SaaS gets serious

19 Dec 2011

What do SAP’s acquisition of Successfactors and Oracle’s purchase of RightNow tell us about how keen the world’s biggest software companies are to be seen as serious software-as-a-service providers, asks Jessica Twentyman?

Smart shoppers will always tell you that it’s always best to wait until the post-Christmas sales to make a major investment. Presumably Bill McDermott, co-CEO of software giant SAP, felt he couldn’t hold back until 2012 to acquire SuccessFactors, a software-as-as-service provider of applications for managing employee performance.

Back in October, he promised that the company was planning to “let the tiger out of the cage” with its 2012 strategy for cloud computing. In an interview with influential AllThingsD journalist and blogger Arik Hesseldahl, he claimed that SAP had “a serious plan to promote SAP cloud”, but conceded that “there’s a lot of it that we don’t market and there’s a lot that we’re assembling for scale right now.”

In early December, the cage door swung wide open. In a surprise Saturday announcement, SAP revealed it was to pay $3.4 billion for SuccessFactors.
The purchase was a surprise, given McDermott’s April 2011 claims that SAP had no plans to make large acquisitions. The price – ten times more than SuccessFactors’ annual revenues – underlines how serious the company now is about cloud computing. The timing – just six weeks after rival Oracle announced its $1.5 billion acquisition of RightNow, a SaaS provider of customer relationship management (CRM) software – suggests that SAP executives knew they needed to make a splash to publicise that commitment, and fast.

What happens next could be more interesting still. With its purchase of SuccessFactors, SAP also brings on board the company’s CEO Lars Dalgaard, a man that Forbes magazine has described as having “all the subtlety of a Jolt-juiced mosh pit.” Not only will Dalgaard sit on SAP’s board, he will also become SAP’s head of cloud.
Dalgaard is a colourful, outspoken leader, who has steered SuccessFactors since its 2001 inception through ten years of solid growth. Some years ago, he used to talk of having a “no assholes” policy at his company; over time, this was modified to the more PR-friendly “no jerks”. He certainly has passion. The question is this: how well will that passion will translate in an SAP environment?

While SAP has pledged to keep SuccessFactors as an independent business unit, it’s clear that Dalgaard’s responsibilities will extend further than the company he once led. So while McDermott may have let the tiger out of the cage, just as he promised, he may at the same time have coaxed Dalgaard into his own home.
Since we’re playing ‘What Happens Next?”, it’s worth thinking about the wider implications of the deal for cloud computing. It certainly confirms that the world’s biggest software companies are taking the SaaS proposition more seriously than they have ever done to date. While both SAP and Oracle have launched cloud-hosted versions of their software in recent years, their respective purchases of SuccessFactors and RightNow buy them a far greater foothold among customers who have already demonstrated a tangible commitment to the SaaS model.

In that sense, these moves can, to some extent, be seen as tacit acknowledgement that internal development and organic sales efforts have not been enough to convince prospects that two companies born in the 1970s can make the leap to the cloud. (In that same interview with Arik Hesseldahl, for example, McDermott says that deployments of SAP’s own Business ByDesign cloud software has been on a “slow roll” to 1,000 installations in 2011.)

It’s certainly good news for still-independent SaaS vendors such as NetSuite, Workday and Taleo, all of which saw their share prices spike on the announcement of the SAP-SuccessFactors deal. We could be on the verge of a cloud-software acquisition feeding frenzy; according to analysts at market research company IDC, “many large packaged software vendors may feel they have a compelling need to purchase somebody and not lose material market share as their buyer base pivots to cloud, even though the valuations are dizzying.”

High price certainly hasn’t held SAP back in its SuccessFactors purchase, even though it has spent almost 50 percent of its previously stated $6.8 billion available cash (as of 30 September) on a company that amounts to less than 4 percent of its overall revenue. At the risk of laboring the point, it’s splurged on a SaaS offering based database software from rival Oracle.

It would still take a real giant to acquire the biggest SaaS provider of them all: Salesforce.com. While SuccessFactors expects to make sales of $332 million this year, Salesforce is on track to make $2.2. billion.
But the SuccessFactors acquisition, as well as Oracle’s purchase of RightNow, demonstrate that the world’s biggest software companies now recognise that cloud computing can’t be an add-on effort. To remain relevant in the age of the cloud, they have to be seen as serious SaaS providers.

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