German software developer, SAP AG (NYSE:SAP), announced its plans to add Fieldglass, a cloud-based Vendor Management System (VMS) company, to its cloud portfolio. Fieldglass is a leading provider on on-demand procurement and contingent labor management solutions and will leverage SAP’s expertise in both Human Capital Management (HCM) and Supply Chain Management (SCM) software. SAP’s third acquisition in these areas, the company augmented the former with the the acquisition of SuccessFactors and and the latter with the acquisition of Ariba, which SAP acquired in 2012.
In comparison, SAP’s largest enterprise software rival, Oracle Corp. (NYSE:ORCL), is furthering its cloud footprint with rapid acquisitions in the digital marketing space. (See: What To Expect From Oracle In 2014?) Earlier this year, Oracle stated its plans to acquire Bluekai, a data management platform to personalize marketing programs, marking its fourth acquisition in the digital marketing space. In CY2013, both these companies reported strong cloud run-rates, although SAP marginally edged out Oracle with a higher cloud revenue growth rate.
In this note, we take a look at the on-demand Human Capital Management industry and analyze SAP’s cloud strategy. We are positive on the sound fundamentals and strong growth prospects for SAP and have a Trefis price estimate of $95 for SAP AG, approximately 19% higher than its present market price of $79.
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A Look At The Global HCM Market
According to Gartner estimates, the total human capital management market is expected to reach $10 billion by 2015. Within this market, talent management alone is expected to reach $4.5 billion, with 75% of these available solutions expected to be deployed on-demand over the Internet.  There has been a lot of activity within the HCM industry as companies are replacing older, legacy systems with new cloud offerings to improve employee retention, deploying staff more effectively and making better hires.  Furthermore, on-demand deployments dramatically reduce the total cost of ownership of IT systems, which has been the USP of all cloud systems.
Within the HCM market, VMS services is an ancillary function, accounting for a very small portion of overall deployments. VMS service providers primarily provide recruiting services for companies in need of temporary and permanent workers and contract staff. Additionally, the VMS service provider market is characteristic of high fragmentation with the presence of various niche players. However, the addressable market for VMS service providers, which includes the net value of all activities carried out by temporary staff and contract workers, is massive and is estimated to be approximately $3.3 trillion globally. 
Integrating Ariba And Fieldglass Presents Significant Growth Opportunity
As stated above, Fieldglass’ main area of operation is in the temporary workforce market which is a high growth, yet fragmented market. According to Staffing Industry Analysts, a global advisor on contingent work, Fieldglass had total global VMS spend of $27.4 billion under management in 2012.  The company is one of the largest VMS providers in the $3.3 trillion market and is used in more than 100 countries and 16 languages. However, Fieldglass’ VMS spend under management of only $27.4 billion in a trillion dollar industry goes to show the fragmentation in the market.
SAP plans to integrate the VMS services from Fieldglass with its SCM solutions acquisition Ariba. Acquired in 2012 for approximately $4.3 billion, Ariba is a leading cloud-based business commerce network. It offers various supply chain related on-demand product offerings including procurement, contract management, supplier and vendor management, cash management etc. Ariba is the largest cloud-based platform with more than 1.4 million companies connected through its network and more than $500 billion in network spend volume in the past 12 months. 
By integrating a cloud-based SCM company with a cloud-based VMS offering, SAP could create a composite offering by leveraging the strength of both Fieldglass and Ariba in their respective markets. Creating an integrated offering that provides both procurement and management services along with relevant temporary/contract workers suitable for the SCM activity greatly simplifies the task for the end user, and unlocks great synergistic value for SAP. These synergies could even expand its current cloud revenue growth forecast of €950 million – €1,000 million for fiscal 2014. 
The Fieldglass acquisition is expected to be completed by the end of the second quarter of fiscal 2014, subject to regulatory approvals.  We expect significant expansion in SAP’s cloud revenue in the long run, primarily resulting from synergies arising out of the integration of Fieldglass and Ariba.Notes:
- Extreme Job Makeover, SAP Blog, March 2012 [↩]
- SAP buys Fieldglass for temp worker management, PCWorld, March 2014 [↩]
- SAP to Acquire Fieldglass, the Global Cloud Technology Leader in Contingent Workforce Management, SAP Newsroom, March 2014 [↩] [↩]
- World – SAP to acquire Fieldglass VMS, Staffing Industry Analysts, March 2014 [↩]
- Preliminary Results Release, SAP Investor Relations, January 2014 [↩] [↩]