The Emergence of “Human Capital Management”

I had dinner a couple of nights ago with two of my favorite executives, the CEO and COO of an enterprise SaaS company in which I invested early stage venture capital. The CEO rose through the sales ranks, and the COO through what used to be called HR and is now being called HCM—human capital management.

I have always liked sales-oriented CEOs because they are focused on customers and measurable results. The good ones spread these orientations throughout the organization, creating a culture attuned to customer service and accountability. This is the first company I have worked with, though, where the number two executive has risen through the HR ranks—and I’m surprised at what a good decision this has turned out to be. We talked a great deal about the shift from HR to HCM and how this reflects on modern personnel practices, especially in technology companies.

When I went to business school, HR was not the choice calling of most of my classmates. It was a backwater focused on administering benefits and avoiding corporate liability—not central to the MBA educational process—or so I thought then.

That is no longer the case.  The functional area has clearly been elevated. Talent acquisition, training, assessment, and retention are no longer backwaters, but are strategic to forward-looking companies.

There are many reasons why HR has become HCM, including better data on what drives strong company performance. Culture is increasingly understood to be important, and this particular company places a big emphasis not just on hiring good people, but on hiring people who fit and quickly weeding out ones who don’t. Yes, top performers are significantly more productive than average ones, but cultural misfits can be disruptive and hinder team productivity, no matter their individual performance. Bad hires are expensive because they have to be replaced, any holes they leave need to be filled, and any damage they have done repaired.

Watching this company, and learning from this team, I have become a convert to modern talent management practices. Apparently, I’m not alone, and am probably behind the curve.

Anybody who has been following the emergence of enterprise SaaS has seen the speed with which the HCM sector has emerged. SuccessFactors pointed the way, growing from startup in 2001 to $330 million in sales before being acquired by SAP for $3.4 billion in December 2011—that’s right, the acquisition price was 10x revenues. Not to be outdone, Oracle followed in February 2012 with a $1.9 billion acquisition of Taleo for 7x revenues. Not content to sit on the sidelines as SAP and Oracle bought their way into the cloud, IBM bought HCM company Kenexa for $1.3 billion in August 2012; the company was on a run rate of about $250 million in revenues—a relatively inexpensive 6x multiple.

HCM SaaS companies also have been well represented in the IPO market. Workday, founded by former executives from PeopleSoft, went public in October of 2012, and is now valued at $12 billion dollars—more than 34 times trailing 12-month revenues of $350 million. CornerstoneOnDemand, another HCM company that went public in May 2011, sports a market cap of $2.6 billion, a multiple of 16 times trailing 12-month revenues of $150 million.

There are also dozens of smaller privately-held HCM companies, many of which are growing at annual rates of 50% or more.

How can there be so many successful companies in this emerging market? There is clearly enough demand to feed them all.

These are all companies that, in one way or another, help businesses to attract, train, motivate, and retain the best people. I haven’t done the math, but it feels to me that if you added up the revenues or market caps of all the HCM companies in the enterprise SaaS industry, it would be the largest sector.

All in all, it was a pleasurable dinner. These two executives have been very intentional about elevating culture in their organization, and that decision—supported by the board—has produced very good results. I’m reminded of this every year at their Christmas party, which feels like a family gathering. Each year they have an artistic contest of some type—most creative door covering, for instance—and it is amazing to see the energy that people in every functional area put into letting their creative sides run free. You can’t predict who will have the most artistic creations based on their job functions. I take this as a sign that people are comfortable being themselves in this environment.

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