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Cornerstone: Does It Still Matter?

By: | July 8, 2019 • 8 min read
HR Technology columnist Bill Kutik, as chairman emeritus, will be at the 22nd Annual HR Technology Conference & Exposition® in Las Vegas, Oct. 1-4, 2019. Watch Kim Billeter, the new Americas Lead for EY HR advisory group (PAS), discuss the question: Why is Cloud adoption taking so long? Just six minutes for the current video episode of Firing Line with Bill Kutik®. Bill can be reached at [email protected]

With the Talent Management Suite Wars long overafter starting 15 years agodoes one of the two winners left standing, Cornerstone OnDemand, still matter, especially when the other one is SAP SuccessFactors?

The simple and definitive answer is “yes.”

And it’s for the reason you may have heard me point out before: There are still about 16,000 large global on-premise HCM installations of old PeopleSoft Enterprise, SAP R/3 and Oracle EBS. While a few users find their on-prem talent-management apps good enough, many are desperately looking for something better.

But for some reasons I understand and others that elude me, those 16,000 have resisted moving to the cloud. First and foremost, they are loath to rip and replace their $20 million (and often more expensive!) highly customized systems that work exactly the way they want. That I get.

They persist despite the world’s greatest enterprise software selling machines working for yearsOracle (10), SAP (seven) and Workday (13)to get them to move to the next era of computing.

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I’m amazed they are still holding their ground in the face of a combined 29 years of selling! Globally, 25,000 on-prem HCM systems were chugging away when Workday first offered its HCM Cloud as the SaaS alternative in 2006. All three vendors now have about 3,000 Core HCM customers each.

But only Cornerstone, SAP SuccesFactors and Oracle will sell what some really wantthose much better cloud talent-management apps integrated into their old on-prem Core HRwithout making users do what they don’t want to: ripping out what they’ve already got.

In Wall Street lingo, that leaves Cornerstone and the others with a TAM (total addressable market) of 16,000 customers, plus the almost uncountable middle-market organizations with 5,000 employees or fewer. So yes, it mattersa lot.

As always, Cornerstone CEO Adam Miller took us down into the weeds at Analyst Day before his Convergence user conference in early June in San Diego. Adam is comfortable with all the details more than just about any other CEO in HCM, sometimes to the chagrin of his senior executives, who imagine he wants to do their jobs! But his unabashed honesty (within SEC limitations) and eagerness to point out his own mistakes and pivots always delight me, and I assume the other analysts, too.

Cornerstone has been profitable for four years in a row, something Workday hasn’t bothered to do once yet, despite being otherwise perfect. It has 3,560-plus clients using its products in 43 languages in 192 countries, serviced by 2,015-plus employees. The most astounding stat is that customers’ employees used its first application, the Learning Management System (LMS), to complete 330 million online courses globally in 2018!

It’s hard to dispute that Cornerstone sells the most popular LMS right now, while still competing fiercely with SAP SuccessFactors for TM suite sales to on-prem users. Going forward, the plan is to leverage that dominant position in learning to drive “Content Anytime” subscriptions into the installed base.

But first, Adam readily answered my question about why, around November 2017, it seemed every other private-equity firm in tech wanted to buy Cornerstone and take it private. Personally, I was on calls with three of them wanting to talk about “unnamed targets” that all sounded like Cornerstone.

At the meeting, Adam said, “If we had sold to private equity, everyone in the company with options would have been screwed except me, so we stayed public.”

Later, he was happy on a Sunday morning call to flesh out all the complicated details that I will spare you. But allow me to use Cornerstone’s situation to shed more light on the software industry you only buy from every three or four yearsone of my goals here for 30 years.

The profit margins on enterprise software are huge. Once it works, the vendor only has to pay to run it and deliver it in the cloud. (Like many SaaS vendors, Cornerstone is shutting down its own data centers and buying those services from Amazon and others.) They don’t have to build a new thing for each customer and really, not much new for customer No. 3,570.

Oh, vendors do have to fix bugs, frantically innovate to stay competitive, watch out for that 20-year-old with something completely new, create the next version … etc. All that can add up, but not into so much, evidenced by the fact Bill Gates and Larry Ellison are the second- and seventh-richest people in the world, according to Forbes!

Software is our era’s equivalent to the railroads, oil fields, auto manufacturing and plastics of the past: the greatest creator of wealth on the planet. Putting aside Russian oligarchs buying whole industries for a song from the owners in the crumbling Soviet Union’s Communist government. That we missed.

However, the profit margins on system implementations are relatively terrible because so many people have to work so hard and so long each and every time for every new customer. Software vendors constantly juggle the risks and benefits of doing implementations themselves (and making sure the new customer is delighted!) or handing them over to partners (sometimes not so concerned, and the horror stories are legend). Cornerstone got into trouble by doing too many implementations itself.

Adam says, from the start, Cornerstone did its own implementations, with partners doing about a third of them, but Cornerstone stayed involved in every one for safety’s sake. Historically, sales usually came 65% from software and 35% from implementation services. But starting in 2014, as it closed larger company deals with much bigger implementations, revenue started shifting to a 50/50 split, which started reducing profits because more of the revenue came with lower margins. That continued in 2015 and got worse in 2016 and 2017.

By then, services was a $100 million business, or 20% of Cornerstone’s $500 million revenue. Wall Street hates software companies having low margin revenue (they can invest in supermarkets for that!), punished the stock price and “activist investors” bought up the cheaper shares.

Remember the nightmare ADP CEO Carlos Rodriguez had with his activist investor and discussed with me at the second morning keynote of the 20th anniversary HR Technology Conference? Activist investors demand the company start making more money (for them) their own way.

Cornerstone decided that, to be more profitable, it needed to shut down that services business, which some thought could only be done as a private company, due to the loss of $100 million in sales.

That’s why the private-equity firms flooded in. How did they know of the board’s secret decision? Any reporter knows that the money guys are the biggest blabbermouths in business when it can profit them.

In the end, Adam figured out how to stay public, exit the service business and replace the $100 million in revenue by returning Cornerstone to its CyberU roots (its first name) of being an LMS content provider.

We all know low-skilled, low-paid jobs are disappearing in the U.S. If a robotic mop can clean the office floors at night, how is the former employee going to feed himself? But we also know higher-level jobs are disappearing, and the long-described fantasy of continuous learning is becoming a requirement for everyone. And who can fill a tech job for less than a fortune, not just in Silicon Valley but in Salt Lake City, New York and Israel? That’s where Cornerstone plans to make its mark.

LMS, once driven by compliance, is now driven by re-skilling employees with a learning experience that engages them. Cornerstone’s focus is on curating other’s content. There is an annual $25 billion market of third-party courses from an estimated 4,500 providers in the U.S. alone. It becomes millions of video courses if you include the free ones from YouTube, which every 5-year-old searches to learn how to play a new video game!

Longtime HCM sales and development executive Josh Schwede is head of learning content, which means he’s going to cut the deals with content creators and shape the mechanism for Cornerstone to choose what and how to sell it to customers. “Content Anytime” subscription services are constantly evolving.

“Pure self-directed learning isn’t working,” he says. “People need a starting point and a recommended pathway or playlist.”

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The most requested subscription right now is called Professional Skills, which includes 1,000-plus titles from 11 providers in four languages and five playlists. Topics include communication, teamwork, digital tools, productivity and personal development, and business acumen. Funny, not a single one of those subjects is taught in business schools except for the last, which includes financial management.

Cornerstone’s top strategic initiative is not focusing just on the executive level but helping first-line managers. To which I would add “first-time” managers, who get promoted for being good at their job but know nothing about managing others doing their old job, except being able to fill in when one calls in sick.

Cornerstone buying Grovo, with its 2,500 microlearning three-minute videos and tools for creating more, has led to the creation of Cornerstone Studiosthe company’s first facilities for creating its own content. Actual studios are open in New York and the Santa Monica, Calif., headquarters for doing that.

There is more, of course, but so little time. A new managing-director structure for selling overseas. Continued development of Core HR for Europe. Recruiting adding a new customer every three days. A full-bore push to sell in Japan, where Salesforce and Concur have succeeded, but HR may still be struggling.

Oh, I must mention Adam has finally hired Heidi Spirgi as chief marketing and strategy officer, after trying to recruit her for 15 years (really!) since she left PeopleSoft to co-found Knowledge Infusion with Jason Averbook, joined him at The Marcus Buckingham Company and then decided not to help rebuild the old band at Leapgen. Obviously, Adam plays the long game, which is why Cornerstone will matter for a long time.

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