Barron’s offered up this very timely, cautionary story regarding tech stocks. In Lofty Software Stocks Are Looking Bubbly, we read:
Many of the stocks appear to be priced for perfection—or near perfection—and that makes them vulnerable to small disappointments. ServiceNow (NOW) fell 4% on Thursday after reporting that its second-quarter subscription revenue rose 33%, but came in just below the consensus estimate for the first time in two years. The shares finished on Friday at $289, unchanged on the week. With Wall Street expecting annual revenue gains of 30%-plus, more disappointments could be coming. Software spending isn’t immune to economic cycles; if there is a slowdown or a recession, the stocks could take a major hit.
Or this bit:
With Wall Street willing to ignore stock compensation, it’s no surprise that software producers issue a lot of it. At ServiceNow and Workday, stock compensation is about 20% of sales, compared with 6% to 7% at Alphabet and Facebook.
Or this nugget:
ServiceNow had 71 cents of non-GAAP earnings in the second quarter, but a loss of six cents a share, based on GAAP. And it had just $22 million of free cash flow in the period after stock compensation. This is for a company with a stock market value of $53 billion. ServiceNow is valued at 90 times its projected 2019 non-GAAP earnings of $3.22 a share and more than 5,000 times its estimated GAAP profits of a nickel a share.
The author is correct to describe current stock prices as “bubbly”. The current pricing is highly susceptible to any market disruption, economic change or execution shortfall. These prices are rich, quite rich, and that carries a lot of risk.
Algorithms, the guts behind much of the machine learning/artificial intelligence initiatives today, are not well understood and the risks with their use are even less so. The Guardian did a nice, detailed but highly accessible piece on the subject and even coined a new word: Franken-algorithms. One example they discussed involved sudden acceleration in automobiles:
Only when a pair of embedded software experts spent 20 months digging into the code were they able to prove the family’s case, revealing a twisted mass of what programmers call “spaghetti code”, full of algorithms that jostled and fought, generating anomalous, unpredictable output. The autonomous cars currently being tested may contain 100m lines of code and, given that no programmer can anticipate all possible circumstances on a real-world road, they have to learn and receive constant updates.
If you want to get smart on algorithms read this piece.
The Month in Financial Accounting
Lease Accounting changes are still rough. After all the to-do involving Revenue Recognition (ASC606) in recent years, lease accounting changes are the next challenge for corporate accountants and software firms. But this set of rules changes has not gone well.
Deloitte describes the upcoming changes as:
ASC 842 changes the way companies across all industries account for their leases and provides investors with a clearer picture of what companies owe through their lease obligations, including those for equipment and real estate. And in 2020, the rule goes into effect for most private companies as well.
If your firm is still wavering on these issues, you should read the Deloitte piece as it also links to a pdf describing five common issues companies face in trying to meet the new standards. Like the RevRec requirements of a couple of years ago, you’ll face data collection challenges, the need for new/updated software and other time sinks to meet these new compliance requirements.
And now we learn that big public firms are having trouble with this new standard. From the Riveron website, we see:
The Financial Accounting Standards Board (FASB) voted last week to extend the deadline for private companies to adopt the new lease accounting standard (ASC 842). If approved, private companies will have until January 2021 to comply with changes to how they report their leased assets.
The FASB’s reason for the proposed extension is largely based on the adoption experiences of public companies. Many of these companies have found the process to be more time consuming and complex than initially expected. Data collection and abstraction, system selection and implementation, internal control design and assessment, and accounting policy development are just a few of the many challenges that management teams must tackle with the new lease accounting standard.
A recent FASB Action Alert confirmed this.
Bloomberg though points one finger at the cause of these delays:
Lease accounting software systems remain incomplete and unreliable. Software vendors have been slow to come up with workable solutions, forcing most public companies to rely on manual work-arounds to adopt the new rules.
Looks like software vendors have more work to do.
(Readers might want to also read this Accounting Today piece on the new regulations.)
I saw this new capability of Host Analytics recently. You can take a picture of a report with your cell phone and the software creates a spreadsheet out of it.
Check out this webpage re: Adaptive Insights (now part of Workday) and how Thiess of Australia used this software in 2013. It’s really an interesting case study as Thiess was pumping all kinds of operational, sensor and other data into the Adaptive cube to perform a better job of preventative maintenance on their mining equipment. Six years ago, they were doing the IoT thing!
I recently asked Adaptive executives why they quit pursuing these kinds of deals and would they resume these in the future. It was an interesting answer. Seems that Adaptive had to get focused in 2013. They couldn’t be a planning, forecasting and budgeting player for Finance AND also be an Operations and IoT vendor at the same time. That was then.
Today, as part of Workday, Adaptive may very well fire up its operational chops again. I look forward to hearing of more case studies along those lines.
The Month in HR
I spent a few hours with some of the Reflektive team in Chicago last week. Reflektive’s big in HR performance management software. Reflektive was founded in 2014, has over 500 customers and has taken in over $100 million in venture capital.
While Reflektive’s got a few large, major enterprise customers, their sweet spot seems to be with firms with 500-5,000 employees. Many of their customers are in high tech and/or experiencing lots of growth. These same customers appear to have a number of knowledge workers in their workforces.
Reflektive also shared the results of some recent research they had conducted. The key stat that caught my attention was:
85% of American professionals would at least consider leaving a job after an unfair job review”. I hope the next research effort digs further into this as I suspect bad/indifferent/ineffective bosses are behind a lot of those bad reviews.
Feedback is bad?
Speaking of performance feedback, this piece in the July-August Harvard Business Review caught my eye. In “Instant Feedback Hurts Our Performance”, readers see that the old adage “people do what they’re measured on” is not always right. In fact, overly frequent polling of employees (to get those darn-nice engagement readings) could be contraindicated. It was also interesting to see how people react to feedback when they are clearly outperforming or seriously underperforming in their role. Hint: it’s not what you’d hope it would be. It’s a short but impactful read for all of you that wonder about great analytics and HR performance management theory. A must read!
Last month, I wrote about a couple of mergers/acquisitions in the HR space. In this Recruiting Daily piece, there’s even more detail on this growing trend. This initial paragraph sets the tone well:
With the first half of 2019 firmly in the books, a few trends become apparent, but none more so than the ongoing consolidation going on within the talent acquisition space. Most recently, this played out with iCIMS announcing its acquisition of Jibe. Before that, we saw Shaker International merge with Montage, and of course, earlier in the year, the big Jobvite announcement that saw the company take on Talemetry, RolePoint, and Canvas in one fell swoop. What we haven’t seen is a lot of talk about why this is happening now and what it means for the industry.
I suspect more of this will happen as there are simply tons of HR vendors in a market that will want to consolidate into fewer, larger solution suites.
When private equity and HR connect
Institutional Investor reported on the effects of private equity and business failures. They found that roughly 20% of businesses acquired via leveraged buyouts failed in 10 years. They also reported that:
Similarly, research published by worker groups including the Private Equity Stakeholder Project and the Center for Popular Democracy claimed that, over the past ten years, private equity firms were directly and indirectly responsible for 1.3 million lost jobs.
That’s a lot of lost jobs. HR leaders can always target the best and brightest in firms that are being acquired by private equity firms and hire them for their own firms.
While some private equity firms are growth oriented and function more like venture capitalists, many others do not. This is why I’m so skeptical when a private equity firm takes over a software firm. I need to be convinced that asset stripping, ruthless cost-cutting, headcount reductions, etc. won’t follow.
McKinsey & the Future of Work
The strategy consultants at McKinsey produced a solid piece on the future of work in America. It’s a piece you’ll want to download, get a tall Dr. Pepper/coffee in hand and read thoroughly. Enjoy!
What you learn reviewing 53 HR products
I was asked to evaluate 53 HR products this month (In fact, I usually get asked to be a judge 2-3 times annually for some kind of tech evaluation.) This time, I was looking for two things from these HR products: inspired innovation and strategic/competitive advantage.
What I saw didn’t exactly impress me. Many of the innovations were simple, incremental extensions to pre-existing products. Some were simply a vendor creating a functional app that competitors have had on the market for almost a decade. Very few products could actually deliver any material top line or bottom-line value creation let alone create a long-term, sustainable competitive advantage for the customer. And, of course, there were products built on some dubious science or had confused correlation with causation.
The very best solution I saw used a lot of website data, external big data and all-new analytics to evaluate different recruiting sources/technologies and their effectiveness. Bottom line: you need to sift through a lot of the same-old, same-old stuff to find the real gems out there.
I had a few minutes on the phone with the team at CloudPay the other day. If you weren’t aware, CloudPay is often used by multi-nationals to help with payroll and regulatory filings in scores of countries worldwide. CloudPay indicated that its ideal customer is often a mid-sized or smaller business with cross-country operations. However, since the company can support payroll processing in 130 or so countries, it also is a favorite alliance partner of major HCM software providers as well as HRMS/HCM Business Process Outsourcers. Dallas-based OneSource Virtual has a relationship with CloudPay.
I learned that CloudPay is often sold direct and that the company does its own implementations. Also, most of their customers have a cloud-based (not on-premises) HCM solution.
There’s a new management team at CloudPay. If you haven’t checked them out lately, it might be worth a new look.
Also this month, I had my first call with recruiting software vendor HiringSolved. It’s a Chandler, Arizona based firm with users in 127 countries.
HiringSolved solves a number of the candidate sourcing issues at the top and middle of the recruiting funnel. It uses a machine learning tool to improve and speed up the job of candidate discovery.
The business problem they solve is that few HR tools can help recruiters parse through the applications, resumes, etc. in their ATS (applicant tracking system), HRMS, external databases, social media, etc. The ML tool can ‘learn’ what kinds of resumes that a recruiter is looking for and recommend the next one for them to review. It’s like the recommendation engines on music or shopping sites.
This type of technology is where the ATS space is evolving. Less-sophisticated search/selection tools will give way to more advanced tools. Employers who must process large volumes of applications, experience a lot of turnover, etc. will want this kind of tech.
Let’s see how HiringSolved and this space continue to evolve.
What’s wrong with CX
Sure, every major enterprise software vendor has a story to tell about customer experience (CX). To even make their story ‘cuter’, they’ll even toss in a bunch of “X” and “O” symbols with every press release.
So, imagine my surprise when I opened an email the other day from a big shoe retailer. This is a company that’s using a MAJOR ERP vendor’s CX and e-tailing technology. The email was trying to entice me about a sale. It even contained a special promo code that I should use.
Well, it didn’t go so well.
- Epic Fail #1 occurred earlier in the week when the retailer sent me an advance email for the sale except that the sale didn’t involve any shoes in my size. Why torture me with offers that aren’t relevant? Couldn’t their software tell if this pitch was pointless for me? I’m sure I’m not the only person who doesn’t buy shoes that don’t fit!
- Epic Fail #2 came a couple of days later when the same retailer emailed me again with an expanded promotion. After the embedded link took me to the sales site, I then applied filters for my shoe size and fit. It turns out the site will show me all shoes in my size and shoes in my width. It just doesn’t show me shoes that actually have that specific combination.
- Epic Fail #3 occurred when, after a lot of frustrating and useless online shopping (i.e., I only found one style of shoe in my size. It’s kind of hard to take advantage of a BOGO offer with these odds). I entered the BOGO promo code but it didn’t work. Everything was priced at full price. No sale for me.
- Epic Fail #4 occurred when I sent the shoe retailer an email wondering if they knew their e-tailing site had problems. My email was returned to me by the retailer’s email server because they don’t accept emails from customers.
“Hello, this is the mail server on _____________. I am sending you this message to inform you on the delivery status of a message you previously sent. Immediately below you will find a list of the affected recipients; also attached is a Delivery Status Notification (DSN) report in standard format, as well as the headers of the original message. <(retailer’s mail address)> delivery failed; will not continue trying”
Customer Experience as a technology OR a business strategy is still a long way from ready. I’m still waiting for that rarest of firms that actually wants a customer’s suggestions. Too many vendors seem to think that a Likert or NPS score is sufficient for capturing a prospect’s feedback. No! That’s just the tip of the iceberg. It doesn’t tell you WHY someone isn’t buying from you. For now, CX should stand for Customer Exasperation not Customer Experience.
But I don’t know why I’m surprised that this major ERP vendor (and others) do a poor job re: customer experience given the way these same vendors find so many clever, devilish ways to wallet-frack a customer’s bank account. That will need to be the subject for a standalone article.
Odds N’ Ends
This Business Insider piece on Oracle’s Private Cloud positioning was very interesting. They reported:
Oracle stopped selling the original version of its "Cloud at Customer" product, which is Oracle's "private-cloud" offering, and started selling a new version, using the same name, based on its Exadata servers. Private cloud is the concept of running cloud software on a customer's own servers, rather than having it hosted from a data center operated by mega-providers like Oracle. Exadata is geared to run Oracle's databases or applications that require Oracle's database. In contrast, the original Cloud at Customer product was designed to run almost any kind of software a company wanted to use.
That was actually a very newsworthy item. I got briefed on Oracle’s cloud-in-a-box solutions a while back and the team behind it was sharp. This change in strategy reflects, I believe, a realization that Oracle can absolutely optimize its apps, databases, hardware, etc. Trying to do so for every other kind of computing load out there shoves them into a low-cost commodity space where several other large players already exist.
Focus is key for many large enterprise vendors. Activist shareholders aren’t going to allow tech firms to spread R&D funds over solutions that can’t dominate a sector. If that capital won’t generate huge market share, it should be returned to shareholders (via dividends or stock repurchases) or invested in something that will generate massive market share and margins.
My calendar doesn’t seem to reflect a lot of vendor events or briefings next month, but that can change overnight. September will be jammed packed and that means I’ll have lots of airplane time to catch up on my reading. Until then, send me your recommendations of great reads. I’m always happy to offer a hat tip for a great suggestion. Enjoy your summer everyone.