Analysis: Cloud specialists – if you can’t beat them, buy them

By Gareth Morgan
21 Feb 2012 View Comments
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Business software maker Oracle’s $1.9bn (£1.2bn) deal to buy cloud-based recruitment technology company Taleo this month is more significant than a simple buy-out of a fast-growing competitor to flesh out a product line.

Taleo positions itself as a leader in talent management tools: the jewel in its crown is its recruitment module. The company says the module is used to process millions of job applications every day, replacing the covering letter and printed CV with a more seamless online process.

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On the face of it, Oracle’s acquisition of Taleo is perhaps a no-brainer. The database giant has, so far, gained little traction in the market with its existing portfolio of on-premise recruitment tools, such as iRecruitment and the PeopleSoft tools, according to Paul Hamerman, business applications analyst with Forrester Research.

“The market had moved to cloud-based recruitment and companies like Taleo were eating its lunch,” he said.

The talent management technology market is competitive, particularly at a time when the economy is creating churn in employment. As that market went for cloud-based delivery of talent management tools, Oracle had to follow.

Flurry of acquisitions

Oracle is not alone in spotting the business potential of talent management technology or the broader segment of human capital management technology. Late last year, competitor SAP entered into an agreement to buy SuccessFactors, which, like Taleo, is a cloud-based supplier of recruitment management tools. The price agreed was $3.4bn - roughly 11 times the amount SuccessFactors reported in revenue in its last full operating year.

Meanwhile, business social media specialist Salesforce.com snapped up social performance start-up Rypple in December 2011 for an undisclosed sum. Rypple will form a new human capital management unit at the company.

One of the reasons that these three business giants have been prepared to fork out on cloud-based human capital management (HCM) providers is that Workday, another HCM market specialist, has done much to convince IT directors that HCM is a product best delivered via the cloud, rather like customer relationship management.

But while this flurry of acquisitions highlights that this is one sector in which firms are willing to spend, it poses some fundamental questions for both Oracle and SAP. For example, SAP may have been willing to pay a higher sales multiple for SuccessFactors than Oracle paid for Taleo because its needs were greater.

“[SAP] has really struggled with Business By Design and will be looking for SuccessFactors to bolster its cloud offerings,” said Hamerman.

SAP developed its Business By Design product to serve as the basis for its cloud-based software, but has since admitted it has struggled to develop an architecture that can provide this functionality and be profitable. The temptation to use SuccessFactors’ software-as-a-service (SaaS) know-how will be strong.

Oracle’s cloud strategy

Oracle’s interest in a cloud-based strategy became clear in 2011, when chief executive Larry Ellison talked up the firm’s public cloud strategy - essentially a cloud stack comprising Oracle kit, such as its database, Fusion middleware and enterprise manager tools, all running on Sun systems. The company then began to populate this public cloud with established SaaS technology, paying $1.5bn for RightNow in October.

The Taleo acquisition fits the same model, as Thomas Kurian, executive vice president of Oracle, indicated when explaining the deal: “Taleo’s talent management cloud is an important addition to the Oracle Public Cloud.”

The acquisitions by both Oracle and SAP highlight the point that moving traditional on-premise applications to the cloud is far from straightforward.

“Oracle and SAP have existing on-premise HCM solutions, but both have been prepared to pay out large sums on cloud-based equivalents, rather than simply transitioning their existing solutions to the cloud,” said Tim Jennings, an analyst with market watcher Ovum.

And while it has only been in the areas of HCM and CRM that cloud-based software has truly flourished, it seems inevitable that more aspects of enterprise resource-planning applications will move to the cloud, said Forrester’s Hamerman.

If and when that happens, Oracle and SAP will both be facing the difficult question of whether they can move their current applications to the cloud or - as they have done with HCM - they will need to buy the technology.

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