Firms Drop Billions to Enter Fast-Growing "Algorithm Hiring" Market

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

News about high-frequency traders (HFTs) is littered throughout the media.  Did the HFTs cause the Flash Crash in 2010?  Are they ruling the markets today, creating an uneven playing field for investors?  It’s a testy subject. 

But algorithms are also gaining traction in a myriad of other markets.  Bon-Ton (NASDAQ: BONT), for example, began using software made by Kenexa, which will soon be owned by IBM (NYSE: IBM), to screen applicants for its hourly wage jobs. 

According to Denise Domian, senior VP of human resources, Bon-Ton hopes to extract dishonest candidates from the hiring pool, giving the company a better chance of hiring top talent.  The software asks potential hires to fill out a 40-minute survey that scores individuals based on their character.  Poor character may translate into employee theft or missed work.

It turns out that there is a growing market for software that allows employers to automate hiring for hourly jobs.  Here are the big players in the industry.

Providers

Last month IBM announced that it would acquire Kenexa for $1.3 billion.  Kenexa’s model is data-driven, using employee characteristics and other metrics to determine what type of personalities are best suited for a particular type of job.  Also, Kenexa helps companies retain workers. 

For example, if it takes eight months for a company to recoup their investment in a new employee, what personality traits are common in workers who stay for at least eight months?  That’s where Kenexa adds value, and the company will likely boost IBM’s profits as data-driven hiring becomes more in vogue. 

In February, California-based software maker Oracle (NYSE: ORCL) bought into the market growth by acquiring Taleo for a reported $1.9 billion.  Taleo is the hiring software used by many major corporations to manage recruiting.  Taleo lets users track job postings and applications, among numerous other features.  Like IBM, Oracle stands to profit as the electronic-hiring market begins to grow.

According to Oracle’s website:

Together, Oracle and Taleo expect to create a comprehensive cloud offering for organizations to manage their Human Resource operations and employee careers. The combination is expected to empower employees and managers to effectively manage careers throughout their entire employment, enable organizations to retain talent and optimize costs, and improve the employee experience through faster on boarding and better collaboration with team members via social media.

Finally, SAP (NYSE: SAP) purchased SuccessFactors in December, shelling out $3.4 billion.  The acquisition gives SuccessFactors the resources to ramp up its product more quickly than anticipated.  According to SuccessFactors CEO Lars Daalgard:

SuccessFactors will remain an independent company and we have a tremendous opportunity to leverage the SAP resources to accelerate SuccessFactors’ business. We’ll now be able to deliver innovations in 1-2 years that were originally on our 10 year roadmap. Together, there is no doubt in my mind that SuccessFactors and SAP will delight our customers and build the most beautiful products in the industry.

This is a large move for SuccessFactors, which will have the resources to grow.  Morover, the move is huge for SAP, which gains exposure to a brand new, rapidly growing industry. 

Conclusion

To end with another example, Xerox (NYSE: XRX) found success in using data analysis to hire workers.  The company has trimmed attrition for its 48,700 call center jobs by 20%, saving it an enormous amount of money.  Xerox does not recoup its $5,000 investment in employees until after six months, and the software has allowed Xerox to find candidates who are more likely to stay.

In an interesting discovery, the company learned that people with a bent towards creativity are far more likely to stay on the job longer than those with an inquisitive nature.  Thus, the company creates tests to single out and award high scores to creative people.  Xerox’s finding is just another example of how our society is shifting toward automation. 

Processes like market making and hiring for hourly jobs used to take thousands of man hours and relied on constant human judgment.  Now, companies are spending dollars instead of man hours, and they make a professional judgment one time – to set up the proper algorithm criteria – then let it ride and hope that they are right.

For the sake of the 8.1% that are unemployed, let’s hope that companies are arranging their algorithms correctly.


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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