Feature: What Big HR Tech Consolidation Means for the Market

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Mar 11, 2020

February’s two standout HR technology deals—the merger of Kronos Inc. and Ultimate Software, followed days later by Cornerstone OnDemand’s acquisition of Saba Software—continue the trend of industry consolidation seen over the last several years. However, they don’t necessarily portend a surge in new activity, industry leaders say.

In 2019, more than $5.3 billion was invested in HR technology companies, according to HRWins, an increase from $4 billion in 2018. Between 2017 and 2019, about $10.4 billion was invested in nearly 650 separate deals.

“HCM has seen a decade of investment, and the space has seen good expansion,” said Mark Brandau, principal analyst at Forrester Research. “But at root, workforce issues have yet to be solved.” Employers, he noted, face increased complexity in compliance, retention, and engagement as the scope of regulations grows and research ties employees to business success.

That means the industry still has a lot of running room, which is a promising situation for investors. Even if the economy slows, the need for HR tech solutions will remain, Brandau said. “If there’s a recession, the focus changes. Now, it’s about finding talent. Later, it may be about operating with smaller staffs.” Besides that, the core issues faced by employers are evergreen, he observed. “People always need to be paid.”

The Kronos/Ultimate and Cornerstone/Saba deals are each notable in their own right, but they’re not watersheds, HR technology leaders say. “I don’t see this as changing the landscape very much,” said Matt Lafata, president and CEO of consulting firm HRchitect in Frisco, Texas. “I don’t see this as disruptive.”

“At the end of the day suites win, and this is why size matters for the vendor,” said Holger Mueller, vice president and principal analyst at Constellation Research in Monte Vista, Calif. While he believes there won’t be much more consolidation “as there aren’t many vendors left to buy,” he noted a lack of innovation in the HR technology space, which offers an opportunity for startups that can challenge established vendors’ offerings.

‘Cross-sell and expand’

February’s headline deals are very different: The merger of Kronos and Ultimate, both controlled by the private equity firm Hellman & Friedman, surprised analysts only because of its speed. Coming just a year after H&F took Ultimate private, the merger “isn’t a big surprise, but it was a surprise to see it so soon,” said Pete Tiliakos, principal analyst with Boston-based NelsonHall.

Given the companies’ common owner, complementary markets, and complementary product lines, most analysts describe the combination as a logical move. Kronos can fill “a significant gap” in Ultimate’s workforce management functionality with its Workforce Ready product for smaller businesses and Workforce Dimensions for the enterprise, said Trevor White, an analyst at Nucleus Research in Boston. At the same time, Ultimate provides Kronos with strong enterprise HCM capabilities, he said.

“This is going to allow them to cross-sell and really expand their overall market size,” said White. “They are essentially filling in the functionality gaps of each other to create a complete HCM/WFM offering.”

The merger may have a particular impact in the enterprise space Mueller suggested. That’s because it creates a company that’s well-positioned to face ERP and HR tech players like ADP in North America. With one vendor less pursuing enterprise business, “Kronos will make it more often onto the shortlist,” he said.

In the SMB market, Kronos/Ultimate “will become a key player” if it follows through on its promise to hire 3,000 full-time employees over the next three years, Mueller believes. He expects the combined company, which has yet to be named, to standardize its product line around Kronos. “It will always be ADP, Ceridian, and Kronos on the shortlist for companies below 10,000 employees.”

At Ultimate Software Connections in early March, many of the company’s customers looked favorably on the merger, although a few expressed trepidation of the unknown. Along with the new company’s name, a number of details about the merger remain to be filled in. For example, said Lafta, Ultimate offers several time products, overlapping with an area of strength for Kronos. “What happens with those?” he wondered. “That hasn’t been communicated.”

Kronos CEO Aron Ain, who will lead the combined business, seems well aware that his team needs to answer such questions as soon as it can. During his keynote at Connections, he emphasized continuity. “People ask me about if we’re going to integrate the products, but you know what? The products are integrated today,” he said, adding that between 300 and 400 customers have both UltiPro and a Kronos solution in place. “They’re integrated today, but we’re just going to make that integration even better than it is and take it to a whole new level at the database layer, the application layer, in all the ways that make sense.”

In the short term, White doesn’t believe either Kronos’s or Ultimate’s customers will see a big impact from the merger. Over time, however, he expects their products to be combined into a full suite of HCM and WFM solutions, along with standalone WFM options. The combination, he said, should appeal to both the enterprise and SMB markets.

Cornerstone’s victory

Cornerstone’s acquisition of Saba plays out across a different dynamic. As narrow applications come under pressure from full-suite providers, combinations like this make sense as a way for smaller firms to address a squeeze in market share, said Jeremy Ames, president of Hive Tech HR in Medway, Mass.

The deal continues the expansion of Cornerstone’s product line and its staking out of additional ground in the HCM market. In the first two months of 2020, Brandau pointed out, the company made two significant purchases: Saba in February and Clustree, a French firm with an AI-based skills engine and skills ontology, in January. Combined with its 2017 acquisition of Ottawa-based talent management suite Halogen Software, the deals represent a victory for Cornerstone, said Lafata. He expects the company to wrap some of Halogen’s and Saba’s best features into its product, and then “something’s going to disappear,” he believes.

Together, Cornerstone and Saba will be “a huge player in the talent management space,” said White. “In a space that’s full of smaller players and increased completion from traditional HCM suites expanding their table offerings, the name of the game was consolidate or die,” he said.

As a result of the acquisition, Cornerstone and Saba can expand their R&D while sharing the overhead involved with sales and administration. “This should help to accelerate roadmaps for customers and allow for more investment in cutting edge innovation,” White said.

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