SaaS Business Models and the UK HCM Market | In Practise

SaaS Business Models and the UK HCM Market

Former Product Marketing Director HCM Solutions, Sage

Learning outcomes

  • How HCM software vendors are likely to perform in a weaker economy
  • Tactical options software vendors have to address weakening demand
  • Outlook for pricing for cloud HCM solutions
  • Comparing 2020 to the 2008-2009 crisis as it impacts HCM software vendors
  • Why smaller vendors are going to struggle more than larger ones
  • How Xero and Workday differentiated their offering by creating a sense of community with customers and through better customer support
  • The risks to a buy-and-build strategy: how a company like Sage has added complexity to its customer offering and how competitors are capitalizing on this
  • Software vendor strategy: the merits of best-of-breed versus a portfolio of solutions
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Executive Bio

Jaime Losantos

Former Product Marketing Director HCM Solutions, Sage

Jaime has over 25 years experience in the Enterprise Resource Planning (ERP) and Human Capital Management (HCM) software industry. From 1999-2012 Jaime held a number of positions at Oracle including Product Strategy Manager for HCM, Development Director for Oracle’s Southern Europe Human Capital Management (HCM) business, and EMEA Business Development Director for HCM. After Oracle, Jaime moved into a series of senior product strategy and marketing roles at market-leading HCM software businesses including Workday (Senior Manager, Product Marketing EMEA), ADP (Director, EMEA Product Marketing), MHR (Director of Market Strategy) and Sage (Product Marketing Director, HCM Solutions). He now runs a consultancy business advising software vendors and investors on product and marketing strategy. Read more

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Could you open up with a bit of context on what you’ve been up to, for the past couple of decades?

I’ve been with the ERP HCM industry, for the last 23 to 25 years, with the likes of Oracle, MHR, Sage, ADP, Workday; some of the most well-known players in the industry, in various positions, ranging from product management to product marketing, business development, including pre-sales. I do have a good understanding of how the market works, who the main players are and, more importantly, at this time, how the players in the market will react to the current situation.

It’s a market that is moving in so many ways. There’s really interesting structural trends going on. There’s the cyclical dynamic of what is a major economic crisis, for the buyers of this software, all influenced in quite different ways, of course. Could you give us a feel, as a practitioner, who has been so deeply involved in this space, for so long, what the state of play for the market is.

This is a very interesting market and a fairly mature one. We’ve had a solid HCM market for the last 25 to 30 years, at least. Most of what I will say will also apply to the enterprise, the ERP market. Before Covid hit, we had a fairly large market of around 25 to 30 billion, depending on what analysts you favor. We had a very healthy rate [of growth], of 5% to 8%. It’s an interesting market, because you have around 10 vendors – eight now, after the Kronos and Ultimate merger – who own a very large part of that market, north of 50%. Whatever those guys do, typically drives what happens in the market. Most of the rest of the vendors, do actually follow behind.

Another interesting point in this market is that it is heavily penetrated by private equity, and even more so nowadays. It is not just the large guys, the Oracles, the SAPs who are buying vendors left and right. There’s a huge interest, for obvious margin and profit related reasons, from the private equity community, to get into this space. At the same time, this fuels innovation at a very, very fast pace. To give you a very recent example, the only reason that Kronos and Ultimate merged, is that they were owned by the same private equity company. It made sense for that to happen. There are lots of examples like that. I think this is very good for the industry, as such. As every healthy, active industry, we are still growing.

As to your question as to how the industry will actually bear the current situation, in terms of revenue and profitability and so on, as you perfectly put it, the jury is still out. If this impact hits more than two quarters or half a year, in terms of revenue, the consequences might be significant, in terms of who is left standing. If you are only looking at a hit of one quarter, say three or four months of revenue, whether it’s permanent or recurring revenue, I think the market will stay pretty much the same. Again, unfortunately, we don’t know yet what is really going to happen.

As it stands right now, most vendors, from SME-focused vendors, like Sage, to enterprise vendors like SAP, are going to see negative growth rates, year on year, quarter on quarter, starting from March and April onwards. Most likely, this will be for the whole year. It is going to be very hard to avoid that. In reality, the Covid crisis has, essentially, obliterated most of the pipe that they had for the rest of the year. If you look at the forecast today, everything is either put on hold or it’s not there anymore. No matter whether your customer is a Phillips or a Unilever of the world, or a very small mom-and-pop shop, in the UK; it doesn’t matter. It’s a very tough situation out there.

A question that emerges here is, what am I doing, as a provider, dealing with this market shock? I suppose, I have a few levers to pull, shifting dialogue with customers, from downgrades and discounts. In terms of mitigating the impact and the pressure that the customers are facing, what options do I have, as a player in this space? How are they going to be looking at this, to try to manage the fallout in the crisis?

Let’s look at this from a twofold perspective. First, from a customer standpoint. You are being forced or asked to cut your IT budget in half, if you still have one. I was actually reading a report from Bain the other day, from April, which was saying that around 52% to 53% of companies have already cut their IT budget in half, or even more than that. That means, essentially, if we move over to the vendor side, your revenue in the coming months is going to dry up very quickly, even if you have a deal which is pretty much about to close, that’s possibly going to be put on hold. From a customer standpoint, there is a lot of pressure to conserve cash, maintain cash, to keep costs down and so on and so forth. Ideally, to also avoid layoffs, but in some industries, especially those that have been hardest hit, that’s going to happen, no matter what.

From a vendor standpoint, you’ve got a number of different levers here. There’s a significant difference if you look at the different vendors. To be able go through this crisis, retain and renew your base as much as possible, protect your revenue source, you need to have deep financial pockets or get into debt. There’s no way around this. The customers will come to you, whether you are on a two or three-year contract or a monthly contract, and ask for some sort of payment relief. At the same time, most of the contracts that you see out there, are extremely flexible, both upwards and downwards. If your workforce goes down 50% overnight, your recurring revenue for the coming month, as a vendor, will be 50% or 60% lower than you expect.

In terms of levers, whatever you do, whether it’s discounting or suspending payments, you will need very deep financial pockets. Not all the vendors out there are in that position, today. If you’re a small to medium-sized vendor, with a relatively small installed base, you don’t have a lot of cash in the bank and this is not a good position to be in. Whereas, if you are a multi-product line company, such as The Access Group in the UK, for example, they’ve been acquiring companies left and right, lately, like PeopleHR, these guys do have PE backing. They have quite a bit of cash left. These guys are in a good position to retain their installed base and that’s the name of the game, here.

Let’s step back again and put our CFO hat on. If I’m the CFO of any mid-sized software vendor, the name of the game now is not up-selling or cross-selling. It’s to keep whatever revenue we have, whatever customers we have, happy and satisfied and keep our fingers crossed and hope this passes. Otherwise, it’s going to be very tough. The revenue structure of most vendors has changed overnight. Whereas, in the past, you had, say, 80:20, with 80 being the more mature vendors, revenue from the existing installed base, upsell, with 20 being new sell. Now, that 20% has pretty much gone. It may come back in Q4 or Q1 next fiscal year, but it’s not there anymore. So the name of the game is, what do I need to do, from a financial standpoint, from a customer-experience standpoint, to keep those guys happy?

The companies that used to have deep financial pockets and also have a customer-experienced focus – first and foremost, like the Xeros of the world, the Workdays of the world, to some extent, some of the minor vendors, I think they have a head start there. Customers are already expecting that from them. They know they can give it to them. Whereas other, possibly larger, vendors will have to struggle with this. Even more so because introducing these kind of customer-support initiatives requires, at some point, even more decision levels. For example, why do we need, as a vendor, to divest R&D money and put it into customer relief measures? Why do we need to do that? We’re killing our innovation, if we do that. The big guys will come over and, possibly, destroy us. These kind of discussions are happening right now, or should be happening right now.

On this question of the centrality of the software, just taking that customer’s perspective, how important is this software, for the operation of my business? I appreciate that it is hard to generalize. These vendors sell to many different types of companies, in different verticals, but if there is a way to sketch out a picture, it would be really helpful to know how you look at the centrality of this software, for the operations of these companies, just to get a feel for, as budgets are cut, where the software sits in the stack of those choices. How central is [HCM software] to my operations, as medium-sized business or enterprise?

HR and anything that revolves around HR, up to 2008, 2009, wasn’t really top in the mind, for most executives, at board level. When it came to budget planning or strategic planning for the next fiscal year or the next five years, HR wasn’t really top of the list. That has changed somewhat. People started to realize the connection between my margin and profit and employee engagement and productivity. Even though it seems pretty obvious, up to about five or 10 years ago, that wasn’t really the case.

HR and anything around HR is typically perceived as back office. In other words, it’s not one of the core processes in the company. As such, when it comes to allocating a limited budget, it doesn’t hold the upper hand. If there is a competing supply chain IT project and some recruiting initiatives, well guess who is going to take the money. That still happens. Generally speaking, all back office functions take a step back, when it comes to the CRM and the front office functions of the world; the ones that touch customers and, at least supposedly, drive revenue. That’s the first point.
The second point is, things have changed significantly. Over the last 10 years, HR and the way you manage people is seen as key to transformation to the company itself, across the company. No matter whether you are talking about manufacturing, R&D, marketing, legal, it doesn’t matter. If you don’t treat your people well, if you don’t have full visibility as to what’s happening, across your company, in terms of engagement or cost, no matter what you do with your front office processes, it’s not going to change a thing. In that context, that counteracts that negative trend that I mentioned earlier.

I know I’m not giving you a straight answer, but it’s not an easy one. Having said that, if you break down HR into its different components, looking at the employee life cycle, from hiring to out placement, there are parts that suffer a little bit more, nowadays. Any budget connected to learning, if it’s not directly related to Covid, it’s possibly going to suffer. In many cases, that’s because you don’t have anybody to train. Of course, that also applies to anything that has to do with recruiting, at this point. But when it comes to compliance, the money is still going to be there. You still need to pay taxes, make sure you’re happy with social security, pensions and so on. That’s all going to be there.

What I see is, going back to basics; going back to the core of the HCM, which is good, old workforce administration, contracts, payroll, pension and benefits. All that good stuff is still going to be around for a while. Again, for many vendors, that’s part of their revenue, anyway. That explains why some of the mid-market vendors will still be able to get through this, as long as it doesn’t extend over Q3 or Q4.

You’ve been in this space for a while and I wondered if it makes sense to talk a little about what you saw in 2008 and in the last big crisis, in terms of user behavior, anecdotes? Is there a frame of reference that our listeners could benefit from, that you had experienced there, in terms of the hit to the industry?

The software industry, as such, as part of the overall high-tech industry, is extremely resilient to cyclic movements. So when the previous crisis hit, which was mostly a financial one, so it wasn’t really a supply crisis, as such and was mostly on the demand side, our industry was not that hard hit. Especially when it came to the enterprise level, it wasn’t really that bad. There were certain industries that really had a very rough time. Anything that had to do with finance or were very exposed to that, then you were in dire straits. I think this current situation is a different level of crisis. I think this could be much, much worse, because it goes across all industries. It’s put a stop on your entire revenue pipeline, so your forecast is, essentially, frozen, but your costs are still there. I don’t think there is a clear precedent of this happening, in this or any other industry, as such. Hopefully, it’s going to be the last one. I don’t think you can draw many experiences from the prior crisis, in that respect. Again, I can talk about it from my own experience which, at that time, was at Oracle. There weren’t major layoffs in that respect, at least when it came to software.

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SaaS Business Models and the UK HCM Market

May 27, 2020

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