1116RA IBM Acquires Kenexa to Drive Boundary-Free Growth

What is Happening?  On 27 August 2012, IBM announced its acquisition of HR/talent management software and services provider Kenexa for $1.3 billion, at a premium of more than 40 percent over Kenexa’s closing share price the previous week.

While the acquisition certainly fills an important spot in IBM’s strategic, growing SmartCloud Solutions portfolio of business management solutions and services, Saugatuck also sees the deal as another step toward more direct competition and confrontation between IBM and traditional business management software providers.

We believe that, within three years, IBM’s SmartCloud Solutions increasing focus on business processes-as-a-service will force significant change in IBM’s relationships with traditional business management software developers and providers, fundamentally changing the business nature and model of IBM. The lines between business process and business software are becoming more Cloudy.

Why is it Happening?  The most obvious competitive factors in IBM’s acquisition of Kenexa include SAP’s acquisition of SuccessFactors, Oracle’s acquisition of Taleo, and the continually-increasing adoption of Cloud-based HR management applications and platforms such as Workday. Kenexa is a strong player – although seen more recently as a slow grower – in the important HR management areas of talent acquisition, employee engagement and retention, training, and performance management market. Revenues for talent management software and consulting services have been valued at around $4B annually in the US alone. And Saugatuck’s annual executive surveys continue to point to talent acquisition, retention, and training as top-tier concerns and management challenges – and a key target area for Cloud-based customer acquisition.

But a potentially more important factor in this deal is Kenexa’s presence and expertise in key HR business processes, including recruitment process outsourcing (RPO). Kenexa is a leading provider of RPO as a set of Cloud-based business processes. Given that IBM’s long-term SmartCloud Solutions focus is strategically based on growing enterprise use of business processes delivered and used as services, Kenexa fits perfectly. Especially since Kenexa’s business model builds revenue streams of outsourcing and managed services on top of Cloud / SaaS services, mirroring IBM’s own current and long-term technology and services strategy and capabilities.

Finally, the acquisition positions and enables more and better leverage of several other important IBM software, Cloud, and traditional consulting services, from social business to Big Data analytics to business consulting. Kenexa’s software and databases collect and manage petabytes of employee, process, and management data, and do it across a growing range and number of business management applications and data sources (including its own Salary.com compensation database). Integrated with IBM’s SmartCloud social business, BPaaS, and other offerings, Kenexa enables a significant and potentially very profitable array of shared information, processes, data, analytics, best practices, consulting engagements, and so on, across departments, between enterprises, and within vertical markets. In effect, this can be seen as a “social app” acquisition that enables and feeds tremendous business synergies, along with the growth and improvement of data analytics as part of business management, within and between “boundary-free enterprises™” (1095MKT, Saugatuck Survey Insights for the Evolving Boundary-free Enterprise™, Part 1, 5July2012).

Market Impact  In the end, we have several things happening that drive and result from deals like this. First, it helps to illustrate the ever-diminishing differences between apps and processes – really begun with the first software, and set firmly in place by SAP in the 1990s, and now more and more erased by Cloud.

Given the broad and deep nature of IBM’s SmartCloud, platform-based services, software, and BPaaS strategy, this diminishment / erasure of the separation between the technology and the operation means that IBM will in effect compete more and more directly against SAP, Oracle, and other biz app providers, most of which are long-time IBM partners and revenue sources.

While we are certain that IBM understands this and is positioning itself accordingly, we are also certain that IBM is trying to be subtle and not overtly disrupt the business of its partners. IBM has multiple methods of working with and driving revenues for / from these partners, including implementation, deployment, enablement, solutions, development, and consulting services. In this sense, IBM will pick its opportunities and potential battles very carefully, most likely focusing on vertical market opportunities, and complementary capabilities. IBM is not likely to go after core financial applications soon, for example. Instead, it will likely focus on targeted business processes and verticals where it has established presence and domain expertise. And it continues to invest heavily in partner / channel development and evolution as Cloud grows more and more important to the average business user and IT buyer.

At the bottom line, this deal is about IBM serving notice that it will not hesitate to move aggressively in Cloud, but will pick its beach-heads carefully and – for the moment – in as non-threatening a manner as possible.

As the world moves more, and more quickly, toward the Boundary-free Enterprise™, acquisitions like Kenexa will give IBM more and better means to build, assemble, and deliver loosely-coupled, opportunistic and easily-valued business solutions, moving up the value chain within the C-suite of enterprise decision makers and buyers. This changes the roles and revenue models of not just IBM and its competitors, but of most ISVs as well (1111MKT, Rapid Change in the Cloud: Software ISVs and Pure-plays Look Ahead, 14Aug2012).

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