HR technology is of key interest to private equity firms looking for "1 + 1 = 3" returns. The recent announcement of the merger between HR software solutions provider Ultimate Software and workforce management cloud provider Kronos is the latest in a years’ long shake-up of HR tech providers. Cloud software, human capital management (HCM), payroll and time management capabilities are important variables in this high-dollar equation.
Less than a year ago, when investor group Hellman & Friedman added Ultimate to its portfolio of 20+ high-growth technology companies, it saw unprecedented financials in the fourth quarter of 2018. GAAP earnings were up 75 percent from the prior year, recurring revenue growth was up nearly 25 percent, and Ultimate’s stock price outperformed double-digit industry returns. Critics of the $11 billion-dollar acquisition called attention to the darker side of the equation: 10x valuation as market growth began to slow, an onerous debt load, and weak EBITDA. Number crunchers will soon begin speculating on the real value of adding Ultimate to Kronos, which was valued at $1.8 billion when it was bought by Hellman & Friedman more than a decade ago in 2007.
While industry analysts will soon begin their analysis and projections of the financials supporting or condemning the merger, in many ways, this math will be the easiest to explain. Client value will be the harder equation to solve. Ensuring an outcome that brings superior customer experience and value takes many more calculations that include the following variables:
- Complementary strengths in payroll and time. For enterprise clients, Kronos is hands down the best-known time and workforce management platform. In fact, ADP’s proprietary eTime solution is a highly customized derivative of early Kronos code. Meanwhile, Ultimate’s solutions for time management include UltiPro Time & Attendance (UTA) for robust client needs like leave management and scheduling, lighter-purpose UltiPro Time Management (UTM), and integration with a variety of client partners and local time vendors. Ultimate’s payroll software is a proven staple with managed services capabilities for tax, garnishments and other popular support options that Kronos lacks.
- A complicated cloud HCM landscape. Ultimate’s HR software-as-a-service (SaaS) offering UltiPro has deeply penetrated retail and restaurant industries and has been a staunch competitor to Workday, SuccessFactors and Oracle Cloud for large, complex clients. Kronos’ cloud HCM offering does not have the same maturity, adoption or success rate. In recent years, Kronos explored go-to-market relationships with several providers who were seeking to fill a gap in their own HR technology portfolio, but to no avail. Rationalizing the combined portfolio of products, each with its own installed base, data hierarchy and migration challenges, will be a preoccupation for years to come.
- Employee experience as an integrated or stand-alone option. Entering new markets is a growth imperative for any HR technology firm. In 2018, Ultimate took a leap with its purchase of document management platform PeopleDoc just as employee engagement and experience were gaining attention. By 2019, in a first-ever deviation from bundling integrated products, Ultimate allowed stand-alone sales for PeopleDoc and Perception, its engagement survey with built-in sentiment analysis, in hopes it would help its Experience Suite continue to penetrate new markets. As buyers seek portal, workflow, and CRM tools to extend HCM SaaS products, Ultimate has remained laser-focused on providing integrated solutions that optimize the employee experience. There is no such tool in Kronos’ portfolio.
- Global expansion that is three-dimensional. Ultimate has considerable success with mid-market clients, but its success with complex, large-market clients has been limited to select industries and countries. Meanwhile, Kronos has built success and name recognition among large, global clients with complex time-management needs. Before the merger, Ultimate was already looking to expand its international presence by tapping the European client base that was part of newly acquired PeopleDoc business. Leveraging new Euro-based clients was an intentional step in Ultimate’s plans to make global gains. The combination of Ultimate, PeopleDoc and Kronos presents a three-way puzzle of products and resources to piece together for meaningful global growth.
- The people economics. Merger arithmetic tells us the combination of Kronos and Ultimate will add up to more than 12,000 employees worldwide, with plans for the addition of 3,000 more in three years. But will Ultimate’s top leadership stay on with Kronos CEO Aron Ain at the helm? And how long will joint headquarters and redundant offices remain in place? Ultimate’s workplace culture is strong and has been a significant driver of its success. In some respects, Ulti-Peeps (Ultimate’s employees) are still reeling from last year’s move from public and employee ownership. It will be difficult to maintain all the well-known Ultimate benefits – full healthcare coverage for whole families at no cost, for example – and costly to extend to the new, broader organization. If benefits dwindle, will employee loyalty dwindle too?
Both companies have award-winning cultures rich in people values, but that does not mean they will be compatible with each other. Retaining people and passion will be key to maintaining the trust and customer-centric energy for which these companies are known. Private equity firms (Blackstone, in this case) tend to incentivize plans that can lead to meaningful payouts down the road.
Exciting times lie ahead for Ultimate and Kronos, entities that must now do the hard work of solving for the unknown variables and delivering exponential value. Competitors will be salivating at the chance to cast doubt and foreshadow disruption. Clients must be convinced the pieces will come together with simple arithmetic – not a quadratic formula.
ISG helps enterprises navigate the changing HR tech landscape to make the right decisions for their business. Contact us to discuss how we can help you.