Three Trends To Watch
Trend 1: The Rise of Strategic Workforce Optimization
In the HCM tech market, trends such as big data, analytics, wearable technology, the consumerization of applications, mobile first, and BYOD are grabbing mindshare and headlines in industry publications and analyst reports. What’s escaping notice in the tsunami of buzzwords is the inescapable fact that features built around these trends are rapidly moving toward commodity status. And woe be to the poor vendor that tries to differentiate based on these (or any) technology features. Too many brands still try and ultimately fail. Technology is always a temporary advantage. Today’s killer app is tomorrow’s RFP column fodder.
What is noteworthy about these trends is what they are building up to — the delivery of Strategic Workforce Optimization for the enterprise. Strategic Workforce Optimization has long been the unfulfilled promise of HCM. The dream has been to have deep, real-time visibility into the workforce to allow lean, efficient management in the same way that companies manage supply chains. The limitation has been the integration of data and systems.
What’s possible is strategic optimization — workforce management and forecasting of the highest order. It’s the convergence of financial and operations data with staffing and recruiting; time and attendance; compliance; performance management; learning and training; career-pathing; succession management; compensation, benefits, and payroll; and workforce analytics. It’s really the Internet of Things (IoT) applied to the workforce — systems, devices, data, processes, and people networked.
What does Strategic Workforce Optimization look like?
- Insight: Time-and-attendance and payroll data shows production demands have increased over time among employees with specific skills and training needed to complete delivery on time and on budget. Furthermore, regulatory caps on the number of hours these employees can work mean that contract employees must be brought in or the company faces increased compliance risks and penalties. Or even worse, production slows and the company risks missing financial targets for the next three quarters.
- Action: Analysis of production workers shows that specific training is available and can be completed in a matter of weeks, increasing the number of employees available with the right skills. The combination of trained employees and scheduling changes would safeguard the production timeline and eliminate the need for contractors.
- Impact: As a result of specific training, the readiness of specific high-potential employees within a talent pool increased and the flight risk of certain key employees decreased. The cost impacts are immediately reflected in forecasts for recruiting, staffing, payroll, and production. The talent impacts are reflected in schedules, career paths, and successor bench strength. The business impact is felt in revenue, profit, productivity, and growth.
So what does this mean?
For HCM vendors, the timeline to achieving Strategic Workforce Optimization will depend on data and systems integration and resolving the separation of software and services:
- Data and systems integration. Is the future of data and systems open or closed? Will buyers pursue a full-suite or a best-of-breed approach? Obviously, ADP, Ceridian, Oracle, SAP, and Workday bet on the full-suite and closed approach. You can’t fault their logic — many enterprise buyers favor the single-system approach at a time when many others are in a replacement cycle. As a result, the enterprise path to workforce optimization will be a shorter one, but it won’t be without bumps. Even the biggest players must integrate somewhere with someone at some point. At the midmarket and SMB level, the path will be a longer one and filled with challenges. Companies at this size will mostly have more systems and less sophistication. Regardless of size, vendors must ask themselves a few questions: Is my integration strategy future-proofed for optimization? What level of customer support, service, and success am I willing to deliver to facilitate optimization with my customers?
- Separation of software and services. For HCM providers, this line is a fairly sharp one: You’re either a software company or a services company — payroll notwithstanding. ADP and Ceridian have taken a different approach by offering software and services that span the full employee life cycle. And ADP is using the data it has collected to look at Total Cost of Ownership (TCO) at a level that is closer to Strategic Workforce Optimization than anything available currently in the HCM marketplace. At the SMB level, this concept is just as salient. Zenefits has gained a lot of buzz, blurring the line between software and service and even testing the bounds of what HCM is. Is it an HCM vendor? Or is it a benefits broker that gives away HR software? As HCM vendors wrestle with the appropriate balance of software and services, it’s important to remember one thing: Be who you are. Are you a software company that also offers services or vice versa? Choose one and be that. Also, expect disruptive companies such as ADP and Zenefits to put more pressure on you to move toward Strategic Workforce Optimization faster than you’d like.
For HCM buyers, the question becomes a more existential one. Will the discipline of HR remain relevant? One reality that Strategic Workforce Optimization will highlight is the inescapable fact that HCM is less about HR and more about finance and operations. Even though time and attendance, payroll, and talent functions fall under HR’s purview, the addition of financials and operations data makes it more about the CFO and the COO. The next few years will determine whether HR can evolve into the strategic partner that the CFO and COO want or whether HR functions get carved up and absorbed by finance and operations.
For HCM investors, Strategic Workforce Optimization is still over the horizon. These ideas are more relevant to a longer-term position. However, when evaluating HCM companies, looking closely at their positions on data and systems integration and the balance of technology and services will serve you well. With early stage companies, the most disruptive ideas will come from technology companies that can use services to drive revenue and achieve profitability faster than the SaaS business model for fast-growth companies typically allows.
Trend 2: The Rise of the Total Workforce
Traditionally, the employment ideal has been the FTE — the full-time equivalent. In the post-World War II world, the FTE was the typical employee — full-time with benefits, on a career ladder, functioning inside a hierarchy, working on-site at the employer’s work location, and typically working 40 hours a week. Most HCM technology is built to serve the needs of FTEs and their employers. It’s also a mode of work that’s quickly becoming far less common — by 2020, only half of Fortune 500 workforces will be FTEs.
The rest of the workforce will be employed on a contingent basis. However, it’s no longer happening in areas of the business we historically associate with the contingent workforce, such as seasonal labor, shop floor labor, administrative support, and IT staff coming in for short time frames or on a project basis. It’s top to bottom and across the enterprise. Even the executive ranks have already seen their share of contingent staff. It’s no longer unusual to hear about an interim CXO or VP brought in on contract to put a department — or company — back on track.
- Economic changes: The global meltdown of 2008 accelerated changes already in motion with both employers and talent. Today, employers like the reduced payroll overhead and the ability to manage project deployment more efficiently. They also like the deferred risk and costs of not being the employer of record. For talent, many employees who were axed in the wave of downsizing found their best, only, or preferred option was contract or freelance work. In a volatile, uncertain, complex, and ambiguous (VUCA) world, the free agent has become a more appealing option.
- Generational changes: Today, 80 percent of workers prefer to work off-site part of the time, according to Staffing Industry Analysts. Millennials and their working preferences are driving much of the change. They want flexibility, variety, choice, personally challenging and meaningful work, less focus on structure and pay, and mobility.
- Technology changes: High-speed Internet access, smartphones, less expensive and more powerful computer technology, and the rise of videoconferencing have enabled a distributed workforce that wasn’t possible even a decade ago. Highly specialized talent with in-demand skills can work anywhere, anytime.
- Legislative changes: The Affordable Care Act in the U.S. now means that employees working more than 30 hours a week must get medical benefits coverage. As a result, many organizations are looking to fill positions with contingent labor instead of FTEs and save on healthcare costs.
Based on the way the contingent workforce has emerged to date, employers have largely addressed the challenge in silos. IT contract labor spend at the enterprise level is primarily driven and managed by purchasing or procurement. Seasonal labor in many businesses, such as retail, is a location-specific hiring decision. Hiring of administrative staff is split between operations and finance. As the shift has occurred over the last few decades, we’ve built a silo for each of these efforts, some with their own dedicated technology.
The limitations of the siloed approach become apparent when contingent labor is being used in all areas of the workforce. The entire process becomes inefficient, complex, and costly. Even though the pains may seem to be primarily a staffing issue, these challenges quickly extend into other areas of HCM. We believe Total Workforce solutions are needed, because employers can’t just manage half of their employees. However, that’s the reality today. In almost every aspect of HCM, contract labor is not being addressed in the same way that FTEs are.
- Talent management: The current lightning rod of “employee engagement” reflects the opportunity and challenge well. How do you measure the engagement of a project team or division that is half contingent throughout the staff and management ranks? How do you address performance and training?
- Compensation: Rewards and incentives also pose a problem for HCM technology built to focus on the FTE. How do you reward performance based on department goals or incentivize your team to deliver results when half of your team members aren’t actually your employees to begin with?
- Benefits: How do you feel about your FTEs not having a benefits package that’s as good as the other half of your team who receives their benefits via the buying power of a large global staffing firm?
- Talent acquisition: Even in areas where contingent employees have long been used, HCM technology does a poor job of offering a global view into the metrics associated with staffing the Total Workforce.
So what does this mean?
For HCM vendors, possibly the only HR technology segment truly prepared for handling the shift is payroll. However, this has merely been a transactional pay class at best. Core HR and extensions of it have done little to address the complexities related to managing the emerging contract workforce. Technology vendors that start to address this issue will begin to usher employers into the next age of the workforce in ways no one is delivering today, except for the staffing firms — and they’re rapidly on their way to becoming an $800 billion market. But this is more than a staffing issue; it touches every aspect of HCM. It’s a big issue, and it’s too big to ignore anymore. Vendors must take the lead — it’s time to educate the market on the Total Workforce and offer solutions to prepare employers for what’s ahead.
For HCM buyers, look and see how HCM vendors begin weaving together solutions for the contingent workforce. SAP made a strategic move in this direction with the acquisition of Fieldglass, one of the leading vendor management systems used to manage contingent workforce spend and control the process. SAP is perhaps the only HCM vendor to have begun to integrate a contingent platform under its brand. It is currently unclear how this will impact core HR offerings beyond integrating contingency staff data into analytics and reports. It certainly gives SAP a head start with regard to addressing this issue before the other HCM vendors at the top of the market. How will other vendors follow suit?
For HCM investors, expect to see companies developing HCM solutions for SMBs to gain traction faster and more easily address the Total Workforce. Zenefits has enjoyed explosive growth in part because it helps smaller employers navigate the complexities of the Affordable Care Act.
Trend 3: The Rise of HCM for SMB
HCM isn’t just for the enterprise anymore. Even though some of the biggest brands in HR technology are in this market, we really believe much of the rapid innovation in this space will be driven by the SMB. The SMB is adopting new HR technology at a rapid pace as solutions beyond just payroll and job boards become available for employers with fewer than 1,000 employees — even as few as 100 FTEs.
As companies grow beyond 100 employees, they tend to look for tools that are more useful than an Excel spreadsheet to manage their workflow. Companies even at the lower end of the segment are addressing issues across the employee life cycle. In an ever more global business world, size is less and less of a qualifier for who needs enabling HR technology. What’s going on?
Trends drive the emergence of SMB HCM. The emergence of the cloud as a cost-effective platform for the SMB segment was the first door to open for HCM in the midmarket. This made delivery of solutions to the segment viable. In the early 2000s, most vendors tried to deliver “lite” versions of enterprise software, complete with enterprise complexity in their interfaces, into the midmarket. That didn’t go well for most implementations. In the midmarket, simplicity trumps complexity.
Now we’re seeing the results of social networks, social media, mobile, and the consumerization of applications across all product segments, making HR technology easier to adopt for the SMB market. These same trends are helping customers find HR technology solutions.
The midmarket solutions being adopted by the SMB today offer a consumerized — and sometimes gamified — interface that offers users ease of adoption and use. But they are no less complex behind the interface. The opportunity for HCM to be disrupted by solutions purpose-built for the SMB is very real, given the market opportunity. Currently, the HCM landscape for the SMB is led by firms like ADP, NetSuite, Namely, Ceridian Dayforce, and Zenefits. We see a huge opportunity for HCM technology focused on the SMB to become some of the biggest brands in the space.
HCM technology begins to offer viable PEO/HRO alternatives. For SMB firms with fewer than 100 employees, the use of a PEO to outsource end-to-end HR solutions, including core HR, employee benefits administration, payroll and workers’ compensation, recruiting, risk and safety management, and training and development has been growing rapidly since its introduction in the 1980s. According to Ibis, there are now more than 700 PEOs in the U.S. and their total addressable market is projected at $120 billion. TriNet has built a $2 billion business in outsourcing HR. PEOs have long been aligned with payroll and benefits administration, but they have extended their offerings to a full suite of HR solutions.
The value proposition for PEOs begins to break down from a cost perspective at between 50 and 100 employees. For organizations with more than 100 employees, HR outsourcing can continue to make sense with administration services organizations (ASO). ADP and Ceridian Dayforce both have offerings here. However, now we see firms like Namely, Zenefits, BambooHR, and others beginning to offer real HCM technology alternatives for companies at the smaller end of the SMB market. For more employers, HCM technology will be a better way to go than PEO or HRO.
Legacy vendors are beginning to react. We’re seeing glimpses of customers with more than 5,000 employees leaving complexity behind and adopting technology developed without compliance or other considerations inherent in enterprise-level HR. Legacy HCM vendors have long provided solutions to the SMB. However, most have begun to re-engineer themselves in light of these trends, such as TribeHR’s acquisition by NetSuite and Ceridian’s re-engineering of the Dayforce platform.
Could the midmarket start to drive the enterprise technology vendor landscape in the next five years? If user adoption and engagement continue to be on the rise as a key buyer focus, the midmarket HR tech offerings leading the way isn’t really out of the question. Customers in the middle market represent some compelling brands — popular brand names from finance to technology to retail, healthcare, service, and hospitality that are viewed as innovators and leaders in their fields. Many of them aren’t planning to stay in the midmarket, either.
So what does this mean?
For HCM vendors, the SMB opportunity goes beyond revenue growth and faster time to revenue. We see an opportunity for HR technology to become more like mainstream B2B technology and less like a fragmented niche market. After getting the product right, go-to-market execution looks to be one of the biggest risks for vendors catering to the SMB customer segment, which rejected being force-fed enterprise software in the early 2000s. The SMB market also typifies the newly empowered B2B buyer, with many reporting that up to 57 percent of their buying process takes place before they contact a vendor and that their trust in vendor content is low.
For vendors, it’s important to understand that the SMB buyer is different from the enterprise buyer. Companies in the SMB market start with a business issue that HR then partners to solve — if there is an HR team present. The buyer is generally much less knowledgeable than the enterprise buyer, a reality that levels the playing field. It also gives vendors that can build brand awareness quickly and educate the market with great content an advantage. And it favors vendors that can mobilize their brand advocates to generate referrals and customer references.
For HCM buyers, remember this: Compared with its enterprise counterparts, HR in the SMB market is more about the business of getting work done. When SMB customers set out looking for solutions, they often have no knowledge of the HR technology vendor landscape. SMB customers probably aren’t attending the industry conferences that are frequented in the enterprise space. The buying process typically starts with searching the Internet, querying professional and personal networks, visiting business publications online, and asking for referrals and checking references from similar companies. Be aware that firms such as Software Advice can help you find the right solution for your company. And it’s about finding the right solution for your specific circumstance, not what everyone else is using.
For HCM investors, the SMB market is your best opportunity for growth in HCM. The enterprise market is saturated with long-term and very well capitalized incumbents. Sales cycles are long — extending as long as 12 to 18 months for true enterprise-wide sales. The cost of sale is high as well, requiring investment in infrastructure and staff to support a high-touch, complex sales environment. Going to market in the enterprise segment remains an opportunity but requires a level of patience that most investors don’t have.
Successful vendors in the SMB market don’t experience the same infrastructure issues that extend time to revenue and cost of sales. Sales cycles can be under 30 days, and the sale can be as close to frictionless as possible. The market is also HUGE. According to the latest U.S. Census data, there are 42 times more firms with 100 to 4,999 employees than with 5,000 or more employees. There are also seven times more companies with 500 to 4,999 employees than with 5,000 or more.