IBM is changing its applications game with its proposed $1.3bn cash acquisition of web-based social HR specialist Kenexa and is moving into the mainstream business application space it has shunned for so long.
Many of its acquisitions over the past year or so have been cloud and analytics based (e.g. Demandtec, Tealeaf, Vivisimo, Green Hat, Varicent – see the HotViews archive). Kenexa aligns with the model via its web-based approach but where the other acquisitions have been around specialist applications, or attract relatively low numbers of users within a business, Kenexa is a high volume mainstream business application that could potentially be used by all employees within a business. That moves IBM into a different area and puts into it on a collision course with SAP and Oracle. The duo already overlap with IBM in various ways (Oracle with databases, middleware and hardware, SAP with databases and some middleware), and all three are players in the fast moving analytics and mobile spaces. But now IBM is entering their traditional areas of expertise. With its combination of services-backed software, IBM is seeking out high margins and new markets - and has been doing rather nicely too (see IBM grows profits, gradually becomes software business).
IBM is not buying conventional HR software. Kenexa addresses recruitment and talent management using social networking and collaboration tools. This combination is another hot area and has spurred other major acquisitions (SAP’s acquisition of SuccessFactors, Oracle’s acquisition of Taleo), and developments (Salesforce.com, Workday). Even standalone social technology is highly valued, as the recent Microsoft Yammer acquisition and Salesforce.com Buddy Media acquisition demonstrate.
Vendors are keen to blend high volume revenue-generating HR with the new forms of social interaction because this is seen as the best way to monitise social media developments. Currently, vendors are struggling to make social investments (which are often tied to loss-making cloud provision) pay. Kenexa is in a similar position. Although it will bring some additional revenue to IBM (Kenexa delivered revenue of $283m in FY11 and is forecast to reach $364m in FY12), the primarily subscriptions-based business made a net loss of $3.8m in FY11. IBM plans to back Kenexa's front office software with a layer of social technology, consulting and other tools making this as much a services play as a software one, illustrating the high margin services-backed software trend analysed in Services-backed software: a new dynamic for services providers. It will be interesting to see how IBM progresses and to what extent this could become the model for profitable revenue generation around subscriptions and new technology areas.