Analysis: HR software firms log gains in shifting job scene
BANGALORE (Reuters) - The U.S. job market may be going through choppy times, but it has been a heady ride for companies that make software to help corporations hire, train and retain employees.
Companies such as SuccessFactors Inc SFSF.N, Taleo Corp TLEO.O, Kenexa Corp KNXA.O and Cornerstone OnDemand Inc (CSOD.O) are all set to gain in a market currently worth about $3 billion.
Independent market research firm Bersin & Associates expects this market to grow by 12-15 percent, or even more, this year.
Shares of some of these companies have powered up through the downturn, with SuccessFactors growing more than two-fold in the last three years. The broader Nasdaq Composite Index .IXIC rose roughly 20 percent in the same period.
Job volatility -- rather than actual job numbers -- is the primary driver of business for these software makers.
The average amount of time an employee spends with an employer has not changed post recession -- it's still under 5 years, said Taleo's CEO Mike Gregoire.
Dublin, California-based Taleo, valued at about $1.4 billion, has seen both revenue and market value nearly double in the last three years, and expects to grow sales by 26-28 percent this year.
As more and more younger people enter the workforce, the churn is only set to increase, boding well for these software makers.
"Millennials are expected to engage in 4-7 different careers -- not jobs -- in their lifetime," said Piper Jaffray analyst Mark Murphy, referring to the 15-25 year age group.
IT organizations are beginning to funnel more money into talent management software as they increasingly recognize employees as assets rather than resources, Murphy added.
A recent Bersin report said most companies spend $800-$1,700, or more, to hire and train each recruit.
"Talent management software is now becoming a mandatory part of corporate human resource (HR) infrastructure, and companies are slowly starting to unravel 20-plus years of investment in now-obsolete HR management systems," the research firm said.
Most talent management product vendors now offer their software as a service, hosted in the cloud. This makes them cheaper, quicker to deploy and easier to use unlike the cumbersome, expensive products offered by traditional vendors like Oracle Corp ORCL.O and SAP AG (SAPG.DE).
The cloud-based products are upgraded every 1-2 years, while those of the bigger companies are not due to their bulk and complexity, said Canaccord Genuity analyst Richard Davis.
EMPLOYEES DRIVE CHANGE
With recovery looking weak, companies are trying to optimize with the staff they have and are looking for products that will help raise employee satisfaction and retention.
"We are seeing a change in the sort of demand that the customer is making from us and it is driven by the employees themselves," Taleo's Gregoire said.
Young employees work in a completely different way from those of the baby boomer generation, SuccessFactors President Doug Dennerline said.
"At work, they expect experiences they get from the Web, like Facebook or Youtube, and not the experience of using enterprise software."
So vendors are offering easy-to-use products that are often linked to social networking sites, or have apps for mobile devices, letting young employees take to them easily and have fun doing career advancement courses.
Piper Jaffray says a quarter of the U.S. working population is set to retire in the next two decades, and companies want to plan ahead, boosting demand further for HR software and services.
"Many companies are now saying, what's our workforce going to look like 5 or 10 years from today and where do we need to go to in terms of skills," SuccessFactors' Dennerline said.
Revenue at San Mateo, California-based SuccessFactors, valued at about $2.3 billion, grew more than 3-fold in the last three years and is expected to grow by a third this year.
The talent management software space has seen its share of acquisitions in the last two years, with the economic challenges putting pressure on smaller, less-capitalized vendors.
Larger companies and private equity firms have rich pickings in a market that is heavily fragmented.
Market research firm Gartner said it expects more acquisitions as vendors look to buy additional market share, or fill out their product suites.
"People are realizing that this is a serious market and we have shown the market that we have an appetite for acquisitions," SuccessFactors' Dennerline said.
(Reporting by Sayantani Ghosh in Bangalore; Editing by Sriraj Kalluvila)
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