Let’s start with a brief look at the early days of Covalent.
The conception began in early 2003 and the official launch was in September that year and we added our first employee the following month and more developers early the following year.
The mission statement was that one day every organisation would have a performance management system like they have a finance system today. We’re getting close but we’re still quite a long way from every organisation having one.
We ended up building functionality into the product that was designed to sit between Microsoft Project and Excel; everyone does this sort of things on Excel. We sat in the middle ground.
The product functionality was fleshed out by customers saying, ‘Could you do this or that?’ and all the application areas we ended up getting into are basically spreadsheet replacements. There are so many reasons why Excel is a great project and there are so many reasons why it’s terrible when you’re trying to collaborate in any sort of way or report on data.
We focused on local government first, even though we knew it could go further, and targeted housing associations. That took a while to crack. We were first to market, but no one "got" it, so we spent a lot of time educating the market, very ineffectively.
Covalent Software CEO Peter McHugh
When you say they didn’t "get" it, what exactly do you mean?
There wasn’t the appreciation of why they’d need it or what the problems were with what they had. I guess two things changed: the regulatory regime changed slightly and a couple of other competitors arrived on the scene, including one from a housing association.
So if that helped the market to mature did potential customers start showing an interest?
After we got our first housing association customer I told our marketing people that we didn’t need to do any more marketing – customers would just come to us! That obviously didn’t work! So we started marketing actively again in 2006. We also started to look at universities, further education colleges and the NHS.
We decided to hold back on the NHS because of the restructuring that was going on at the time. But that is still going on, and that’s a big problem with that market, although about 10% of our customers come from the NHS now.
The product is mature in terms of functionality and proven capability; there are 200 public bodies using it and nearly 30,000 users.
How has the company grown since those early days?
We grew rapidly in early years and have grown every year since but has tailed off in recent years. That’s mainly because of public sector cuts and changes to the market. Last year, partly as a result of those changes and partly because of more offensive reasons, such as the product maturing, we started looking seriously at breaking into the commercial and private sector and the US.
We had developed a suite of applications that we called a corporate performance management system, because that’s what public sector bodies were buying. But when we broke it down we saw that we actually had a number of different components.
In particular if you look at corporate performance management as defined by Gartner and so on it’s very financial – budgeting, forecasting etc – and the leading players are BI tools or financial metrics, none of who we would ever come across.
So we had a problem with how we define it and how analysts in particular define it. But within that we discovered that if you Googled "corporate performance management software" you got different vendors compared to "risk management software". That was interesting to us because we looked at our risk management product and decided we should be operating in the governance, risk and compliance (GRC) space, so that’s a focus going forward.
So how does your product in that area work?
There are four features to risk management: identification, assessment, treatment and monitoring. It helps with the identification of risks by tracking incidents, for example a council may be tracking homeless figures, which can be an indicator of the need for housing.
It then assesses them on a likely impact basis and, most importantly, it then treats them. It can also monitor your compliance against established frameworks.
Another component was employee management. A lot were using it to manage tasks arising out of the staff appraisal process – performance review etc. They put them in to Covalent and track it through to completion.
Like the "corporate performance management software" I started Googling "employee performance management" and you get SuccessFactors and other big US companies that now call themselves Talent Management vendors. We do the essence of that but need to do some more to flesh that out; it’s been a major development area over the second half of last year and we launched the product in June.
That specifically addresses the issue of staff appraisals and streamlining that process and integrating it with a corporate view of performance rather than having it a just an annual activity that is devoid of context. We’re getting a lot of public sector interest in that.
So how are companies managing this sort of issue normally?
What amazed me when we started looking at it was that, even in large enterprises, that process is still very paper-based: someone emails a form, it’s printed out and filled in, taken to a meeting and any comments are added to it, printed out again and put in a file. From an HR point of view all the opportunity to aggregate that information and provide intelligence – such as succession planning and working out training budgets – is impossible to do with paper in a filing cabinet.
The public sector cuts must have had an impact at Covalent
The public sector is very steady. I’m not worried about it going away, I’m worried there isn’t the growth there we want. But in this environment there is as much if not more demand and need to manage efficiency and resources in a more effective way, so we’re getting a lot of interest from those perspectives.
The public sector, including the NHS, isn’t going away but it’s going to be basically a new market with the way it’s being restructured. Mid-term there are very big opportunities in that market because there is very much a culture of performance management.
So are you profitable at the moment?
Our core business is hugely profitable and has been for the last four years. This year we’re likely to incur losses because of investment; we’ve grown the staff base by nearly 30% and we’re up to late 40s in terms of employees now and we’re doing a lot of marketing. So that will make the overall business unprofitable. And we’re investing in building out the product all the time as well.
