Market Stage
For our vendor landscape reports, we place the stage of the market and key trends in one of four categories that align loosely with the technology adoption life cycle segments. Hover over the graphic below to see how the HCM technology market stage and key trends align in each.
The HCM technology market appears mature when viewed through the narrow lens most market observers apply today. You’d be hard-pressed to find an enterprise employer (5,000 employees or more) that has not adopted some form of core HR technology or services. It would also be a fair assessment to say that the battle for market share is over and a few vendors — ADP, Ceridian, Kronos, Oracle, SAP, and Workday — will be battling it out for bigger slices of the pie for the foreseeable future. A lot of market share will be at play. According to Sierra-Cedar research, 22 percent of respondents who had an HRMS were in a replacement cycle in 2015. Of those, one-third were planning to move to a cloud solution and one-third were evaluating a move to a cloud solution.
However, it would be a mistake to say that the HCM technology and services market has settled into maturity. Over the past two decades, the growth of the HCM technology and service market was largely built on automating transactions in payroll processing and benefits administration. The established workflows supported command and control and legal compliance. The cloud has simply offered better access to these capabilities.
Today, the landscape is shifting. Many HR leaders say that changes in the workforce and the adoption of new technologies are driving new metrics for the measurement of successful HR, such as workforce adaptability and agility in today’s volatile, uncertain business reality. It’s a perfect environment for disruptive new brands to enter the market with new approaches as HR leaders look for technologies to support their work as they strive to innovate their processes. As a result, we believe that the HCM market is more squarely placed somewhere between “early adopter” and “early mainstream” than maturity.
We’re not suggesting that an upstart will displace any of the current market share leaders. However, the pressure is on for current HCM leaders to reinvent themselves and their applications. HCM’s biggest brands will continue to have an audience with HR leadership, but new solutions will continue to emerge and challenge the status quo.
As we look across the competition in the HCM market, we see a classic go-to-market challenge for new and emerging vendors in the space related to funding of marketing efforts. Leading brands have all been committed to a market share growth strategy, spending 50 to 80 percent of their revenue on marketing. We’ve seen leading vendors in HCM spend more than 100 percent at times in order to shore up their position in the market or drive awareness of a new release, module, or service. Most new and emerging firms are following a profit-focused growth strategy, spending 5 to 12 percent of revenue on marketing. Both strategies are valid. However, most emerging and new vendors have stated goals that are out of alignment with their spend. They emote like a market share vendor, but spend based on profit margins.
As we look at the brand power ratings in this report, they provide a fair proxy to strategy assessment. Those vendors with higher brand power ratings are, or have, invested at a market share growth strategy level. Those with lower ratings have executed more of a profit-focused strategy.
Market Size
Just as we see disruption in market maturity, we believe that there has been a sea change in the definition of the category itself. Because it emerged from the payroll services space, the HCM space has never been about technology alone. For years, it hasn’t been solely about core HR technology, either. Offerings have extended into consulting, PEO, BPO, and across the entire employee life cycle.
Most projections place the HCM technology market around $11 billion in 2016. Keep that number in mind, and then look at the market caps of the larger brands. Workday’s market cap alone was hovering at over $15 billion during the time we developed this report. Not to single out Workday, but as Seth Meyers once put it, “Really?” You quickly get the idea that the market is saturated or being puffed up for investors.
That’s why when looking at the size of the overall market, we believe it’s important to ask a fundamental question: What, exactly, constitutes HCM? We believe that market projections for payroll and benefits services, PEO, BPO, talent management, talent acquisition, and HR services must also be considered. HCM vendors such as ADP, SAP, and Oracle have lines of business in most, if not all, of these segments. As a result, we see a total addressable market for HCM — even staying true to core HR and payroll — far greater than $11 billion. The HR customers in enterprise (5,000-plus FTEs) and the midmarket (1,000 to 4,999 FTEs) have consistently shown their preference for “platform” solutions. In our view, this preference also increases the total addressable market potential for HCM dramatically.
Because of the overlap in some of the categories listed and the fact that not all HCM vendors will extend in the same directions, you can’t just roll up the market size for all things HR and call it the potential for HCM. However, even if we stay true to HR, payroll, talent management, and talent acquisition, The Starr Conspiracy Intelligence Unit believes the market size for HCM is $131 billion. Comparatively, the market size for enterprise B2B software is $297 billion, and cloud computing is $158 billion. HCM is no niche.
The point is illustrated well with the following popular market-size projections for the various HR technology and service segments that an HCM vendor may commonly offer alongside its core HCM technology offerings. There is clearly a lot of overlap between the markets. We don’t see the HR technology and service markets rolling up to nearly $700 billion. We view these projections as more of a barometer to the overall possible addressable market.
| Category | Market Size |
|---|---|
| Payroll and Benefits | $41 billion |
| HR BPO (including PEO) | $500 billion |
| Talent Management | $14 billion |
| Talent Acquisition | $72 billion |
| HR and Benefits Administration | $62 billion |
Growth
Annual growth rates assessments for HCM technology range from 6 to 11 percent. We believe the most significant growth opportunities will come from the SMB segment in the U.S. Internationally, in both mature and emerging geographical markets, the movement of HR technology to the cloud will continue to create even more opportunity for HCM platforms that can truly support the complexity of global implementations.
The growth-rate assessments, averaging 8.5 percent, may hold. The story for HCM may be about the growth of the addressable market as SMB buyers mature in their adoption of HR technology and vendors address the emerging contingent workforce globally.