With interest in performance management solutions still strong even during these down times, the market for both SaaS and on-premise software suites remains buoyant.
by Andy Teng
During economic times like these, the tendencies of most executives are to hunker down, slash costs, and ride out the storm. However, for those keen on not only surviving but also thriving, it may be the ideal time to put some distance between themselves and their competition.
But what’s the best way to achieve such a lofty goal when budgets are reduced and investments in organizational development are hampered? And is it an activity in which HR leaders can partake that will earn them the much-coveted seat at the table? Moreover, how does HR demonstrate the contributions it is bringing to the table when its accomplishments are often overlooked or undervalued by peers?
Despite the current economic turmoil besieging most businesses, some HR departments are charging ahead to make their companies more competitive through well-designed performance management programs.
Although resources may be constrained, these executives are nevertheless driven to raise productivity and efficiency by taking on organizational performance. Adopting a management suite as part of a broader talent management strategy also helps organizations better identify high-potential workers they want to keep and cut the ones they don’t when it’s time to hand out pink slips. Most importantly, today’s powerful technology helps managers and workers function at a higher level.
Rolling out Pieces
That was the thought process for Cherie Mullen, the director of learning at Utica National Insurance Group, a property and casualty company based in Utica, NY, when she invested in performance management technology. With nearly 1,500 employees in 11 offices along the eastern part of the U.S. and in Texas, Utica first implemented a learning solution before taking on other performance management installations. Most recently, it rolled out a 360-degree feedback system as part of that effort.
Mullen explained that Utica National initially focused on learning by bringing in a learning management system (LMS) to help track employee training. She said previously, the company relied on multiple Microsoft Access databases to accomplish the same task, but it couldn’t provide the same degree of insight or ease of use as the LMS. Shortly after that component was put in place, the company turned to technology provider SuccessFactor, the leader in the fast-evolving performance management software market, according to analyst firm the Gartner Group. In implementing components of its product suite, Utica National has made marked strides in organizational goal alignment and workforce engagement, Mullen added.
“The system created a mindset that asked what is important to Utica and how did it allow the community to see us. It allowed us to create essential and associate competencies. These are the things that are important to us,” she said. “Employees are visually able to see where their goals are and how to impact managers’ goals. Previously, they knew where their goals were, but that wasn’t easily documented. You can now go in and make sure you are still on track. When corporate plans change, that will filter down and people can have a better sense of alignment.”
As part of Utica National’s investment in performance management, the company uses SuccessFactor’s assessment, employee profiling, and reporting and analytics tools to gauge competencies and professional skills progression. As the company has rolled out various functionalities, it has seen a lift in workforce performance, although Mullen said results are not always easy to measure. Last year, it looked into adding succession planning as part of the program but had to put the initiative on hold because of budgetary constraints—not an uncommon occurrence in this downturn. Mullen said Utica National is hoping to free up the purse strings by 2010, when the economy is expected to finally recover. Still, its previous investments have already paid dividends, and for managers the results have led to a clearer line of sight into their human capital.
“With the performance system, it allows us to create consistency in how employees are measured, to look at competencies of employees, and to be able to understand where we are and to dedicate our resources appropriately,” she added.
Mullen’s experience is not unlike those of other HR leaders who have invested in performance management systems. Achieving a clearer picture of an organization’s talent competencies is perhaps one of the most effective ways for HR to become more strategic and help the business on the road to recovery. Today’s performance management solutions are also a work in progress fortified by a continuous stream of improvements including greater functionality and integration to help HR and business managers make sense out of raw data. Furthermore, with so many different flavors of performance management suites available, buyers from a spectrum of industries, sizes, and geographic footprints are bound to find a suitable solution for their particular needs.
“It’s been a hot area of the market. A lot of vendors are offering products in the space. There are a few reasons why in terms of the overall strategy an organization may have for talent management, performance management is an important linchpin,” explained Jim Holincheck, managing vice president at Gartner and author of the Magic Quadrant report on the performance management market.
Holincheck pointed out that one of the reasons for sustained interest in performance management tools among employers is that they help to achieve several important goals: integrate several critical functions in the talent management arena, enable companies to develop their next generation of leaders, and help shore up gaps in ERP offerings. Additionally, because there are many vendors offering unique solutions, the functionality bar is constantly being raised. Also, many of the solutions available allow users to turn on service modules when they are ready so HR organizations can pace the rollout of any module to their own schedule.
But what exactly constitutes performance management? After all, the components of talent management are closely tied to each other, so a clear definition of the subset of performance management can be difficult to achieve. Gartner defines it as a software suite that minimally addresses three closely related areas: employee performance, succession, and compensation planning. Other functions such as workforce planning, talent acquisition and recruitment, and learning are closely tied to performance but are generally considered to be part of the broader talent management area.
Gartner estimated that the market for performance management software was about $450 million in the 12 months that ended September 30, 2008. That total represents solutions from 24 companies. However, according to a survey Gartner conducted among 123 companies, only a small fraction bought all three modules from the same vendor, and even fewer bought a complete suite of talent management services from one provider; in fact, fewer than five percent of survey respondents said they procured recruiting, performance, succession, compensation, and learning modules from the same company.
What does this mean? It shows that investment in performance and broader talent management services remains small, and that employers are leveraging just a portion of the products available. Moreover, it indicates that the industry remains immature. Despite revenue growth of 25 percent and higher among some of the top software vendors in this space, market penetration remains low. Holincheck said clearly the economy is having an impact on software adoption as many employers hold off buying until their discretionary spending frees up.
Even if their checkbooks are frozen, organizations’ needs for greater performance management support have not. In Gartner’s survey, companies cited a number of reasons for investing in performance management. A desire to automate their processes was most often cited, followed by a need to link pay with performance, to develop the next generation of leaders, and to improve retention. Other reasons included process standardization and integration with learning functions. Clearly, HR organizations see opportunity to broaden their influence on their companies by improving business outcomes through better performance.
“Some of the specific linkages have been important for companies, such as pay for performance. Others are looking at how to develop the next generation of leaders in the organization. Those are things that have a lot of resonance,” Holincheck pointed out.
Indeed some vendors have seen interest and sales of their products surge because customers are hoping to more efficiently use their human capital. Greg Thompson, the senior director of emerging products at SuccessFactor, said that many prospects last October had halted their investment in software, but since then the market has made a comeback, largely due to the fact that companies see opportunities to raise productivity and are aggressively moving forward with their plans.
“At the end of the day, especially in this climate, it’s ‘Do more with less.’ That’s the consistent theme we’re hearing now,” he said, echoing the sentiments of others around the industry. Thompson added that in some ways the bad economy may help some companies to make a decision to invest in performance management software because they are trying to improve productivity now.
New Bells and Whistles
Several other drivers are also behind why performance management software has garnered so much interest, even in this economic climate. Many industry observers point out that development of various solutions and the functionality they offer have been accelerating in recent times as competitors drawn to the segment ratchet up their offerings. Best-of-breed providers have traditionally dominated the talent management/performance management market, but some big-name software vendors are also getting into the act. Household names such as SAP, Lawson, and others are rolling out competing functionality that boast seamless integration with ERP systems. And with just about every performance management software vendor making its products available on a software-as-a-service (SaaS) platform, many of the traditional costs and pain related to on-premise installation have disappeared.
According to Gartner, in a 2007 survey among vendors, 44 percent of HR organizations utilized performance management software through SaaS, but that percentage seems to be rising. While some vendors still see a continued demand for on-premise delivery of software—Saba, for instance, still boasts a large installed base of on-premise customers despite higher interest in its SaaS solution—it’s clear that SaaS continues to gain acceptance even among large companies that have traditionally kept their software behind the firewall.
While the attractiveness of an SaaS offering is just one reason why HR organizations are drawn to some of the software suites available, what really pulls them in is functionality and ease of integration with clients’ HRIS platform. Moreover, many best-of-breed vendors are constantly rolling out innovations to cater to a variety of market needs. This is possible, in part, because of advancement in service-oriented architecture and Web 2.0 technology. Also, many developers are now leveraging things such as cloud computing, social networking, and additional advancements in software technology.
Chris Tratar, senior director of product marketing for Taleo, explained that a lot of the innovation work is around leveraging data. While an integrated performance or talent management suite can unlock a lot of the hidden value of employee data, integration with the HRIS around payroll and benefits data can give managers even more insight.
“Generally there is a high level of interest in workforce planning. That’s an untapped frontier in talent management. It requires tapping into a variety of data sources. One of the things they [managers] have been looking for is related to usability. It is the ability to give them tools that are easier to use,” Tratar said.
For instance, if a manager receives feedback about a particular employee through a Blackberry, he or she can then forward that information to the employee profile, where it can be used later on for assessment and review. He explained that the managers own the data; HR simply enables them to access it.
And that’s a point that Tratar and other industry observers emphasize: The goal of performance management is to offer business partners tools that help them make better decisions and effect better business outcomes. Although many companies still view the technology as a way to alleviate administrative minutiae, they sometimes miss the bigger picture of how these tools should be leveraged to improve the bottom line—either through pay for performance, succession planning, or employee goal alignment.
Still, optimizing performance management technology is an iterative process, and most companies do so in incremental steps. Understanding how to maximize one module before moving on to the next is critical to developing an efficient process, and vendors often see clients slowly pacing their expansion into new modules. Maksim Ovsyannikov, senior director of product strategy and marketing for learning specialist Saba, said many of his clients who first implemented the company’s learning platform have gradually added performance management since. Those who have installed versions released in the past two years or are on its on-demand platform can easily add performance management functionality, which is integrated with its learning module.
He explained, however, that companies do not always implement solutions in a purely linear way. Sometimes they decide to invest in an on-premise learning solution after having engaged in an SaaS performance management solution—contrary to conventional trends. Other times organizations may choose to buy all of their software as an on-premise solution to ensure data privacy. But whatever the approach an organization takes, he cautioned to be careful in the selection of an integrated suite, saying that there is a mad rush to market right now among many software developers, and often times they overextend their ability to deliver.
“I don’t see a lot of smart growth” among some vendors, he contended, adding that some providers of recruitment technology who add performance management capabilities in their software may be overreaching in their ambitions.
Careful Vetting Advised
Certainly vendor selection remains a pitfall in the performance and talent management segment because the industry continues to consolidate and mature. Nothing spells disaster for an HR executive’s career more than choosing a provider who can’t deliver or has no longevity in the market. With additional shakeout likely to occur, should HR organizations delay their implementation of performance management software until the winners clearly emerge? Gartner’s Holincheck doesn’t think so.
“I think you don’t delay buying because of consolidation. You look at the business reasons you have for doing the purchase. You try to mitigate the risk as best you can,” he said.
That means doing lots of research, collecting customer testimonial, and examining the financial strength of a particular vendor. Going with brand names such as an SAP may be a safe play, but these vendors might not have the functionality offered by best-of-breed providers. In the end, HR organizations will have to rely on a thorough vetting process to make their pick.
Which vendors will emerge as the clear leaders in the performance management marketplace? That remains to be seen, but what is clear for now is that by embracing these tools to help the business better cope with the economy and the eventual recovery, HR will demonstrate its strategic value at the table like never before.