Rambles and Rumbles

In the last quarter we have had a lot of major announcements, a couple of big industry trade shows, a couple of IPOs and some significant movement and traction in the human capital space. All are signs of a very healthy economy, with lots of potential upside. With last week's job data showing an increase in non-farm payrolls of 215,000 last month, the strongest increase since July, this is great news for all HR vendors. It breeds money and investment in the HR space with technology, recruitment, investment in our people and so much more.

I'd like to start by thanking everyone who sponsored and participated at our September Employers of Excellence Conference that recently ran in Phoenix. It was the largest event that we have ever hosted and the program featured great keynotes including Jim Collins, Dewitt Jones, and Coleman Peterson. We were extremely pleased with the high quality and quantity of Senior HR Executives and we could not have done it without you, our sponsors.

We have three exciting opportunities next year for vendors to participate in.

1. Our 5th annual Employers of Excellence Conference program, which will be held in Las Vegas at a new facility called the Red Rock Resort, October 25 to 27. This program will be even bigger and better than this year's in terms of the pricing opportunities for vendors to get involved, so we encourage you to check that out at crm.hr.com/events/national. Also note the call for presentations that ends on January 13, 2006 as well as the ability to nominate one of your clients for a best practice award. (This will be posted shortly.)
    
2. Last week we announced a relationship with FOSE, which is the largest industry government technology show. We will be running an HR technology track for government employees in Washington. The event runs March 6 to 8 at the Washington Convention Center and we are having a call for exhibitors for this event. There will be over 25,000 government technology professionals in attendance. As most of us know, the government represents a huge opportunity for investment in HR practices, including leadership recruitment technology, with an estimated 60% of the government workforce set to retire in the near future. It's also a very underutilized vertical for HR technology and automation so there are major opportunities within the government for all industry members to participate. See crm.hr.com/events/gov for more details including a call for presentations, and exhibit details.
    
3. Three times a year we run a CEO forum in Boston. We are looking to host a national CEO Forum, where we bring together the heads of HCM firms to network, research the industry as well as learn how to grow our businesses. This year we have partnered with Acetech. This is an event open exclusively to CEOs of the human capital space. This event will run March 1 to 3 in Whistler, B.C. More details about this event are available at www.acetech.org; just go to the Whistler conference. The intent is to help fellow CEOs build better industries and better companies. We will be running a special track just for the human capital industry around some of the great keynotes that they have. CEOs, all of whom are significant players, will speak to us about how to build these businesses. We'll learn how to build brand, develop leaders and how to build market share. I'll be doing a lot of internal networking with CEO's in this space to come up with some trend data that can help us all move our business forward.

I'd also like to recognize the "Best Overall" award winners for the three Employers of Excellence programs including Phoenix, San Francisco and Tampa (which actually wrapped up December 8th.)

a) Phoenix:

• Arizona Spine and Joint Hospital
• DriveTime
• St.Joseph's Hospital and Medical Center

b) San Francisco:

• Accolo, Inc.
• Exelixis, Inc.
• Pool Covers, Inc.

c) Tampa:

• HomeBanc Mortgage Corporation
• A-1 Temps
• YMCA of the Suncoast

I wanted to acknowledge these companies for the excellent work they have done in building their workforce engagement, culture, and the business dimensions. This was the first time we have done this local Employers of Excellence program and it was quite successful in terms of getting companies to participate. There was obviously a lot of hard work put in by these employers and I want to congratulate those HR professionals who have done an amazing job.

HR Technology

We always have the honor of going to one of our favorite industry trade shows in the fall, which is the HR Technology event. It was significantly bigger than the previous year which is a sign of the growing economy, coupled with a very well run trade show. Although, I do question how many more EPM (Enterprise Performance Management) and Talent Acquisition vendors we really require in this space. The booths with an integrated product line seem more popular and we do see a start of a trend in that people are actually looking at entire suites of products or how to integrate these suites.

For example, people like Authoria, after the recent acquisition of Hire.com, now have a suite that includes benefits communication, compensation, performance management and talent acquisition. Kenexa, HR Smart, Softscape and Pilat all have well-rounded suites. This does not mean that there is not room for BOB (Best of Breed Providers) it simply means there is room for a few BOBs in each space - and they better be BOBs. Ultimately, a holistic approach to managing your workforce is nirvana and we do think these vendors will gain significant traction in the future.

We had a meeting with TomorrowNow, which sells alternative maintenance programs for PSFT clients and is experiencing significant growth. In fact, they have grown from just 17 employees a year ago (when they were purchased by SAP) to over 120 employees. They target PSFT clients who are paying 18-22% annual maintenance costs on PSFT software. Much of it may be shelfware. Their value proposition is that they offer a 50% savings on traditional maintenance licensing costs.

The other thing is that everyone is, rightly so, picking on the Oracle/Peoplesoft/JD Edwards merger. Oracle is working on a massive technology integration initiative, which takes time. Although they do have a very good track record of delivering, they do require time. A lot of the best-of-breed vendors in the talent acquisition, LMS and performance management space have experienced significant growth as they continue to sell their best-of-breed solutions instead of companies adapting to these modules to their ERP strategy. In addition, there are over 30 documented cases of traditional Peoplesoft and JD Edwards accounts moving to alternate platforms such as Lawson or SAP. I think this is still a relatively small percent, but it is a growing percent. It's going to happen until Oracle finalizes the deliveries for fusion and dates become closer. One of the marquee clients Oracle/PSFT lost was Wal-Mart, who is now a Lawson client.

Traditionally, where we have seen Lawson as a mid-market player, I can tell you that a number of their key marquee clients are actually Fortune 100 companies - so keep an eye on them. They rightly believe that their product is a significant competitor to the other key ERP players in the space and they are experiencing significant traction in the human capital space.

In the last quarter we have had a couple of IPO's and a reverse takeover. The Taleo (TLEO) IPO debuts after the widely successful Kenexa (KNXA) IPO with very little excitement. KNXA continues to be significantly above their opening evaluation.

I wanted to just take a few minutes to look at a competitive analysis of some of the publicly traded companies in our space. First of all I took clients that touched hundreds of thousands of users, sold software as a service (predominantly) and offered significant impact to organizations as they traditionally touch a wide number of users within each organization. At the end of the chart I compared the evaluation to Salesforce.com (a CRM tool widely adopted in the industry but that only touches salespeople.)

The first thing I see is that firms in the HCM space are very undervalued. Some (such as the LMS vendors) who probably touch more people than all the others are the most undervalued. None of these vendors have market evaluations similar to a Salesforce.com.

The reality is that there is a wide disparity between market value of organizations. LMS vendors like SumTotal and SABA are very, very under-valued, compared to the suite vendors or best-of-breed vendors like Kenexa.

In the next Vendor Files we can take this a step further and compare these vendors to the industry giants like SAP, Kronos, ADP and Talx. One may ask what the difference is between a Kenexa and a Taleo. Kenexa has, in our viewpoint, a well-rounded suite. Although many of their clients only use one or two of their modules, they have a large opportunity to go back to their existing client base and upsell them on additional products that could be integrated into the base Kenexa product, whereas a firm like Taleo has to go out and find additional clients. They can get some additional revenue from their client base by selling them additional licenses or the VMS product line, but their suite is limited.

Taleo is also in a much more competitive industry. There are a lot more vendors just specializing in the talent acquisition space compared to the suite space. I think both Taleo and Kenexa have an incredible upside and they are valued significantly higher than the LMS vendors.

Ultimate Software also gained significant traction in software as a service for the mid-market in terms of the HRIS payroll capabilities and if you look at a five-year chart you will see significant growth there. So there is hope for us all!

What do we need to look at as owners or managers of these businesses? How do we capitalize or maximize shareholder value and drive up the evaluations of our companies? I think there are some inconsistencies in the way the markets are treating the vendors that touch the total workforce so we really need to examine this and make sure we can maximize the value.

The EPM market continues to be red hot with record numbers of deals being allocated for people. Authoria had a record quarter as well as Mindsolve, Halogen, and Success Factors. It seems as though everyone is converging on the performance management vertical as it does touch on everyone in an organization. Companies like Recruitmax, who bought the Knowledge Point assets and Authoria, who bought AIM, have moved into this space but we also see a number of other players who are actively trying to align or purchase performance management vendors to compete in product. So there's still going to be a lot of movement and action in this space with record numbers of deals being consumed.

There's also been some significant product enhancements from two companies in the recruitment space. The first is Wanted Technology, a smaller Canadian firm that specializes in recruitment advertising/competitive research, who completed their reverse takeover. Below is an example of some of the work they do. Finally there's a vendor who has found a way to make money selling data. Their predominant market is newspapers. As recruitment advertising agencies and job boards build, we see a large upside in integrating this to a talent acquisition system as well as selling direct to people interested in workforce analytics and planning.

The tools can be integrated to a talent acquisition system or used for competitive intelligence for any of the job boards, newspaper markets, and staffing needs, so they can find out who is doing a significant amount of recruiting and competitive analysis. It is fully automated and employee-based and I think it is one of the only products in the industry that can really help salespeople identify key accounts to go after. You may want to take a look at that if you are in that business.

The second one is ZoomInfo, who offers an expanded search that actually includes campaign management so for up to 100 records at a time, you can actually connect or email clients about it. They've also extended searching capabilities to drill down on work verticals such as companies and they continue to do some very innovative, great work so make sure you check them out.

Google has definitely entered the recruitment space with the GoogleBase products. There's not much traction yet, but we'll see what happens when their free classified launches and where it goes long term. With billions in the bank if they want to win in this market they can.

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