Kronos Acquires HR/Payroll Product Line

by Alex Woodie

As a completely Web-based and fully integrated payroll/HR solution, Abra Enterprise is a rarity in the software market, Kronos officials say. The application features roles-based self-service functionality that delivers information to users based on the particular role they play in the company. The application was written in a combination of Microsoft C++, ActiveX, HTML, and SQL procedures calls. The program is completely Web-based, which means all users--including administrators--must interact with the program using Web browsers. Some functions require the use of Microsoft's Internet Explorer, while most users can also use Netscape Navigator. On the server side, the software sits on Windows NT and Windows 2000 servers equipped with Microsoft's SQL Server database.

Kronos paid Best Software a lump-sum down payment and will continue to pay Best Software a royalty for the next 10 years based on a percentage of the revenues it receives from selling software developed with the Abra Enterprise source code. Neither company is publicly revealing the terms of the deal, which was finalized on March 15 and announced last week. However, because Kronos and Best Software are both publicly traded companies, they will eventually have to disclose the numbers in financial papers submitted to the Securities and Exchange Commission.

Kronos officials say they will integrate the Abra Enterprise source code into Kronos' existing Workforce Central suite. Workforce Central is Kronos' flagship time and attendance application. It was written mostly in Java, with some C, and runs on Windows and Unix servers using SQL Server or Oracle databases. Kronos also offers a time and attendance package for OS/400, which it calls iSeries Central, and a client/server package for Windows and Novell Netware environments that it calls Timekeeper Central. The company is not planning to integrate the Abra Enterprise source code with these two latter applications. However, Kronos' AS/400 and iSeries customers can expect to see a heightened state of integration--or what Kronos officials call "blending"-- between iSeries Central and Workforce Central in the long-term future.

By the time Kronos is ready to start selling the Abra Enterprise application in June, the company will have segmented the source code into two modules of the Workforce Central suite and renamed them Workforce Payroll and Workforce Human Resources, says Jim Kizielewicz, vice president of marketing and corporate strategy for Kronos.

The integration of the Abra Enterprise source code into Workforce Central will commence in two stages. First, Kronos will enable Abra Enterprise and Workforce Central to talk to each other and share essential information. This will be done by the time Kronos starts selling the HR/payroll software out of three or four regional sales centers this June, Kizielewicz said.

The second stage of integration will involve melding the separate SQL Server databases into a single SQL Server database, which will cut down on the cost and administrative overhead of maintaining two separate databases. This second stage of integration will be rolled out in time for the general availability of the payroll and HR applications to Kronos' entire sales network this October, Kizielewicz said. In the long-term, the company will be enabling the sharing of common objects between the two systems. The company is also considering developing a version of the software that uses the Oracle database, Kizielewicz said.

The sales channel was a key factor influencing Kronos to purchase the Abra Enterprise source code from Best Software. Abra Enterprise was first released as Best Software's high-end, fully Web-enabled payroll and HR offering in 1998. At that time Best Software realized it needed a sophisticated sales force to sell the sophisticated product, so they set off to build a direct sales force. However, following the $500-million acquisition of Best Software by the British tech conglomerate Sage Group in 1999--Best Software had a market capitalization of around $100 million, but remember, this was 1999)--Sage started to break up Best Software's direct sales force in favor of using the reseller channel, which Sage relied on with its other companies. As a result, sources say, sales of Abra Enterprise stagnated. To date, there have only been 125 deployments of Abra Enterprise, according to Kronos.

So the scene is set: Best Software had a cutting-edge application, but what some viewed as an ineffective go-to-market scheme. Kronos has 200 direct sales associates which drive upwards of 90 percent of Kronos $200-million in yearly revenue, but no payroll or HR software to sell to its customers, who were desperate for the software.

And luckily, the twain had crossed.

Actually, Kronos cast its nets far and wide when it first set out to conquer the fragmented payroll and HR software market last year. The company examined applications from 25 different software vendors, which it eventually narrowed down to nine companies that had viable products. From that point, Kronos looked closely at the offerings from three of them, and entered into serious negotiations with two.

So why did Kronos choose Best Software? "It was one of the only companies to offer integrated HR/payroll and employ self service in a 100 percent pure Web environment," Kizielewicz said during a conference call with analysts last week. Many other companies offered integrated payroll and HR functionality and employee self service, but it relied on Windows fat client interfaces, he said.

The second reason for choosing Best Software was that it minimized channel conflict. The licensing agreement between the two companies allows the Best Software unit of Sage to continue to sell and support Abra Enterprise. However, Kronos won't be "funding its competitor," as Kronos founder and CEO Mark Ain put it, because they're tackling different market segments. Best Software primarily sells to companies with fewer than 500 employees, whereas Kronos will sell to "midmarket" companies with between 250 and 2,500 employees. Kronos officials say any conflict in sales involving companies with between 250 and 500 employees will be minimal because in fact Kronos will concentrate its efforts on companies with more than 500 employees. Over time, Kronos' payroll and HR software will have changed so much that it won't be recognized as originating from Best Software, Kizielewicz said.

The acquisition does, however, set the stage for some healthy co-opetition between Kronos and one of its partners which accounts for about 8 percent of Kronos' annual revenue, or more than $23 million: Automated Data Processing, the large New Jersey payroll processing service bureau. ADP has an OEM agreement with Kronos for its time and attendance software, which ADP offers to customers on a rental basis, bundled with its payroll processing service.

Despite the obvious conflict between Kronos and ADP in the payroll space, Kronos officials are confident there's sufficient room in the market to satisfy both players, especially as it provides customers with greater choice. Whereas some companies would simply rather do without the hassle of processing their own payroll, others see it as giving them more freedom from deadlines to do it themselves, Kizielewicz said. Additionally, Kronos' new software could pave the way for new partnerships with ADP for services such as check printing or tax filing, he said.

So how big is the market for payroll and HR software? According to Kronos market research, there are 76,000 companies in the midmarket space (this number must be for very large midrange customers only). Of that number, 60 percent process payroll themselves, whereas 40 percent outsource it to a service bureau like ADP. The key statistic is that the majority of both camps are unsatisfied with their payroll setup, Kizielewicz said.

It will take some time before Kronos is fully geared up to sell the new software, and not much revenue is expected to come in from the new software in Kronos' fourth quarter, which ends September 30. During fiscal 2003, Kronos can expect to see revenues of between $7 million and $10 million, with sales accelerating for the next five years, chief financial officer Paul Lacy told analysts on the call.

However, Kronos does have a head start on the selling game because a quarter of its direct sales force has experience selling HR and payroll software, Ain said. Approximately 30 Kronos employees have been assigned roles involving the new software, and the company has hired two executives to guide the development of the new business. Bill Larkin joined the company about a month ago as vice president of marketing for HR and payroll products, and Jeff Meyer only recently joined Kronos as its vice president of engineering for the products.

Ain announced his intention to lead Kronos in the payroll/HR software market during Kronos' user conference last summer. Since then, he and his executives have characterized the market as extremely fragmented, with no clear leaders. In fact, the situation in the payroll/HR market is not unlike the situation in the time and attendance market outside of Kronos' influence, Kizielewicz said.

Kronos strengthened its already firm grip on the time and attendance market this January by acquiring its largest competitor, SimplexGrinnel, which was one-tenth the size of Kronos. (To read The Four Hundred's report on the acquisition, click here.) The application brought two additional time and attendance products, but more importantly, it brought an additional 8,000 customers. The Kronos customer base was about 30,000 customers at the time of the SimplexGrinnel acquisition. Now, with its purchase of the Abra Enterprise source code, Kronos is hoping to put some order back into the payroll/HR space, and continue to grow its business.