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Here is one way to break this down:
Early stage private companies - Vendors in this category are often innovative and exciting. They also are relatively small (less than around ~$20M USD in revenue) and more often than not, venture funded and still burning cash. But, with a prolonged recession in the works and little new money available for investing, these companies are having to pull back significantly in order to conserve precious cash. Since their businesses are less mature, with a small base of long term recurring revenue, pullbacks can be draconian, and customers could be in for a rough ride. Buyers, do your financial diligence! Some of these companies will do fine, but be aware of the risks.
Highly devalued public companies - This is the highest risk category of all. Why? Because these companies are trading near the basement with no near term prospects for recovery and they have investors that want out. While some of these companies may be sizable and have enough cash to survive, they are at very high risk of being bought out within the next year. I don't need to name these companies, which would be exceedingly impolite, but you likely know who they are, and buyers should be very careful when dealing with them.
Stable public companies - All public companies have been hit hard by this economy, but some of them are fundamentally sound, of scale and still capable of charting their own course and innovating. I would include companies such as Laswson, Successfactors, Taleo, and Ultimate among some others in this category. I think buying from these sorts of vendors is a pretty safe bet. They have enough scale and cash to survive, and even innovate a little in a prolonged down economy. However, I don't look for these companies to be very acquisitive during the recession. They all view their equity as devalued, and are unlikely to use it (or cash) to do a big deal.
The ERPs - As usual, the ERPs get their own category, but I'd throw in ADP, Paychex, and some of the other large employer service giants in here as well. The good news is, nothing has really changed. The bad news is, nothing has really changed. Buyers will probably get better deals, but don't expect much to change about doing business with the big boys. Don't expect a lot of innovation. But, if your organisation was okay with that direction, then move along smartly.
Stable private companies - The wild cards! For those looking for action, this is the place. First of all, the category is truly a mixed bag, but if there is going to be change, I think there is a good chance it could come from this category. Some companies are simply of scale and will keep doing what they've always done. But, some well run private companies could end up being very acquisitive over the next year while the stable public companies are still rebuilding their share prices. All of this is predicated on the return of some amount of private equity in to the market over the next year, which, in and of itself, is questionable. Given the lack of constraints that a private company of scale has, plus a return of some capital, some real breakouts could occur here in the next year. But, as with all private companies, buyers should do their diligence, both financial and strategic. Sometimes it's hard to tell who belongs in this category and who belongs in the category below.
Declining private companies - Stay away unless they really have some differentiating thing your organisation must have. These companies are neither innovating nor stable. Sometimes a company in this category may have a technology that survives, even if the company may not. Sometimes, a declining company gets recapitalized and can change its course. But this relatively common phenomenon in the past, is unlikely to happen in this economy for some time. Again, buyers do your diligence.
There are many valid and different ways to look at the HCM/Talent technology vendor landscape, and this being only one of them. I hope it provokes some thoughts and is of some use.
3 comments:
The problem with private companies is that all of them will try and convince you that they're stable private companies, but in reality in this market and in this economy, they're all declining private companies. Without audited financials, you have to trust some oily sales guy's word, which is highly risky.
I agree with you wholeheartedly, hence my emphasis on diligence. If the company is private, by all means buyers should ask to see audited financials. If the vendor refuses, I would view it with some suspicion. Also, buyers should be willing to sign a non-disclosure agreement and they should make sure that they have a resource on hand that is capable of talking through the financials in a knowledgeable way. I have posted about thast before.
The problem with public companies is that all of them will try and convince you that they are more stable and reliable than any private company, or any public company smaller than them. If the banking crisis should tell us anything it is that corporate accountants can be just as oily as salespeople. At least with the salesguy, you know you're getting greased.
In this market and this economy, I don't believe anyone can say with any certainty what might happen next. Strong mid-sized companies may become attractive acquisition targets for lumbering giants with cash on hand. Previously-stable public companies may make deep cuts into various budgets in order to meet the earnings expectations of a Street environment that punishes small digressions with 30% same-day haircuts. Currently-stable companies with cash may go on buying sprees and wake up with a green-beer hangover.
Amongst all of this, many if not most companies could still do far better than they do in product evaluation, which is almost always going to be far more relevant to their experience as users in the near to intermediate term.
Simply put, I would be surprised if even one in ten companies that add a detailed financial review to their decision, make a better selection as a result. I would not be surprised if three or four make a worse one, though.
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