IBM Kenexa acquisition indicates strategy shift
OVUM VIEW
Summary
IBM’s recent announcement that it intends to acquire talent-management solution provider Kenexa for $1.3bn in cash indicates an important evolution in IBM’s strategy, and has greater significance than just another software and services acquisition.
The Kenexa acquisition will shift IBM closer to being a provider of core enterprise back-office software. In its transition to become one of the major players in software and services, IBM has stayed away from directly owning core back-office enterprise applications like ERP and CRM. Instead, it has focused on partnerships with application vendors and on creating value by pairing the partners’ software with its technology and services.
With the Kenexa acquisition, Ovum expects IBM to start moving more deeply into owning the core enterprise applications so that it can develop a series of solutions that will exploit its vast and global portfolio of software, R&D, consulting, sales, marketing, and infrastructure services assets.
Smarter workforce through enterprise solutions not just applications
While the Kenexa 2X Platform is likely to continue to be a standalone SaaS offering, the real long-term value for IBM and its customers is the development of comprehensive end-to-end solutions for talent management. The key extract from IBM’s announcement presentation was “real economic value is created when social technology and analytics are applied to transform business processes”. This clearly signals the direction in which IBM will head. IBM will aggressively develop solutions that not only bolt on to IBM’s analytics tools and socially enable the talent-management process, but also exploit something even more valuable: Kenexa’s huge repository of HR data and domain expertise that it has gathered through its various services and its recruiting process outsourcing (RPO). By bringing to bear not only its analytics technology but also its Big Data analysis staff, IBM can provide unique value that standalone applications such as Oracle, Taleo, and SAP Success Factors cannot. If properly positioned, this should give IBM an edge when discussing talent-management solutions with not only IT or HR, but also “C” suite officers such as the CEO and head of sales. In fact, the two examples in the presentation that IBM spent the most time on were focused on the sales force.
Smarter workforce in the customer context
Ovum believes that the intelligent management, enablement, and deployment of the right talent at the right time to support the customer’s desired outcomes is a crucially important component of the value-creation and delivery process. This goes beyond efficiency and is about the effective orchestration of the firm’s collective talent and intellect driven by the customer’s desired outcomes, by combining:
- Talent assessment (Kenexa)
- Talent development (Kenexa)
- The ability to harvest realtime customer intelligence (IBM or other)
- Optimal deployment based on historical analysis (IBM analytics)
- Enterprise social collaboration (IBM or other)
A large enterprise will make better use of its talents and be better able to mobilize them faster to maintain its value to customers and deliver a superior customer experience. This powerful combination promises to significantly improve agility and is a key piece in what Ovum is calling the customer-adaptive enterprise, enabling organizations to develop enduring customer relationships by being consistently relevant.
Throwing down the gauntlet to SAP and Oracle
What is just as interesting is the long-term implication of this acquisition on the core enterprise applications market. Over the last decade or so IBM has focused on becoming a provider of software and services while still maintaining a healthy, if focused, hardware business, but it has stayed away from directly taking on ERP, CRM, and other enterprise applications vendors such as Oracle and SAP. Instead, it has partnered with core back-office application vendors, surrounding their packages with high-value services and extended technology such as analytics. The partners might have changed (for example, in 2012 IBM started a multi-year transition from Siebel to SugarCRM for CRM), but the strategy has stayed the same.
This acquisition, however, should be a huge cause of concern for the established enterprise applications vendors, especially Oracle and SAP. It shows that IBM is serious about entering the enterprise applications market in a big way, and is likely to drive a series of other strategic moves among the biggest enterprise applications vendors to counter IBM’s move.
Ovum gives acquisition positive MANTRA assessment
Ovum’s MANTRA (vendor M&A tracking and analysis research methodology) assessment of the IBM acquisition of Kenexa is “positive”. When examining the 10 potential M&A motivations in the MANTRA framework, all the positive ones (for example, fill a technology or product gap) scored “high” while the negative ones (for example, remove a competitor) scored “low”. As a consequence, Ovum’s opinion is that the acquisition makes sense for IBM. The Kenexa acquisition will bolster IBM’s Social Business strategy and will help drive revenues in both products and services. However, this is not only positive for IBM, but also for enterprises and public sector organizations, because Kenexa’s products and services boosted by IBM’s portfolio will produce an enhanced set of offerings.
Recommendations for IT and HR executives: business as usual
IT and HR executives at enterprises and public sector organizations should respond to this acquisition with a business-as-usual approach. IBM has a track record of investing in acquisitions, so there should be no concern over the viability of the product or RPO offering, and talent, technology, and products will not be cut. In fact, it is extremely likely that IBM will invest heavily in Kenexa in, for example, R&D and marketing. Kenexa spent only 9% of 1H12 revenues on R&D, which is low for software companies. Competitor Taleo spent 19% of revenues on R&D in 2011, and Successfactors spent 20%. IBM could easy double Kenexa’s R&D and this would represent a rounding error in IBM’s overall $6.26bn R&D spend.
Customers of IBM and Kenexa should not see this acquisition as anything that will impact their installed base or procurement plans. Instead, Kenexa customers should look at it as a net positive because it will add new functionality and services from IBM’s portfolio of R&D and services.
APPENDIX
Author
Carter Lusher, Research Fellow and Chief Analyst: Enterprise Applications Ecosystem, Enterprise Solutions
Jeremy Cox, Principal Analyst CRM, Enterprise Solutions
Continue the conversation
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We also encourage IT executives and managers to compare notes with Ovum analysts about what they are hearing from their vendors, how effective the vendors are in keeping customers up to date, what vendors could be doing better, and which key vendor staff are staying or leaving.
Further reading
SugarCRM becomes the core of IBM’s next-generation CRM (Ovum, May 2012)
SugarCRM Opens the Door to Large Enterprises (Ovum, May 2012)
2012 Trends to Watch: Mega-vendors (Ovum, April 2012)
Vendor M (Ovum, April 2012)
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