and other issues, this is a big revenue stream for CSOD (with good margins since most vendors are willing to give Cornerstone 50% of their fees), so I think it could significantly change the nature of the company.
If you consider consumer platform companies like Apple or AT&T, they now know that a huge part of their ongoing revenue will come from content (entertainment, news, or other content). Cornerstone is trying to do the same – without the “advertising revenue” problems these other companies face. As I mentioned, there are plenty of complexities to work out, but overall there’s no question this will bring new revenue to the company.
Company Culture is Strong
The culture at Cornerstone remains one of the company’s competitive strengths. Cornerstone competes with much larger players in almost every market, yet continues to grow year after year. Much of this is driven by the product and its positioning, but much is also driven by the company culture. Adam Miller and his new leadership team (he recently hired Jeff Lautenbach, President of Global Field Operations, and Adrianna Burrows as Chief Marketing Officer) are excited and seem to work well together, and this infectious attitude permeates the company. As I’ve studied so many software companies over the years I’ve always found that culture and teamwork trump product over time, and Cornerstone’s culture remains strong.
Finally let me add another important development. While CSOD has outwardly stated they do not intend to become a payroll or ERP vendor (Oracle, Workday, SAP, Ultimate, and ADP dominate these markets), they clearly see demand for more core HR functionality. In a fairly shrewd move the company built a product called Cornerstone HR which serves as a core HR integration hub for companies that have many heterogeneous payroll and HR systems. This is essentially a direct competitor to Workday, which recommends that companies junk their old systems and start over. It seems to be working.
Today Cornerstone has more than 100 companies using the Cornerstone HR product, and I interviewed a few of them. These are companies (mostly in Europe today) who are not ready to spend many millions of dollars on a Workday, SAP, or Oracle replacement and have either organizational or technical reasons why they cannot replace their old systems. So they buy Cornerstone HR and suddenly everyone in the company is on one integrated talent platform, without the need to replace all the local payroll and core HR systems.
Think about all the years middleware companies have continued to grow (look at ServiceNow, for example). Companies desperately want solutions that help improve the employee experience and replacing a core ERP application is a very expensive risky endeavor. While Cornerstone HR does not directly compete in the enormous market for ERP systems, it can grow in a complimentary way for many years to come, and this lets Cornerstone decide how much functionality they add in analytics and other application areas. In many ways it’s similar to ServiceNow’s amazing growth in this market, which I will write about separately.
The bottom line story is momentum. Cornerstone is positioned for growth ahead and with its new focus on services partnerships, revamped learning and recruiting products, and ability to sell a solution to integrated HR projects, I think the company can continue to be a market leader in the years ahead.