Modern HR requirements create huge opportunities for vendors of HR technology, but only so long as they are able to innovate. This need for innovation, however, comes along with complex challenges of a technological, financial and organisational nature. Vendors need to carefully navigate this gauntlet to become champions over the next decade.
Jonathan Boyes, Partner at Hg
Vendors of software to the Human Resources function have seen a dramatically changing environment over the last decade. With the emergence of web-delivered and mobile solutions, HR software has finally become strategic and turned into an increasingly important driver of innovation and value.
This technology revolution has created massive business opportunity for vendors of HR technology, but has also left traditional players facing challenges.
At Hg we see two main shifts in HR software that are driving competitive edge and that require very specific measures by any vendor wanting to master the paradigm shift – the emergence of strategic HR and the increasing prevalence of SaaS.
Traditional HR software used to focus on transactional tasks such as payroll, expense management and time tracking. Most of these systems were expert systems, installed on premise, with users being predominantly functional staff from the HR department. The key requirement was not to fail, and even though this was complex enough, room for further differentiation was limited. As a result, pricing was not based on value and hence allowed limited upside for additional value.
With the emergence of web-delivered software, it has now become possible to turn the whole employee base into users and thus integrate them into the HR process. This has triggered a revolution in the way HR systems can be used, turning them into strategic rather than purely transactional tools. In addition, increasing automation and digitalisation of transactional tasks (such as expenses and entry of personal data) has freed HR departments from a decent amount of burdensome admin work and gives them more time to focus on strategic tasks and value creation.
In this new era, pricing is based on the value delivered by the software, creating significant potential for vendors with superior products, intelligence and user experience.
With the emergence of cloud-delivered software, modern HR software vendors saw the opportunity to sell their solutions in a SaaS model, thus taking away the IT infrastructure, middleware and application delivery from the customer and manage these themselves in a much more scalable way.
The expansion of the value chain unleashed by this shift coupled with strong economies of scale created massive opportunity for vendors to drive their revenues and profitability.
As traditional HR software platforms experience difficulties meeting the technological requirements for this transition, incumbent players are faced with the daunting task of creating new SaaS platforms from scratch (which exceeds the financial resources and know-how of most vendors) or else risk being stuck in the ‘old world’ of software vending. Those who are able to build (or acquire) a new platform then stumble into the next challenge – to convince their installed legacy customer base to follow the vendor’s strategy and migrate to the new cloud-based service. In this case, one of the main strengths of payroll and core HR systems – high customer loyalty – suddenly becomes an obstacle on the path to success.
In contrast to this, new entrants have the advantage from starting out on fresh, modern technology that does not need to cater the needs of an installed customer base. However, their offerings are typically constrained to niche applications as it is extremely costly (and requires deep domain knowledge) to build broader HR software suites from scratch. Going broad, beyond niche apps that address functionality whitespace, also leads to a replacement battle with incumbent vendors sitting on highly profitable customer pools, a game that is very cash consuming and easy to lose out on.
As a result of these challenges, there are fairly few fully integrated SaaS-based HR suites combining fully transactional requirements in payroll and core HR with modern, best-in-class Human Capital Management, especially in the midmarket and enterprise segments that have more complex requirements. This is even more true in an international context as transactional HR systems face highly diverse national regulatory requirements.
Whether incumbent or new entrant – with rare exceptions it will be the players who are able to build integrated and modern suite platforms combined with massive scale (organic or via M&A) that will come out as champions over the next decade.
Hg has been an investor in HR software businesses for almost two decades, driven by the belief that the emergence of the new technologies creates the opportunity for significant new value to the customers. For those software vendors who can adopt this trend and unlock this value for their customers, there is a fair share of profit in return.Hg witnessed this in its most recent investments in Visma, P&I, Access, IRIS and Brightpay, who all showcase this conviction. These players represent the rare examples of strong incumbent platforms that have been able to re-innovate themselves and use the scale of their client base and deep domain know-how to deliver outstanding user experiences and customer value based on modern technology.Hg’s investment in P&I is the perfect showcase for this strategy. The business has not only achieved to introduce a fully integrated native and SaaS-based HR suite capable of running payroll in 14 countries, but – most importantly – has delivered full proof of the strong customer benefits of its platform by an unprecedented pace of existing customer migrations and best-in-class NPS.