SAP has made a major move to "Cloudify" its software portfolio with the $3.4bn acquisition of the darling of HR software, SuccessFactors. However, while HfS' research partner Ray Wang succinctly outlines why this is a winning move for SAP, we do not believe this is particularly good news for BPO service providers and services clients.
This rampant consolidation of business software apps firms makes it tough for service providers to develop their own Business Platform offerings and develop outcome-based delivery models. As we have been discussing at length on HfS, the leading BPO providers are hurriedly developing service offerings that are underpinned by Business Platforms to support transactional, high-volume, standardized processes with very little variation in outputs. HR services are prime candidates to be optimized by Business Platform delivery, epitomized by ADP's GlobalView payroll and HRO offerings - arguably the industry's first Business Platform - introduced years before anyone even knew what a Business Platform was.
This means BPO providers have three choices with their Business Platform strategies
Choice 1: Develop and patent their own cloud-based workflows
This is surely where BPO service providers can really clean up, provided they can deliver complete clusters of standard process offerings for their clients that are cloud-based, affordable, scalable, high-quality and - most importantly - can be maintained with quality service personnel that can offer consultative support when needed, as the client seeks to transition onto the offerings. Most BPOs today are developing prototype platforms that they can "productize" as utility services, once they achieve a handful of clients using each offering. Our ongoing research already points to more than 150 business platforms in various nascent stages of development from the BPO providers.
Choice 2: Acquire them from a client or another vendor
Most of the ambitious BPOs are seeking to pick up new clients that deliver the potential to develop industry platforms, such as TCS' recent $2.2bn Friend's Life engagement which gives the firm the ability to enhance and deploy insurance systems across multiple insurance clients, and Cognizant's acquisition of UBS' India operations to service capital markets clients. In terms of outright vendor acquisitions, the capability to develop platforms is high on the agenda, such as Capgemini's recent acquisition of VWA and its WebCollect OTC platform, Infosys with McCamish, Accenture with Zenta and IBM with Sterling Commerce.
Choice 3: Partner with a software firm and deliver directly to the client
Both SAP and Oracle have invested heavily in structured programs over recent years to encourage the BPO providers to deliver processing services that are underpinned by their software products. This has included programs to support education and implementation throughout the outsourcing process, in addition to license agreements structured specifically for an outsourced environment. Many BPO "partnerships" have been announced such as Wipro with Oracle and Netsuite with Genpact, however, we've yet to see significant evidence of clients chomping at the bit to take up these software/BPO partnership offers. Most of the software firms have "partnered" with as many services providers as possible to maximize their market opportunity, as opposed to co-development and co-investment of product and delivery resources.
While SAP already has been attempting to assemble its own portfolio of Cloud "offerings", it has been worried about cannibalizing its cash-cow legacy revenue from its ERP licensed products. How SAP structures the licensing and pricing of SuccessFactors is going to dictate whether BPO providers offering HR services will seek to push it proactively to their clients.
SAP joins Oracle in increasing its stranglehold over enterprise software platforms
For service providers seeking to push HR services to large enterprises, it's increasingly challenging to avoid partnering with either SAP or Oracle in some capacity (Choice 3 above).
For example, if the client already has PeopleSoft or SuccessFactors and wants a BPO provider to service those existing implementations, there really are only two ways for the providers to be competitive from each other:
1) Be cheaper than everyone else. Provide payroll processing or employee-record update services at a lower FTE cost than the next provider. Hmmm... doesn't sound like a very attractive business for the ambitious provider looking to increase its margins and service value... sounds more like a race to the bottom.
2) Be better than everyone else. Provide HR consultative services, such as succession planning or change management that truly differentiates themselves from their competitors, and allows them to charge higher rates to the clients. Clearly, this is the preferential model for providers seeking higher margin-value, but wouldn't it be so much more attractive to provide their own workflows and platform?
The dichotomy here is that whatever route BPO service providers decide to take, they can only really achieve price-per-headcount results and can't truly look at delivering real business outcomes for their clients, if they are delivering someone else's workflows. For example, being incentivized financially for lowering a client's employee-attrition, or increasing their employee-satisfaction. Moreover, whichever way they look at it, they are going to have to factor in the hefty Oracle or SAP license fees somewhere along the line.
The bottom-line: SAP and Oracle need to embrace outcome-based service provision to make this attractive for both BPOs and clients alike
SAP and Oracle need to work with service providers to develop outcome-based scenarios for clients. This means they actively need to offer up portions of their license fees to incentivize risk-sharing pricing. This could work if the ERP provider gets paid via the same gain-share model the BPO has structured with its client. However, this is a lot easier-said-than-done, as it's hard enough for client and provider to broker a gain-share engagement model, let alone invite the software vendor to get involved. (If someone has an example of this type of model actually working in practice, please tell us, as this is where many of these engagements need to be structured in the future - and would be a great advancement for the lawyers and third party advisors, if they dare to venture away from their familiar FTE-based transactions).
Ambitious services providers in the HR space need to look further afield to make smart platform investments. There aren't too many options left in the market for BPO providers seeking to make their own platform investments. If you read the speculation, Taleo is the next best available, and this isn't overly attractive, with most of its revenues coming from recruiting. It also puts the spotlight on SuccessFactors' (arguably) toughest competitor, Cornerstone OnDemand, with its compelling platform of integrated Cloud-based talent management processes.
Beyond Taleo and Cornerstone, there are few public HCM SaaS vendors left worth acquiring, and there is precious little value to be found when examining the HCM start-up space. The darkhorse in all of this is what happens with Workday, and whether it can make itself a more attractive partner for one of the BPOs to make a real play into the HR BPO services market. What would be game-changing, is if one of the leading BPOs were to acquire Workday and create a whole new platform/BPO ecosystem in its own right; however, it's unlikely that any of them would dare upset their cash-cow Oracle and SAP relationships.
It seems the Oracle/SAP stranglehold is set to continue for a few years' yet, but the increasing development of the Business Platforms market could be the ultimate force that finally starts to erode their domination.