Virtually Observing Five9

by Dave Michels

A few weeks ago, Five9, Inc. (NASDAQ: FIVN) announced its intent to acquire Virtual Observer, provider of WEM workforce engagement management (WEM). Virtual Observer has been a Five9 partner for more than three years.

My initial reaction was confusion. To me, WEM didn’t seem like a smart investment, certainly not a priority. Virtual Observer was already a partner, so there was no gap to fill. Why buy the cow when the milk is free?

However, upon further reflection, I’ve come to appreciate this acquisition. I’d like to take you through my journey, and why I changed my conclusion.

WEM: Disruption Ahead

Let’s start with WEM, or actually, or even better, workforce optimization (WFO). WFO is to PBX what WEM is to UC. Basically the same thing with a newer name. WFO/WEM is critical to a well-run contact center operation. There are several components to WEM, but the two biggies are scheduling and quality management (QM). Both of these areas are going through some significant changes, and I’m not confident that all of the current WEM vendors will make the transition. 

The WEM sector will likely be disrupted by two separate forces. The first is that other software sectors are figuring out how to handle complex scheduling. Most contact center solutions are aimed specifically at the contact center, but scheduling resources is not a problem unique to the contact center. Yet, while other enterprise scheduling solutions can work in the contact center, few WFO/WEM scheduling solutions work outside the contact center. The general enterprise-scheduling solutions are getting better all the time. Consider apps such as:

  • Shifts: Add-on for Microsoft Teams
  • Salesforce Lightning Scheduler
  • Vertical industry solutions, such as Workpath in healthcare, and 7Shifts for restaurants

AI-powered capabilities also are working their way into scheduling, and into QM even more so. AI-powered tools can monitor and assess quality more efficiently, in-real time, across all conversations instead of samples, and more securely than traditional QM methods. I suspect that QM was the gem in this acquisition.  

Investing in WEM didn’t make sense, but I was neglecting a few important points: other trends and the rate of change. 

CCaaS Expansion

There’s another important trend occurring: CCaaS providers are increasingly including WEM as a core service. A similar transition took place with conferencing, in the transition from UC to UCaaS. With UC, conferencing was a separate but adjacent solution. With UCaaS, we saw adjacencies, such as conferencing, become core services. 

In fact, several CCaaS leaders already have WEM. NICE inContact and Genesys bundle WEM services, and Talkdesk intends to do so. As contact centers move to the cloud, they’re using integrated solutions for WEM. This, in turn, puts pressure on stand-alone vendors. I believe this squeeze was a likely factor in the merger of Colabrio and Telopti. 

Five9 needed an integrated WEM offering to be competitive as a CCaaS leader. So, now we need to consider if Five9 should have built its own WEM or acquired one. Acquiring Virtual Observer was relatively low-risk. It was already cloud-proven and integrated. The companies share more than 150 joint customers. Virtual Observer also services competitive implementations (such as Talkdesk) that Five9 will likely target. 

But I don’t expect Five9 to leave Virtual Observer alone. It will continue to offer the solution, but likely apply its own engineering to develop AI-powered QM. Five9 gained a product and its engineers, so now has both a product to sell today and a probable next-generation QM solution on the horizon. 

Cost-Benefit-Valuation Analysis

Terms of the acquisition were not disclosed, so this part (actually the whole post) is pure speculation. I am guessing Five9 got a decent deal on Virtual Observer. Trying to figure out what companies are worth is difficult, and multiple bidders have a big impact. I doubt there were multiple bidders. The standalone WEM industry is shrinking as users flock to CCaaS (and CCaaS flocks to integrated solutions). 

Virtual Observer started as a premises-based vendor, so I’m thinking it didn’t have a SaaS multiplier effect on its valuation. This is the kicker: Five9 does. Five9’s market capitalization is about 11 times revenue. Virtual Observer’s revenue will go directly to Five9’s revenue, and indirectly to its valuation. I’d expect Five9 will see a valuation increase greater than what it paid to acquire the company. 

Five9 obtained product, revenue, roadmap, inroads to competitors, and staff in the Virtual Observer acquisition – without a lot of risk. Shrewd move. 

Note: As I was writing this post, Genesys acquired nGUVU to bring its WEM suite new AI and gamification capabilities. I haven’t digested this one yet, but Sheila revealed that nGUVU will play a role in Genesys’  multi-year effort to unify its three different WEM offers. I expect all of the CCaaS providers to make investments (development and acquisitions) in WEM over the next few years.