Why Did SAP Pay $8 Billion To Acquire Qualtrics?
This week was a big one in the world of enterprise software: SAP announced plans to acquire Qualtrics, a fast-growing scrappy provider of survey and feedback software, for $8 billion. And this was not a small deal: Qualtrics’ revenues as of Q3 were $372 Million, and the company is growing at 42% YTY. This means SAP paid more than 20X revenue for Qualtrics, which is one of the highest valuations I’ve seen for a company of this size.
Why did SAP Pay So Much?
Well I’ve been looking at this market for years, and we now live in a “Feedback Economy.” As I wrote about in Feedback is the Killer App, companies are adding feedback forms and pulse surveys to everything that moves, so consumers and employees have more opportunity to gripe, complain, and compliment than ever before.
I think it all started with Yelp, then Amazon, then Uber… and now everybody wants to rate everything. In fact, as an interesting article in The Atlantic pointed out this week, there is so much feedback going on, it’s not always clear where it goes. Last week on my trip to Chicago I received two surveys about my hotel, two about my wifi access, and several from the airline. I really didn’t have time to answer any of them.
In the case of SAP and Qualtrics, the company sees an enormous new market. While SAP has made billions selling operational software (what SAP calls OX), Qualtrics is pushing an agenda for what they call experience software (EX), an emerging area that every company is now focused on.
It’s All About The Experience
The word “experience” has taken over the software market, and for good reason. In today’s digital world, if your experience isn’t good, you just don’t do business with a company. But how do you undertand and manage it?
This customer experience market, which started with tools to conduct surveys, is a set of software that helps every company operate like Amazon. Do you understand your company’s brand experience? product experience? customer experience? employee experience? All these areas are important in business today, and Qualtrics is here to automate it all.
While Qualtrics started as a survey company (we purchased it back in 2005 when the company was brand new), the goal now is to move into a much bigger space. So Qualtrics sells its tools to entire organizations as a platform to capture experience data (the State of Utah now spends almost a million dollars a year on Qualtrics), and has a vision of providing this data in real time to managers everywhere.
Have you ever tried to build a new product, roll out a new HR program, or redesign a website? The biggest challenge you have is figuring out “what did they like about it and what didn’t they like?”
This is a tricky problem to solve, and it isn’t as simple as sending them a simple survey. We need a platform that can collect data easily, report and analyze it in real time, and then publish the data to the managers who need it so they can immediately act. And this means Qualtrics as a survey platform is only a piece of the puzzle – it has to go much further.
The Employee Experience Market
The part of this market I know well is what we used to call Employee Engagement (it’s now called Employee Experience), which is roughly a $1 Billion market of products and services. In that market, there is an army of vendors (Glint, CultureAmp, TinyPulse, Energage, Towers Watson, AON Hewitt, Perceptyx, and others) that provide various forms of pulse surveys, real-time feedback tools, and smarter and smarter employee survey systems. They are all growing at double-digit rates.
As the chart below shows, these platforms are becoming more real-time, more intelligent (most can read comments and provide text and sentiment analytics), and more actionable. In fact, some of the more advanced EX systems actually give employees and managers “nudges” to help them improve, all based on the results of various forms of feedback. (Imagine if a customer service agent or product manager got that kind of real-time support.)
In the SAP world, this means the company could plug Qualtrics into SuccessFactors and immediately offer a solution for employee experience measurement coupled with talent and HR management. (I”m sure SAP will do this.) It also means Qualtrics functionality will likely appear in Ariba, Concur, Hybris, and just about every other product SAP has to sell.
Valuation: Will The Growth Continue?
The big question for analysts is whether this was worth $8 billion to acquire. Just a few weeks ago LinkedIn acquired Glint for over $400 Million at a much lower multiple of revenue. LinkedIn is a juggernaut, so we can expect Glint to grow quickly. It’s clear that SAP sees a lot of opportunities here, and to me, this tells me something about scale.
The market for corporate survey software is pretty big. Analysts believe it will be around $6.9 billion by the year 2022. So while there are many players (SurveyMonkey, Medallia, Glint, and many others), Qualtrics only has around 7,000 customers. With SAP’s customer base of over 200,000 clients, there is a lot of growth to pursue. But there’s plenty of competition to worry about.
Workday has toyed with the idea of building a survey/engagement platform, and this may push them to move. Ultimate Software acquired Kanjoya and got into this business. Oracle, Saba, ADP, and Cornerstone have started building their own survey platforms. And now that SAP has jumped in, I think we will see more large vendors do the same.
It’s never easy to tell when an acquisition will pay off. It’s clear that the SuccessFactors acquisition was very successful for SAP, but there are other deals (IBM’s acquisition of Kenexa) that don’t always pan out as well. In this case, since Ryan Smith (CEO of Qualtrics) is sticking around, I think SAP is buying not only a platform but also a management team, a brilliant set of marketing and sales professionals, and a vision for experience management that can help SAP move in an entirely new direction.
From Inside-Out to Outside-In
One of the executives at SAP I talked with put it this way. For almost 40 years SAP has dominated the world of building software companies need to run their business. This is an “inside-out” problem.
Today companies want to do the opposite. They want every employee to feel like they’re facing a customer, and every decision to be customer-led. This is an “outside-in” problem.
If SAP can pull this off, they could build a set of tools that help every company behave like Amazon; deliver real-time feedback to managers about customers, prospects, and employees – in an actionable and useful way. That market is probably 10 times bigger than the “survey” market, and it leverages SAP’s expertise in data management, infrastructure, and enterprise solutions.
As Bill McDermott, CEO of SAP put it:
SAP already touches 77 percent of the world’s transactions. When you combine our operational data with Qualtrics’ experience data, we will accelerate the XM category with an end-to-end solution with immediate global scale. For Qualtrics, this introduces a dynamic new partner with the belief, passion and scale to bring experience management to millions of customers around the world.
And as Ryan Smith, CEO of Qualtrics put it:
Our mission is to help organizations deliver the experiences that turn their customers into fanatics, employees into ambassadors, products into obsessions and brands into religions. Supported by a global team of over 95,000, SAP will help us scale faster and achieve our mission on a broader stage. This will put the XM Platform everywhere overnight,” Smith said, adding that the deal represents a “once-in-a-generation opportunity to power the experience economy.
It’s a big move and clearly, SAP has a big vision. I’ll be watching this closely and look forward to letting you know how it goes.