SAP SuccessFactorsSoftware giant SAP acquired internet software company SuccessFactors on Saturday for $3.4 billion, in what most accounts praised as a commendable move to embrace the so-called “cloud.”

The “cloud” is a buzz-word that refers to the new way applications are being delivered: over the Internet.

Some analysts said the price SAP is paying for SuccessFactors was “nuts.” It’s a whopping 49 percent premium over SuccessFactors’ market value. SuccessFactors sells software that helps manage employee performance. This doesn’t exactly exude sex appeal. It’s also not a big play in mobile, big data or any of the other buzz-worthy areas considered broadly strategic these days.

But looked at more closely, the SuccessFactors deal is more than just another purchase by a hungry software giant trying to transform itself. From what I can garner, it’s actually a brilliant move on several fronts. SAP is way behind the cloud movement, and this purchase could help it catch up. And the deal could even propel SAP into a more compelling beast still, by helping it actually break free from the chains to its existing model, which is to sell software upfront to companies for thousands (or even millions) of dollars — something few companies want to do anymore. More on this in a second.

SuccessFactorsIf SAP pulls this acquisition off properly, it could deal solid blows against Oracle, its main competitor, and IBM, another competitor. My analysis is helped by an interview earlier today with SAP’s Sanjay J. Poonen, president of global solutions, and informed by the insights picked up at the CloudBeat conference we produced last week, during which we talked with several experts, including Oracle’s Rick Schultz.

Here are nine main reasons this looks like a deft move:

1. Talent management is the future

Talent management is a key area of growth in the economy going forward. Ask your company’s human resources or recruiting expert; they’re likely to concur. With the Web, people can boost their profiles, they become more accessible, and they’re therefore more poachable. That means companies need to act more agressively to protect their valuable employees. Distinguishing the good from the bad performers is crucial.

LinkedIn founder Reid Hoffman once told me created created his company on the conviction that on the web, people have essentially become small businesses (concerned with pushing their personal brands). Employees care more about where they work, and they’ll move quickly to find better work.

Ray Wang, head of San Francisco-based Constellation Research, told BusinessWeek: “What SAP had in human resources — basic transactional software such as payroll — was good enough for the old era. In the new era, performance reviews and talent management will be important.”

SAP’s Sanjay J. Poonen, President of Global Solutions, asserted the same thing in his interview with VentureBeat today. He pointed to the growing competition between companies — and countries — to attract employees.

“This is a talent economy,” Pooenen said.

Lars Dalgaard

Above: SuccessFactors CEO Lars Dalgaard

2. Talent? Well, SuccessFactors has that too

Lars Dalgaard, SuccessFactors’ CEO (pictured left) is considered a passionate, savvy leader, and SAP picks him up with this deal. He’ll become the executive vice president of cloud at SAP, helping the company navigate one of the most important future industries.

Add to this the fact that SAP has lost some talent lately, namely John Wookie, who had headed SAP’s on-demand strategy, and Jeff Stiles, SVP, Solution Marketing, another executive who led on cloud issues, but who leaves in January.

SAP has flubbed its efforts to build much of worth in the cloud so far, and Dalgaard could really help.  He’s shown what he can do: He founded SuccessFactors ten years ago, raised a little more than $45 million, and is now selling it for $3.4 billion — no small feat. By the way, Dalgaard launched  the company’s “Dashboard” product at DEMO, the conference we co-produce, in 2005 (watch this demo to see him in action).

3. Employee Performance gives SAP a leg-up on competing products

SuccessFactors is the undisputed leader in its field. Recently, Forrester rated the Plateau Systems talent management software the best in its sector, and Plateau is now owned by SuccessFactors (SuccessFactors bought it in April). Oracle’s horse in this race is PeopleSoft, which is part of the new Oracle Fusion, but the product is widely considered inferior. It didn’t even show up in the list of Forrester’s top talent management vendors. Indeed, it’s precisely the lack of innovation in the so-called “human capital management” (HCM) area by the big software leaders — SAP included — that led to the rise of other players in this space such as Taleo (whose revenues come mostly from recruiting), Workday, Ultimate Software, and Cornerstone OnDemand. Some say the latter is SuccessFactors’ toughest competitor.

4. It fills a big hole in SAP’s own offering

With the acquisition of SuccessFactors, SAP can now boast it covers the four top segments where cloud providers offer software: customer relationship management (CRM), collaboration, procurement and human capital management (HCM). So far with its HCM, SAP has offered core HR and payroll software, but it hasn’t offered a cloud compelling employee performance software. While SAP has offered on-premise talent management software (as well as on-premise workforce analytics, and shared services delivery), SuccessFactors enriches that considerably with its focus on the cloud.

SuccessFactors actually comprises several offerings, including talent management, recruiting management, goal management, performance reviews and business execution. More significantly, picking up SuccessFactors will likely help SAP slow the rumored hemorrhaging of SAP customers to companies like SuccessFactors, Workday and SalesForce. Other SAP customers, including Siemens, had started using best-of-breed on-demand (cloud) talent management apps like SuccessFactors alongside their SAP core HCM product — causing a dangerous beachhead for them to start using other cloud products in other areas.

5. SAP and SuccessFactors have complementary customer bases, allowing for cross-sell

There is reportedly little overlap between SuccessFactors’ 15 million users (at 3,500 customer companies), and SAP’s huge base of users. This allows for a significant opportunity for SAP to cross-sell into SuccessFactor’s customer base. The San Mateo, Calif.-based SuccessFactors operates in 170 countries. CEO McDermott said SuccessFactors’ added sales — boosted by SAP’s distribution channels — could help SAP beat its 2015 revenues target of 20 billion euros by as much as 1 billion.

6. Seamless integration with SAP’s back-end could make SuccessFactors more compelling

Granted, this point may be true only for SAP’s wealthiest enterprise customers that can afford SAP’s on-premise offerings. But because SAP is the leading on-premise software provider, it’s had a lot of experience learning how to integrate cloud software offerings with on-premise software. For example, say you’re using a cloud application, and you’re looking at a customer profile in that app. If want to look up that customer’s credit history within SAP’s back-end software, you can do that without a hiccup. SAP will make that sort of integration for SuccessFactors seamless.

This contrasts with the difficulty of  integration of other software not owned by SAP, like Indeed, integrating requires bringing in a third-party solution just to glue things together, SAP’s Poonen said. “We’ll have a clear leg up,” said Poonen, referring to anytime a cloud software wants to integrate with SAP’s core HR, compensation systems, or financial software.

To be sure, there a lot of questions that still need to be addressed regarding the integration of SuccessFactors overall, not to mention other challenges integrating the social business assets of SuccessFactors, which includes CubeTree, a collaborative software that includes things like wikis, blogs, polls and filesharing. But SAP’s Poonen argues that SAP’s organic growth — which stands in contrast to Oracle’s cobbling together of many pieces of software — has made for a user experience that is more elegant.

7. SuccessFactors is free from the chains of SAP’s enterprise software sale legacy. This could herald a bigger break at SAP in the future.

SAP says it is going to let SuccessFactors run independently, with a software-as-a-service (SaaS) subscription model. Could this be the first move by SAP to free itself eventually from reliance on its costly on-premise business model? To be sure, SAP has too much at stake to turn its back on its existing model. But SAP needs to do both, and it’s making the right noises regarding the cloud.

The purchase of SuccessFactors is being made by SAP America, a different entity than the German parent company SAP AG, which some observers hope could suggest a move to create a separate cloud division that lets SAP distances itself from an on-premise business model still further.

At the least, SAP’s Poonen confirmed in our interview that the plan is to let SuccessFactors operate unfettered by SAP’s on-premise sales strategy: “The cloud business runs on a different type of DNA, a different clock cycle,” he told me. “The selling motions are different. SuccessFactors will need access to our customer base, but they will not be bound by our approach. Their development team needs to innovate monthly and quarterly.”

8. This is a huge cloud play, stealing the initiative over the other full-stack providers

Among the companies are considered full-stack software providers — SAP, IBM and Oracle — this is appears to be one of the biggest moves yet from any of them to embrace the cloud. Oracle acquired CRM company RightNow for $1.3 billion in October, which was seen as an acceleration of the cloud wars, but many see RightNow as an uninspiring company, which Oracle is largely buying for its cashflow.

There’s no doubt that SuccessFactors is a huge play in cloud, at a key time. The cloud is nascent, with major cloud companies like SalesForce and Amazon only now hitting $2 billion and $1 billion annual cloud revenues respectively. The global market for cloud services is expected to explode, to $148.8 billion in 2014, from just $68.3 billion in 2010, according to researcher Gartner Inc.

Yet we’re still early, as there are few other big cloud players besides Salesforce and Amazon. According to Poonen, SuccessFactors is one of the next biggest (it has about $300 million in revenue). So it’s a nice gem indeed for SAP to slot into its cloud product. SAP’s cloud platform is called Business ByDesign, and it refers to the software SAP plans to let people access over the Internet. It has 700 customers, and growing.

9. It’s a nice complement to SAP’s analytics and mobile strategies

SAP has kicked off two key initiatives lately, namely the building of an in-memory database computing technology (called HANA), to speed up analytics within applications, and a move to allow software to work wirelessly on any device. These two initiatives were boosted by SAP’s purchase of business intelligence giant Business Objects for $6.78 billion in 2007, which SAP now powers with HANA, and SAP’s acquisition of Sybase last year for $5.8 billion, which lets SAP go mobile with its software products. SAP will also have SuccessFactors run on HANA, to turbocharge its performance, according to Poonen.