IBM Accentuates its RPO and Talent Management Offering by Acquiring Kenexa

Gary Bragar, HRO Research Director, NelsonHall

Although a bit smaller than the $1.9bn Oracle paid for Taleo (coincidentally at $46 per share as well) and the $3.4bn SAP paid for SuccessFactors, I believe that IBM’s acquisition of Kenexa, a cash transaction at $46 per share or ~$1.3bn and closing in Q4 2012, will have a much more immediate and larger impact than the aforementioned acquisitions.

Both Taleo and SuccessFactors were specifically acquired for their talent management (TM) technology. Beyond the strength of Kenexa’s technology, however, is the provision of TM services including:

• Consulting
• RPO
• Employee engagement
• Leadership development.

According to an IBM study conducted earlier this year, 71% of respondents cited “human capital” as the leading source of sustained economic value, above products and services innovation and significantly higher than technology. Kenexa, as a HCM and TM provider, will compliment IBM’s TM offering, which focuses on the full TM life cycle of attracting, developing, rewarding, and retaining talent. Specifically, IBM’s TM offering includes:

• Recruiting
• Learning
• Performance management
• Compensation
• Succession management.

In addition to its multi-process HRO (MPHRO) offering, which includes TM, IBM also specializes in providing workforce strategy transformation, social technology, and analytics to predict and measure performance.

While RPO is part of IBM’s MPHRO offering, it also provides RPO on a standalone basis to GM. Kenexa’s RPO capabilities, however, will accelerate IBM’s RPO market share, making it one of the largest RPO providers globally with clients headquartered in North America, Europe, and Asia Pacific. Kenexa also delivers RPO services in Latin America including South America in ~25% of its contracts.

Kenexa’s BrassRing technology is one of the two most widely used applicant tracking systems in RPO contracts. Kenexa also brings its Kenexa 2x Recruit platform, which in addition to recruiting and learning contains the following performance management modules:

• Goal setting
• Competencies
• Performance appraisals
• Compensation
• Career development and pathing
• Succession planning.

NelsonHall estimates that Kenexa has more than tripled the size of its RPO business since 2006 with brand name clients including Ford and multi-regional contracts with Baker Hughes and Eli Lilly.

IBM’s price of $46 per share is a 42% premium over Kenexa’s August 24^th close, but it will be well worth it. IBM is getting much more than software technology; it is getting assets, including human talent that can make a HCM difference. IBM’s plan is to combine its approach to social business, analytics, and TM to transform business processes to create smarter workforces with measureable business results. Given Kenexa’s record of growth and IBM’s experience with integrating acquisitions, this sounds like a good plan and a great business opportunity for both companies.

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A Double Dose of Kenexa

Last week, Kenexa announced Q3 revenues and held its annual analyst relations meeting. Revenues for Q3 2011 were $75.7m, up 59% year-over-year. Subscription services were up 38% to $55m, professional services increased by 102% to $22.2m, and RPO was up 26% at $20m.

The top 80 customers averaged $1.6m in annualized revenues, up $.4m over Q3 2010. Sixty new “preferred partner” clients were added during the quarter (each with over $50k in annual spend), up 50% Y-o-Y. Three large client deals closed in the quarter including Baker Hughes and a life sciences company, all of which Kenexa won against multi-vendor partnerships with its breadth of talent management services available from a single vendor, a differentiating factor.

In addition to increasing its revenues and client base, Kenexa is integrating aquisitions, setting up new partnerships, and doubling down on the pace of new service developments and introductions. The integration of Salary.com is ahead of plan and some of the largest compensation deals in Salary.com’s history were just signed. Its new alliance with SkillSoft provides an enriched option for learning as part of an end-to-end talent management solution, adding to its coverage of one more key talent management base.

The latest “2x” service, Kenexa’s 2x Perform, was launched for early adopters. It is an integrated, enterprise-level performance management, succession, and compensation planning system. The new SaaS service joins the likes of 2x Brass Ring, 2x Onboard, and 2x Mobile. In 2012, 2x Perform will be expanded to all markets and 2x Assess will add to the growing survey and assessment product line. The feature and function basics are also a development priority with enhancements to the user experience underway.

We also heard live from several clients and while each had very different recruiting and talent challenges, each saw the same strengths in Kenexa. The right technology and service bells and whistles are there, but as one client said, “the technology makes you productive, the relationship makes you successful.” And it was the relationship aspects that each client highlighted including a focus on client success from the executives to the account teams.  Part of Kenexa’s high revenue growth is coming from an increase in the number of services sold in new contracts and service additions by existing clients. How do you really know you have great customer satisfaction? When they trust you with a greater share of their wallet.

With good news on all fronts, the management team mood was expansive and the conversations wide-ranging at the analyst event. From the presence of four generations in the workforce and the shortage of talent when and where needed, to the global impact of the economic crisis in Greece, talent management ties in one-way or another to much of what we see happening around us. Expect to see Kenexa there, on the front lines, helping clients around the world create improved business results through the many elements of talent management.

Linda Merritt, Research Analyst, HRO, NelsonHall

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