An SMB Play
As Cornerstone described the acquisition to us today, this is all about SMB (Small and Mid-sized Business). Cornerstone defines the SMB market as companies with less than 500 employees, and there are millions of them. Sonar6 has around 385 customers today and probably generates revenues between $3-4M per year (average price is around $6-7 per user per month).
Cornerstone has tried to enter this market in the past with Team Edition, but the reality is that it is almost impossible to take enterprise software and "dumb it down" to be easy to use for small companies. Small companies need many of the same features as big companies, but they need a system which is extremely easy to learn, extremely easy to understand, and extremely easy to configure. In a small company the buyer of this type of software might be the CEO, CFO, COO, or HR manager. They simply want something that works. Day one.
Cornerstone's thesis is that SAP and Oracle, with their new acquisitions of SuccessFactors and Taleo, will take their eye off the SMB ball, leaving the market wide open. Actually this is not true. SuccessFactors has built out an entire mid-market solution set, which includes packaged training and best practice templates. Taleo has been very successful with Taleo Business Edition (revenues are not broken out but they may be around $30-40M, depending on how they're measured), because all companies of all sizes need to recruit people. And both companies have dedicated sales teams in this market, so I would not expect them to slow down this momentum at all.
About the SMB Market and Shifts in Performance Management Software
While there is some truth to Cornerstone's thesis, the SMB market is harder to win over than it may appear. I like to think of it as follows: in the enterprise market you are fighting a series of wars one customer at a time, winning over an account to buy your solution and then celebrating the success for many years into the future. In the SMB market, by contrast, you are fighting thousands of tiny battles at the same time, trying to convince small businesses to make a decision on something they may or may not need, and probably 1/3 or more of them never use the software at all. There is a lot of churn.
This is the reason why so many enterprise software companies avoid or neglect the SMB market. It takes a different product, different sales approach, and frankly a totally different solution focus.
We as a company actually tried to use SuccessFactors when we were smaller, and as much as we saw the value in using the software, we just found it too hard to set up and use. People didn't find it particularly useful so it died on its own. Cornerstone's challenge here is to make sure that Sonar6 is not only easy to use, but it has some compelling type of functionality, otherwise excited customers don't renew and the churn rate is very high.
Learn.com sold its LMS into the SMB market, and they did grow to around $30M before they gave up, and they found that a small subset of smaller companies really badly need training management systems. They found they were competing with Salesforce.com, Sharepoint, and hundreds of other small business online portal systems which small companies use. And this doesn't even include ADP's Workforce Now, which is a full fledged talent management product which comes embedded with ADP payroll. Learn.com often had to sell their system as a "fully customizable website" in order to get small companies to buy it.
Added to this complexity is the fact that the whole market for performance management software is shifting in a new direction. Yes, companies do implement performance reviews, but frankly they hate the whole process – so they want the process to be more informal, more social, more dynamic, and more integrated with collaboration, rewards, knowledge sharing, and general office productivity tools. So the market for a standalone performance management solution for SMB is rapidly shifting in other directions. (Witness the huge price Salesforce.com just paid for Rypple, a company with a totally redesigned approach, which was slightly touching this space but was hardly generating any revenue.)
We have identified almost 20 such new startups building what we may end up calling "work management software" – tools which combine some form of social performance management with collaboration tools. These include Teamly, Cleargears, WorkSimple, Synergita, Small Improvements, Murmur, and a bunch of others (including Vana HCM which has a fully integrated talent management system based on Force.com). They're all small, doing similar things to Sonar6, and sellling to SMB.
And let's not forget Halogen Software, the most successful mid-market talent management software company in the market and SilkRoad, a very fast growing integrated talent management provider who is also laser focused on the mid-market. SilkRoad has developed a user interface called Point which is just as innovative as Sonar6 and probably several years ahead because it integrates talent management with collaboration and profile management.
I think that this new market, that of integrated "work management" tools which helps teams align goals, communicate, collaborate, and evaluate their performance – is going to be huge. It represents a merger between the collaborative management tools like Basecamp and the more traditional HR performance management tools like SuccessFactors. No one owns this yet, but Salesforce.com is moving in this direction. It plays to the whole area of "agile management," which is the future of business management in general.
(PS, the whole topic of Agile Business Management is becoming a new mantra among companies of all sizes and has huge impact on HR iteslf – come to IMPACT and hear my keynote on this topic if you want to understand it well.)
So this is a huge market, but it's already crowded, and I am not yet convinced that these products have all come together to deliver the right combination of features that SMBs truly need.
Implications for Cornerstone and the Market
For Cornerstone this is a low risk move and over time it could grow into a good contribution to their overall business. It somewhat flies in the face of the company's "organically built software" message because they do intend to share design ideas and functionality between the two companies, but Cornerstone would argue otherwise.
CornerstoneOnDemand was also very vocal about describing this as the company's "first acquisition," showing that the company knows that they have money in the bank and see the value in buying existing businesses to grow. In a sense this is a great thing for Cornerstone – it brings the company new ideas, new distribution, and a new product family to bring to market. Just like all the other talent management vendors in the market, Cornerstone will now learn how to integrate a new company, drive an integrated product strategy, and take advantage of new ideas in building their business. So it represents a process of "growing up" for Cornerstone as a business.
I do not believe this acquisition has any major impact on most of the other players in the market (although ADP, one of their biggest partners, could get slightly perturbed). It gives Cornerstone a brand new platform for growth, and we can just hope that the distraction of trying to focus on SMB and enterprise at the same time doesn't dilute the company's efforts. Cornerstone has a strong management team and has executed extremely well to date, so we see nothing but potential upside here.
For the market as a whole, this brings one more innovative, graphically rich system into the space, which always brings new ideas to others. The Sonar6 product feels more like a video game than enterprise software, and that alone just might be exactly what this market needs.