In my last post, I wrote about one aspect of the way in which I look at and learn about the HRM software vendors and outsourcing providers with whom I’ve been meeting over the last few months, namely their ambition as businesses. In this post I want to take up another important aspect of that same topic, what I’ve been looking at and learning about the competitive context in which these vendors/providers operate. No surprises here, and it’s something I’ve written about before in briefing select clients, but I thought it might be helpful to the larger community to collect these thoughts in one place.
Since 1967, I’ve witnessed and participated in (leaving fingerprints along the way for all to see and evaluate) more generations of HRM software than almost anyone reading this post. However, the generational change now underway — quite far along actually, in case you and/or your vendors aren’t with the program — is far more complex than those that have preceded it. We’ve had many changes in underlying technologies (e.g. mainframe to client server to native Web to cloud), we did a very big move in business model when we went from custom development to the use of packaged software, and we’ve certainly had several generations of how we build software, from “arts and crafts” to software engineering to agile and more, but there’s a lot more going on now and over the past five to ten years than just these types of changes.
What makes this such a challenging time for all HRM software vendors and service providers is that their business strategies, in order to remain relevant and be successful, must now address many fundamental areas of change in the enterprise software business that are happening at the same time. That doesn’t mean that every vendor/provider needs to incorporate every single change that I describe below within their business strategy. But it does mean that, at a minimum, they must make clear business decisions about how they will address or not address each category of change and then weave those decisions into a coherent business strategy, along with all the other elements of strategy like nature of products/services, target markets, distribution methods, etc. etc. From the perspective of market influencers and buyers, understanding how each vendor/provider addresses these sea changes in the enterprise software business provides enormous insight into their likely success, even viability, in today’s market.
So what are these changes, and why do they matter? Here’s my take:
- Business models — from licensed to subscribed – and while this change and the pace of this change differ by geography/specific industries, subscribed is strongly preferred now in many to most new deals by buyers of HRM software/services buyers and by industry investors because it removes a very large and up-front capital expenditure in favor of a usage-based, ongoing expense. And while there may still be quite long contract lengths and up-front prepayment in order to secure advantageous pricing, great HRM SaaS vendors are able to create enough stickiness in the desire for the products and enough elegance in their sales through implementation processes to enable rapid and not unreasonable costs in the run-up to full production to move themselves and their customers into that productive, recurring revenue phase of the relationship and then keep them there with very low cost-to-achieve renewals — or so goes the expectation by buyers and investors and market influencers.
- Deployment models — from on-premise or 3rd party hosted to vendor hosted (ideally, in the cloud) — this change and the pace of this change also differ by geography/specific industries, but vendor hosted, ideally with the industrial strength and improved costs of the cloud, is preferred strongly in many to most new HRM software/services deals by buyers and absolutely by industry investors. From a buyer’s perspective, while there remains a key role for IT to play in the evaluation/selection/implementation (especially as regards putting any new applications into the larger and interconnected landscape of systems supporting that buyer’s organization, there’s no need to impose unduly on the always challenged infrastructure resources of their own organization. Need a sand box to evaluate and the implement a true SaaS solution? It’s provided by the vendor. Need two production tenants, one that’s physically in Europe to head off privacy concerns until such time as the underlying policies can be revised? It’s provided by the vendor (assuming you’ve selected one with global capabilities). Need to ramp up production capacity quickly to handle the launch of a new business or an acquisition? It’s provided by the vendor. Pretty sweet when you consider how low on the list the HR function can be when requesting rapid IT attention.
- Architectural models — from customized single to configured multi-tenant – not only is this essential to cost-effective, rapid time-to-market and time-to-revenue, and scalable operations for subscription/hosting by vendors, but it also opens up a whole range of new revenue sources, from selling aggregated analytics to 1-to-1 marketing. This is a particularly contentious area, and there are clearly situations and buyers that don’t lend themselves to multi-tenant configuration only, true SaaS (not to mention a gazillion customers already in the installed bases of legacy lincensed/on-premise/single tenant HRM software vendors), but the momentum does appear to be on the side of these newer architectural models because the offer the ultimate range of productive options for both buyers and vendors. Vendors can host and subscribe whatever they’ve got, often doing so and calling it SaaS. But doing so beggars their future in an industry where the many benefits of true SaaS will only accrue to those vendors who have it and to their customers.
- Software development models — from procedural to models-driven — Workday is a good example within our industry of the improved time, quality and cost-to-market this approach delivers once the foundation tools are built/tuned (and these aren’t growing on the commercially available bush yet) and assuming the foundation object models are right and stable. More importantly, those advantages are cumulative, providing considerable leverage as each new release is built on the last one. Workday is by no means the only example of this and there’s a lot more coming. This is one area where I have to keep my mouth SHUT as to who’s doing what, but any vendor who’s not looking deeply into these capabilities is going to wish they had done so by now. One reason why this has been the holy grail of computing for as long as I can remember is that it eliminates one of the most confusing, error-prone, costly and time-consuming steps in bringing new functionality to market, which is translating the always imperfect verbal and text requirements for product into the procedural logic of program code. By capturing those requirements within the models themselves and then letting those models be the application, much less is lost in the translation.
- User experience — from self service as an add-on, transactional/data entry-style and PC-based to consumer-like self service as the only/primary service, with considerable embedded intelligence and increasingly mobile, social, multi-media, we’ve seen the consumerization of HRM software and services. And while I’m hot damn on a keyboard and always will be, many to most of my younger colleagues, not to mention those workers who are always on the fly, are finally getting HRM delivered to them when and where they need it. Even more important is that, with sufficient embedded intelligence within the HRM user experience, we really can unleash more complex and strategic HRM interactions without everything having to pass through the hands of the HR department (or even its call center surrogates) without sacrificing the quality, timeliness, completeness and risk-mitigation of those interactions.
- Buyer responsibilities/behaviors — IT and business leaders play very different roles in true SaaS selection/use, with senior line business leaders taking even more control of strategic HRM software decisions, and there’s far more SaaS available on a try before you buy basis, but I believe that the interrogatory configurator approach will be the turning point for a total rethink of the whole buying cycle and process. While it’s entirely possible to get into production more quickly and less expensively with true SaaS, there’s still a lot of heavy lifting — or their should be — to be done by HR leaders to clean up years of crummy data structures, refactor codes for a more modeled environment, get serious about competency-models however socially developed, and much more in order to get full value from at least the more strategic HRM software coming as SaaS. And inserting new software, SaaS or otherwise, into the existing systems landscape takes some serious rethinking of all those interfaces and integrations, with smart buyer/IT partners working hard to reduce the number and complexity of such interconnections.
- Buyer influencers/influences — from a few major (which vary by market and HRM process) professional organizations, print journals, vendor conferences, traditional analyst firms and HR tech conferences to a host (glut?) of bloggers, Webinars, in-person and physical HR tech conferences, Twitter streams, new-age analyst firms/centers of influence, and vendor conferences, etc. — making your voice heard through the general din is much more challenging and has reshaped/is reshaping vendor marketing to be more social, relationship-based, multi-media, integrated, guerilla, and substantive. The very fact of my having a blog on which I can write this post tells you everything you need to know about what’s happened in the marketplace of ideas surrounding HRM software and services. Vendor marketing teams not only have to get their messages across to the “official” analysts and influencers, but they have to monitor and participate in a huge array of forums in which their products and companies are discussed. If you’ve been following one of the best of these, the HR Technology Conference discussion group on LinkedIn, you know how pointed can be those discussions and how much influence they generate.
- Green field versus replacement deals — almost all US companies of any size as well as many to most around the world have some level of automated HRM support. Those with more than 500 workers usually have some form of HRMS, but often with outsourced payroll processes, and at least some strategic HRM functionality, either via their HRMS or via talent management software add-ons. For most companies of any size, it’s no longer just about getting the payroll done and avoiding compliance woes but rather the needed to deploy a productive and engaged workforce. As a result of 40+ years of automating at least payroll, many to most of today’s and tomorrow’s HRM software/services deals are replacing some earlier form of automation, if only spreadsheets and user-developed databases. And buried in all that prior automation are the crummy data structures (anyone remember when we were limited to 80 character records?), worse coding structures (the ubiquitous employee status code into which we threw everything but the kitchen sink — but surely that was killed off a couple of generations ago?), important historical data that must be brought forward or which will require us to maintain old systems just so we can access old data, and myriad other implementation issues that must be addressed as we move forward in a way that doesn’t drag the past along to hobble our future.
- Sales/implementation models and timelines — more than in any time I can remember, and its axiomatic in the case of true SaaS because of the very different business model, there is tremendous pressure on vendors to: (1) shorten initial elapsed time/cost to customer and vendor value — consider impact of channel partners and interrogatory configuration, (2) absorb most of the cost, and not get subscription revenues until customer is in production — significant accounting issues here for revenue recognition, etc., and (3) shorten continuously the elapsed time/cost to value as vendor rolls out new releases and/or customer needs change. I’ve noted above the architectural foundations, interrogatory configuration and models-driven development being two of them, for addressing this particular strategic challenge, but there’s a lot more dimensions to this particular challenge that can’t be addressed solely by software design. The competency profile of our best salespeople for licenses/on-premise enterprise software, and the incentive compensation plans and other HRM policies that drove them to achieve the needed business results, must all change for true SaaS. On some level, there’s the opportunity to eliminate much of what traditional enterprise software sales people, and pre-sale consultants, do, replacing it with marketing that reaches beyond HR, freemium software trials, and interrogatory configuration to move prospects through implementations.
- Growing ownership by private equity firms — and, in some cases, for longer periods of time — but with wildly different investment philosophies: (1) invest, turnaround, grow, operate, return profits, but this is rare, (2) dress up and flip in a few years, (3) milk a maintenance/subscription revenue stream, doing just enough to prevent customers from absorbing the pain of moving, and (4) longer horizon but not operators. Where once a floundering HRM software vendor either went out of business or was bought for its installed base and/or maintenance stream by one of the software graveyards/aggregators, the presence of private equity firms allows for some very different scenarios in terms of both maintenance stream milking or investing for growth/renewal. Many very capable and growing HRM software and services firms are owned entirely by private equity firms, using new capital provided by these firms to seize opportunities that they just couldn’t do on their own. On the other hand, there are also firms in our industry whose private equity owners are doing quite the opposite, squeezing all investments to reap maximum short-term profits.
- Growing consolidation — many factors at work here, not least of which is the emergence of true SaaS puting pressure on vendors: (1) to achieve the scale/new markets needed to support fixed cost aspects of the business and deliver the growth/margins needed to support IPOs and/or (for already public companies) desired stock prices/multiples, (2) to buy growth as a cover for their inability to achieve sufficient organic growth and/or to support the increased investments needed to re-architect for true SaaS, and (3) to re-architect, not just for multi-tenancy but also to address newer/less costly development approaches, rising customer expectations re: mobile/social/richness, increasingly global (or at least multi-national) customers, new and/or evolved competitors, etc. Many of us have questioned the high G&A spends of some of the most visible and rapidly growing HRM software vendors, but if you believe that true HRM SaaS is a consolidating landscape wherein there will only be a very small number of vendors left standing in each important segment, then a “land grab” and huge R&D investments may make more sense than trying to increase profits substantially in the short-term.
I believe that we’re at a major industry inflection point, not only about taking advantage of new technologies but also about changing business models and deployment options. In my view, many existing HRM software vendors will not be viable/independent in 2-3 years unless they are able to adjust quickly enough to all of these changes. There’s also a ton of consolidation going on in specific BPO domains, like payroll service bureaus, background checking, assessments, PEOs, benefits administration, etc., and new types of SaaS-based BPO are emerging/growing. Some of today’s vendors/providers will do very well indeed under a new set of business, technology, deployment, etc. models, but many more won’t, and the items above constitute a pretty good checklist for assessing that viability.
If you’re a vendor, you may want to consider how well your stated (real?) strategy addresses the contextual changes I’ve noted above — and there are myriad variations on all of these changes as well as myriad effective means of addressing them — and be sure that you can explain during briefings how your strategy approaches each of these areas. If you’re a buyer/end-user, be sure that your vendors are truly on top of these changes and that your firm’s needs are a good fit for the direction your vendors are taking on each of them.
Boy, what started out as a short post on this subject got right out of hand, but that seems to happen to me with some regularity. Guess I’m just not a sound bite kind of blogger.