{audio:0:00:07} Could you open up with a bit of context on what you’ve been up to, for the past couple of decades?

{audio:0:00:14} 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.

{audio:0:01:00} 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.

{audio:0:01:44} 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.

{audio:0:02:46} 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.

{audio:0:03:44} 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.

{audio:0:04:33} 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.

{audio:0:05:41} 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?

{audio:0:06:19} 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.

{audio:0:07:34} 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.

{audio:0:08:45} 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.

{audio:0:09:38} 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?

{audio:0:10:41} 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.

{audio:0:11:58} 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?

{audio:0:12:42}  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.

{audio:0:13:30} 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.
{audio:0:14:28} 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.

{audio:0:15:17} 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.

{audio:0:16:14} 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.

{audio:0:17:08} 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?

{audio:0:17:34} 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.

{audio:0:19:26} Other companies in the high-tech industry, like hardware or equipment, that was a different story. They suffered a little bit more and they always do, for obvious reasons. But software was not that hard hit. It was much worse, actually, in the year 2000. That was a major hit, a major downturn, with major layoffs. Just to give you an idea, at that time, I was part of Oracle US and I belonged to a sales group that had around 110 million turnover, as a sales group, on a yearly basis. It went down to 10 million, overnight, pretty much, as we crossed centuries. That was crazy; that was a major issue. Again, the way most vendors dealt with that was by massive layoffs, cost-cutting; nothing fancy, nothing special, in that respect.

{audio:0:20:27} Yes. I don’t think it’s going to be as bad, in this case, as long as this is restricted to a one quarter hit; a very bad quarter. If we are looking at two, three, four quarters, many of those small, medium-sized guys are going to struggle, big time.

{audio:0:20:49} As we were saying, uncharted waters is the word of the day, today. Just to pick up on something that we were talking about, a little bit earlier, on pricing and this overarching question for the industry, in this context, which is, how recurring is recurring revenue? There are a lot of businesses out there, in the HCM space, in the ERP space, talking about high-quality revenue bases, strong recurring revenue bases, resilient revenue bases. It flows into this question of pricing and the discussion we were having a little bit earlier. Maybe we could go a little deeper into that, into the pricing behavior we are likely to see from vendors, and what impact that’s likely to have, on top line, particularly in HCM?

{audio:0:21:53} There’s a lot of buzz going around, trying to nit-pick what’s high quality revenue or recurring revenue. In my experience, having been in the trenches, at some recurring revenue driven companies, such as Workday and, to some extent, Sage as well, I’m not sure that’s an actual discussion. I think what really matters here is, how well you actually know your customer base and what tools you have to retain that customer base, and keep your churn levels at a decent level. Churn is going to happen, no matter what, whether you’re Workday, whether you’re 98% retention rate or you’re Sage, with a not so exciting retention rate.

{audio:0:23:00} As a company, you need to devote time, resources – whether they are financial or actual human resources – to keep your customers happy. Why did Xero storm the UK market in the way it did? Of course, because it had a very strong accountant-oriented strategy so, essentially, impacted on accountants, much more than Sage did, at the time. That’s one good reason. But another one is that they created a sense of community with customers. Price and cost wasn’t the leading question in whatever conversation they had. Whereas it was with Sage and it definitely is with Intuit. That’s one example.

{audio:0:23:44} What happened with Workday? Why did Workday storm into ADP’s, Oracle’s and SAP’s installed base, supposedly strong and loyal installed bases? Among other things, even though it was, by far, the most expensive product, and still is, they devoted a ton of resources to the customer support, to the customer experience, to make sure that the customers were actually happy, throughout the entire process. Not just get them through the door, sign the deal and get out and forget about it, which was fairly commonplace in the industry, a few years back.

{audio:0:24:27} I think that’s what really matters, more than the actual pricing. If you are in that position, if you’re at a 99% retention rate, churn is still going to happen, especially at times like this, but customers tend to be much more loyal and at least raise a hand, when they’re thinking about moving on. I would approach the discussion in these terms. Pricing is pricing. There’s no magic trick here. You can go as far as your financial means allow you to; that’s, essentially, it.

{audio:0:25:09} That absolutely reframes that conversation, I think, in a much more effective way, which is to help us understand which kinds of players will be pulling that lever more and which other players have a broader frame of reference, for the customer. As you mentioned, to really get into detail on that, because I think it’s central to our conversation today is, on the customer experience side, and looking at these relative newcomers – certainly Xero and Workday have been around for a little while – as you said, they’ve been storming into incumbent’s  installed bases. On that specific point of user experience, community building, could you give us some examples of what these players are actually doing?

{audio:0:25:52} Before I do that, I just want to make a quick caveat. From a vendor’s standpoint, and having been lucky enough to be part of various very successful vendors, in the past, it’s kind of unfair to compare companies that are starting from scratch, truly from scratch, like Xero and Workday, with guys who have been there forever and have multiple product lines, like the Oracles and Sages of the world. Of course, at some point, they were there too. I’m saying this because, again, when you have that baggage, it is much harder to actually counteract the new entrant’s pressure. It’s the nature of the game; we all know that. But it tends to be, to some extent, unfair.

{audio:0:27:30} Those two companies, Xero and Workday and also Salesforce, to some extent, are the poster children of the cloud revolution. Some analysts like to think that the cloud revolution is much more than tech. It is also putting your customer truly first, as a vendor. Again, being part of the good old days of Oracle, that wasn’t definitely the case. It could have been SAP or any other software vendor, back in the last century. It was a different kind of world. In 2005, 2006, both Workday and Xero got into the market, started from scratch and they looked at things that were not working in that particular market. For example, the quality level that was being delivered, from a software standpoint, was really poor, in most cases. That’s something that Larry Ellison used to joke about. We don’t finish our software; we let our customers do that. That was a major issue that the industry, as a whole, had to deal with. That was one of Workday’s and, to a lesser extent, Xero’s focus.

{audio:0:28:46} Another one was, as I mentioned before, the way software vendors related to or engaged with their customers. It wasn’t an end to end relationship. It wasn’t a lifetime value relationship. It was just, eat and go, pretty much. An old-fashioned way of doing things. Especially with Workday and some other, smaller vendors, later on, they developed a more consultative, trust-based relationship which paid dividends for these guys, over time. That was another major issue, in the industry, at that time.

{audio:0:29:26} Another thing that they realized, very soon, is that while growing organically is, typically, the way to go in high-growth industries, to keep the pace of the market, down the line, that prevents you from delivering the value of innovation to your customers and that’s a key thing. Let me give you some examples. SAP acquires SuccessFactors; Oracle acquires PeopleSoft. Both great solutions. What happened to those installed bases? They were being eroded around the edges by incumbents, like Workday or other folks, because the acquiring companies, SAP and Oracle, could not deliver the innovation that went with that software, to their installed bases. They forgot to integrate solutions into the overall portfolio. In other words, they forgot to create a seamless user experience. They forgot to do that. That’s where the Workdays and the Xeros of the world got in and said, hey, we’re starting from scratch; we don’t have all the bells and whistles that these guys do. We’re offering you 70% or 80% of what they do, but you will have an end to end, seamless experience.

{audio:0:30:55} Another very simple example. How did Workday win when it went in? They only asked one very simple question to the CHRO. Can you tell me what the overall cost is, for your entire workforce today and can you break that down, by employee? 90% of them could not. They just did not have that figure. You are the CHRO and you don’t really know where your staff costs come from. I know it sounds stupid today, but back in 2007, 2008, it wasn’t really a question that most folks could answer. Again, something as simple as that. That shows you that there was a huge opportunity for the Workdays and the Xeros of the world, to get in and provide that better customer experience.

{audio:0:31:57} That is one part of the story. The other one is that these companies are driven by extremely savvy business people – Workday, take Dave Duffield and Aneel Bhusri. Even more than that, when they felt a need for it, they actually snatched interesting resources from their competitors, like Workday did with SAP or Xero did with Sage. They’ve also been very smart when it came to talent and developing their own talent. For example, when Workday wanted to go international, they just went to SAP’s rack to say, who could we pick from SAP? Who could move over and make that happen? So they did. When Chano Fernandez, President of Workday, came over. I think it was in 2013 or 2012. That’s another part that is very important.

{audio:0:33:01} When you’re a much larger company, and you’ve been in business for 30 years, that’s not that easy to justify, this kind of agile talent development behaviors. Again, there is one last factor. Neither Sage nor ADP nor Oracle were extremely fast getting into the cloud. They were not even serious about it. They had very deep pockets, they could have let two or three years pass, let the Workdays of the world take the risk and see if it worked and then jumped on the bandwagon, so they did. But in that time, Workday and other folks built a major brand around a very sophisticated product that Oracle could not replicate for five to six years, starting from scratch. Those are some of the reasons why these two companies have moved forward and stolen a sizeable chunk of the market from the incumbents, whoever those were.

{audio:0:34:17} As an incumbent, from a strategy perspective, how should they be looking at innovation? In terms of organic, in terms of acquisitions, you’ve witnessed this in a number of places. If there were some takeaways from your experience on that and how to handle this question of innovation and the threat of these very nimble, agile cloud-native competitors, what are my options, as an incumbent?

{audio:0:34:56} This is something I’ve given some thought to, over the years. Again, funnily enough, I’ve been at various companies who went about innovation in different ways. All of them were successful. Success from various different reasons and innovation is just one of them. But if you look at it, there doesn’t seem to be a single approach to innovation. Having said that, most companies have two options when it comes to innovation. Buy that innovation. Go out into the market and get some interesting assets or the IP from somebody. Or start from scratch.

{audio:0:35:38} Wherever you go, whatever you do, innovation tends to be slightly overrated. Most companies, at least in this industry, tend to grow and innovate in an incremental fashion, even if they acquire something from somebody else. Kronos and Ultimate, for example, just created a merger, as they were doing the same things, with the same tech. When Cornerstone OnDemand acquired Saba, same thing. They’re using, pretty much, the same tech. Both of them were extremely sleek, so there’s not a major change there. Having said that, and I’ll go back to something I mentioned before, if you go for the inorganic innovation approach which is, let’s buy some innovation, some flashy products and then bolt that on to our existing portfolio, then I’m sure there’s going to be an excellent opportunity there. If possible, let’s make sure that there is overlap with our installed bases, so we can cross-sell the hell out of it.

{audio:0:36:50} That’s all fine and dandy, on paper and from and M&A and private equity standpoint. The reality is, and I experienced this at Sage, with Sage People, and also with Intacct that Sage acquired, if you don’t build something to deliver that innovation as a single entity, towards the customer – if the customer perceives that you are, essentially, just adding complexity to your entire offering – that’s not going to work. You need to deliver the value innovation but you need to connect all those different pieces. It doesn’t matter how, from a technical standpoint, but the customer needs to perceive that they are looking at a single solution. Whatever need they have, whether it’s connected to invoicing or billing or taxes, there’s a company where they can plug in and get going.

{audio:0:37:48} The opposite approach is, you could say to your customer, of course we do whatever you are asking us to do. We cover 100% of your requirements. But hey, we will need to somehow pipe this together, so it works. It sounds like an old discussion which we, supposedly, have done with, but the reality is that is still not yet the case. It’s not just technical integration. When you acquire a massive asset, such as Intacct or People or SuccessFactors, there are many other levels of integration that need to happen, so you can deliver that single view to the customer, as Oracle liked to say it. There is cultural integration, process integration and so on and so forth. That takes time. In my experience, most companies take two or three years to integrate a sizeable asset into their existing portfolio. It is, at that point, that that new asset can actually start delivering on innovation. Before that, essentially, it’s a standalone business unit. It doesn’t have any synergy, in that respect.

{audio:0:39:00} You’ve made it very specific, in relation to the situation that a business like Sage might face, that’s really an agglomeration of acquisitions. A great market position, but it really is a bundle of businesses that have been acquired over time. A number of big players have experienced that kind of trajectory. A question arises there, just to go off on a very brief tangent is, as these businesses have grown and they’ve acquired and you’ve put that in the context of innovation and defending market position and growing, has the competitive environment changed since these services have been bundled? Maybe this takes us into part of our discussion, where we wanted to talk about point solutions, versus portfolio solutions and the way HCM and payroll players compete. Has that changed the nature of the market?

{audio:0:40:02} Yes; that’s a key point here. When you think about innovation, again, as I mentioned, in my view, there is no single solution. Both organic and inorganic work, depending the market context. The reality is, what you cannot do, is ignore the context. That’s what, to some extent, happened to some of the large folks. If you look at the market today, from a customer standpoint, in terms of customer preferences, what we like to buy, what we like being told, and compare that to the market 10 or 15 years ago, there are two or three major differences.

{audio:0:40:45} One, which is key to our discussion, is that most companies would rather deal with a suite of products, to some extent integrated but, ideally, 100% integrated, ideally with a single product – if that’s not possible, the more integrated the better – than with different niche vendors. That wasn’t possible in the past but, today, the market is extremely mature. Most suites of products, especially in the HCM space, do offer maybe 80% or 90% of what any customer, no matter how sophisticated it is, will go for or need. Of course, there are industry specific markets, where you need niche vendors, such as healthcare or oil and gas. But in general, most of the large folks do offer most of what you could need, as a customer.

{audio:0:41:32} In the past, we used to say that our customers would get 80% from the standard software and 20% to 25% from the niche vendor. I think that’s changing somewhat. That has to do with the maturity of the market. It’s not exclusive to HCM. It’s happened before, in CRM and other markets. But that’s one major change driver, in this space.

{audio:0:42:00} In this context, niche vendors will have a much tougher situation than they did in the past. That explains the consolidation that we’ve seen in the market, over the last 10 years and why all talent management vendors, all of a sudden, decided they wanted to be HCM vendors. All HCM vendors decided that they wanted to be ERP vendors. They, essentially, expanded their addressable market. That’s one main element of change in the market, when you look at what was happening in 2005, 2006.
{audio:0:42:40} The other one, of course, is the cloud. Not the cloud, as such, but how relevant you thought it was for your business, as a vendor. There are still vendors in the UK, especially, that still believe the cloud is interesting, but you can get by with a mixed or hybrid approach to it and that customers will not care. I think customers do and this crisis will show that that’s the case. I have very good friends, in those markets, in those companies but I think customers really do care about whether the vendor is a full cloud company or just pretending to be.

{audio:0:43:28} To play devil’s advocate, why would I care, as a customer?

{audio:0:43:32} There are a number of things. When you become a true cloud company, it’s not just putting your stack on top of Amazon. Anybody can do that. You need to transform your entire company. As you do that, your financial metrics change, the way you look at customers changes. That is, essentially, because your switching costs go down significantly, as is happening in the market today. You need to take care of your customers. That kind of treatment is a transformation in the company, as such. Becoming a cloud company is much more than the tech. It’s moving to SaaS as a whole company. You, as a company, are a service, on all levels. That is a major change.

{audio:0:44:19} It’s a major philosophical change, I guess, in an organization.

{audio:0:44:21} Exactly. Some vendors didn’t pick up on that at first. They all have done now, as they are very smart people. In those years in the interim, all the new entrants, disruptors, came in.

{audio:0:44:41} I guess, to answer that question on the customer side is, why would I care, as a vendor, whether I’ve got someone that is, perhaps, less active in cloud? As a customer, it just sounds as if it’s going to be better, with a cloud service, because of the service mentality and the underlying anxiety [the vendor will have], because of these reduced switching costs, about losing me as a customer. So I’m just going to end up getting a better experience.

{audio:0:45:15} I think so, yes. That has been my experience at Workday, at Sage, even at ADP and, to some extent, at Oracle. The more the transformation into a cloud SaaS company progresses, the more customer-oriented the company became. In the long run, we know that that had a financial impact. In the long run, it made the customers more loyal and created more stickiness in the installed base.

{audio:0:45:47} It sounds as if you are describing a market that has become a lot more competitive, would that be fair to say?

{audio:0:45:54} Yes and no. The fact that the market has been consolidated at the speed that we’ve seen, essentially, removing players from the fray. So Saba is no longer there, as it became Cornerstone. Ultimate and Kronos are going to be just one entity. In the UK, for example, The Access Group is buying everybody. Well, not everybody, but it bought PeopleHR, which was a decent vendor. It has just acquired CoreHR, which was one of the leading – still a small sale – but a very interesting vendor, one I used to compete with while I was at MHR. I’m not sure it’s becoming more competitive, in that respect. There are a lower number of vendors. What I think is becoming more competitive is in the fact that there is an explosion of vendors, moving up and down market, in the mid-market. That is where the competitiveness is going to start.

{audio:0:47:01} Workday has been moving down market, for a while, as much as they can. They are selling the Apple of the software world, so to some extent, they will get to the mid-market. Today, the mid-market is possibly the up market of most companies. SAP has been in the mid and small market, for years. Oracle, with NetSuite, has been aggressively been targeting the mid-market for a number of years, since the acquisition. At the same time, there are companies in the mid-market who are trying to move up market. Sage is one of them. With Sage People and Sage Intacct, they have a Workday like product. It’s cloud based and in the case of Sage People, Salesforce based. They could go, head to head, against Workday, in some deals. They are moving up market, as well.

{audio:0:47:54} But at the same time, they’re moving into the down market, which is their natural turf, anyway. This is the expansion happening in the mid-market. The mid-market is, kind of, disappearing, or everything has become mid-market, these days. Everybody is playing there. I see quite a bit more of fierce competition happening there. Most of it, private equity fueled.

{audio:0:48:20} What’s happening to pricing, as a result of that? What do you see, in terms of the medium to long run implications of this increasingly intense battle, for the mid-market?

{audio:0:48:33} In theory, and again, this will vary by market, but in theory, this increased competition is supposed to benefit the consumer, which in this case, is the mid-market companies. That’s what is supposed to happen. The real question is, when is that going to happen? Most companies have one or three-year contracts, and renewals tend to have some nitty-gritty details, in terms of pricing adjustments. I’m not sure how much of that price change or price pressure will actually translate into changes in the actual contract.

{audio:0:49:17} For new sales, I think this is going to be a significant price pressure downwards. A good example of that, which is already happening, is what Intuit has been doing in the UK. They could not compete, brand wise, against Xero or Sage, but they could definitely compete price wise. They didn’t have the brand, but they had the deep pockets. So they’ve been selling their lower-end product, QuickBooks, like hot cakes, because it’s extremely inexpensive. That’s starting to happen and will keep on happening.

{audio:0:49:58} Workday is doing something similar, to a different extent, when it goes down to the mid-market. Now they have split the business – by that I mean they have different managers, different targets, working with different kind of P&Ls, between enterprise and mid-market. That’s happening as well. They also have different pricing, not just on the services side, but on the subscription side, as well. That should be a good thing, in the medium to long term.

{audio:0:50:35} We’ve got a period of intensified competition, likely pricing pressure and, as that shakes out, over time, we’ll see a few winners emerge, I guess, that might be able to capture some pricing power, for those that survive?

{audio:0:50:50} Yes, absolutely. If I knew who those were, I’d be buying stock like crazy.

{audio:0:51:02} If I could just ask you quite a basic question, for our listeners, which is around how a customer – and you gave us a really interesting example of the Workday pitch, in the question that they would ask the CHROs – in terms of the buyer for this software, and to be specific, on the mid-market, in HCM, as a buyer, what is the hierarchy of priorities I have and what am I looking for, in a vendor? How do I select between these offerings?

{audio:0:51:41} When I dealt with this, we used to separate by buying criteria, by company size. We used to think that, in the enterprise world, they were all about company transformation, data transformation and cost was secondary to that. It wasn’t really such a big deal. That’s the heritage of so many Oracle years. Then when it came to the mid-market and the lower end of the market, cost was king; price was king. In many cases, you were actually not comparing just different vendors, but your internal and external options. Outsourcing was, typically, on the table, as you move down market.

{audio:0:52:38} I think that, over the years, most customers, purchasers, have become much better at looking at and comparing software. At the same time, there’s a lot of information, online, to some extent, accurate, about what the different products do, whether it’s coming from Gartner or any of its various satellites, or whoever it is, whatever site you favor. There’s quite a bit of information, in that respect. What I’m trying to say is, as a vendor, the customer will have 80% or 90% of the information they need to choose the solution that they are after.

{audio:0:53:21} In that context, I think what matters most, these days, is how good are you at keeping your customers happy. Again, I’m hammering this point. Why? Potentially, because as part of your sell, if your customers are happy, then 90% of the deal is done. Let’s talk to them. Don’t pester me with functional requirements. Of course, we will have an RFP out, an RFI; you’ll have to go through that. But again, if you can elevate that conversation, customer to customer, C-level to C-level, even at the mid-market level – we’re not talking enterprise here – everybody I trust in my industry, they could be my competitor, I don’t care. At least somebody I know has been through exactly the same problem as me, over the last five years. That’s a key element here and another very good reason why moving to the cloud is key.

{audio:0:54:26} Of course, pricing is still relevant. You always have your budget. But another factor is that, the result of the installed based customers being more educated is that they are in a much better and stronger negotiating position, these days. They know what they can ask for, in terms of explanation, in terms of the vendor modifying the road map to include certain requirements and so on and so forth. I wouldn’t say it is a customer-driven market, but I think they are in a much stronger position than they used to be, in the past.

{audio:0:55:18} As we draw the conversation towards its conclusion, it might be a very natural opening for us to summarize on the meaning of a true cloud business. Certainly, I think you’ve laid out, very clearly, a number of the components of a true cloud business. Maybe we could tie that all together, in your final comments, from a vendor’s standpoint. Philosophically, how do they look at serving customers? How do they build product?

{audio:0:55:46} In my opinion, I would say that the way I see it, and I’ve seen it in many other companies that I’ve worked for, moving towards the cloud, tells me that a true cloud business is a company that engages with their customers in a trusted partnership relationship, more than anything else. They’re looking at the long term more than closing your targets for the next quarter or closing the necessary deals, to make our numbers. They’re trying to look at a much longer-term relationship with their customers.

{audio:0:56:32} Of course, that derives from the various SaaS metrics that underlie the financials of any cloud-based business, namely, the lifetime value and that, to me, is the key differentiator of a cloud business. When it comes to it, they can do different things. They can go hybrid, they can use Amazon, or Microsoft or Xero, or whatever it is; it doesn’t really matter. But the thing is, they need to have that trusted relationship with their customer. This is where most managements tend to fail, but you need to make sure that that goes beyond sales. It’s not just convincing your sales force that that is the way you should be treating customers. You need to convince support; you need to convince R&D. You need to convince your C-level that that is the way we treat customers here.

{audio:0:57:27} In my view, that is a true cloud business. It goes way beyond technology because that technology is generally available, anyway.

{audio:0:57:43} Exactly. Perfect summary; it starts with the mindset. It’s a different way of going about selling software.

SaaS Business Models and the UK HCM Market

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

SaaS Business Models and the UK HCM Market

Former Product Marketing Director HCM Solutions, Sage

inpractise.com/articles/cloud-software-businesses-and-HCM-jaime-losantos

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Jaime Losantos

Former Product Marketing Director HCM Solutions, Sage

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