Choosing an HR Software Partner

Over the past five years, more than $4.5 billion has been invested in HR software companies, and the size of the market is estimated to reach $9.2 billion by 2020. Here's a guide to help you choose the right HR software partner for your organization's needs.

By Jim Madden

The HR function has been inundated over the past few years with a proliferation of software companies. If you Google “Top HR Software Systems” today, you will find a “Software Advice” site that lists more than 300 products.

HR software's origins can be traced back more than 30 years to products such as Tesseract, and modules from MSA and McCormick and Dodge. All of these companies have long since vanished in their original form – perhaps a precursor to today. HR software took off in the 1990s through ERP software such as SAP and Oracle, and through dedicated HR software platforms including Peoplesoft (acquired by Oracle).

Each of these products was premise-based. That is, they reside on a company's computer. These products changed how organizations, both large and small, approached and managed their HR processes. But when technology evolved and the cloud entered the picture, many of these players were late to leverage it. Countless new HR software companies were quickly empowered, through the cloud, to harness this game-changing technology and leapfrog the market leaders. Interestingly, among the first were the Founders of Peoplesoft, Dave Duffield and Aneel Bhusri, who later founded Workday, a cloud-based HR-software provider.

Over the past five years, more than $4.5 billion has been invested in HR software companies, and the size of the market is estimated to reach $9.2 billion by 2020. Many of the new companies are focused on specific sub-segments of HR including applicant tracking systems, talent management systems, specialty payroll and rewards and recognition, among others. As large as this space is, the reality is that there is now an overpopulation problem among HR software companies. There are far more entrants in the market than can be reasonably sustained. Inevitably, there will only be a handful of winners and a very large number of losers. This is not the first time this cycle has occurred. Does anyone still recall MSA or Tesseract?

In any given market, there will be approximately three well-known market leaders. The HR software business has been no different. Assuming it evolves like a typical market, after the three leading companies there will be a very long tail. For certain, there will be a few companies that will have a successful point solution for a particular industry, niche, or even country. Beyond that, most of the remaining 300 companies will not be sustainable on their own. They will either be acquired, or, more likely, they will eventually implode. Picking the winners is not so easy. Indeed, more than 50 venture-capital and investment firms think they are right.

The business media is already starting to pick -- and unpick -- their favorites by chronicling HR software success stories and then later revisiting those same companies to point out their weaknesses and foreshadow their demise. No one wants to be part of the HR leadership team left holding the bag when their HR software partner closes shop. So don't just sign-up with today's media or marketing darling; give this decision the time and careful attention it deserves, and below are five suggestions to help guide your process for choosing an HR software partner.

Review their business model.

Market leaders will have a good business model, one that will make money tomorrow or very soon, if not today. For example, companies that rely on health insurance commissions in lieu of license or subscription fees face a long-term threat from eroding insurance commissions. Health Insurance commissions are already down more than 1/3 from what they were five years ago. Potential further regulation or rules on health insurers is a real risk in eroding these further. This implosion was witnessed once before in the 1990s with professional employer organizations that focused on making profit through health and worker's compensation insurance arbitrage. This proved unsustainable. Several PEOs imploded, taking a few insurance carriers with them. “Freemium,” to use a term that's already out of vogue, is simply not a reliable business model. Successful companies price their products fairly; they don't give them away for free. The model must also be scalable, so that the product and response times are as good when they reach 100,000 customers as when they have only ten.

Size matters.

For software companies that have a niche offering, make sure they have a broad enough market appeal to grow and be successful. Their total addressable market should be at least $500 million. If not, you may later find yourself stuck with the company that acquires them, or you may have to change partners all together. You don't always have to go with the big guy, but your partner needs to have a large enough potential market and enough funding to grow and enhance their products.

Consider the company they keep.

The caliber of the companies they are already partnered with says a lot about their likely success. Do other companies in tangential spaces want to partner with them?  Do they have a reputable outsourcing partner like AON Hewitt (for enterprise) or Paychex or ADP (for small to mid-sized businesses)?  A business-management-software partner such as NetSuite, SAP or Oracle? Part of your research should include piggybacking off the due diligence of other reputable companies.

Research their board.

Do they have an exceptional board of directors; members who will look for what is best for the customers, not just the shareholders? As impressive as their names may be, a board consisting solely of insiders, financial sponsors and investors is a bad sign. You want your partner's board to consist of a mix of outside independent industry experts and entrepreneurs who have been successful elsewhere.

Make sure you have an exit plan.

You did your homework, but the company is showing signs of failing; low to no growth, starved for new product innovation or fleeing management. Despite your best efforts, movements happen in the vendor market. Make sure you've already thought through this and secured contractual rights to easily and quickly move your data to an alternative provider. Build into the agreement full ownership rights to your data and specific transition obligations on the vendor in the event a switch becomes necessary.

The lesson here is to hope for the best and plan for the worst. You want to give yourself the best chance of picking a winner, but also make sure that you have protection and a back-up plan in place, in the event you later discover you didn't back the right horse.

Jim Madden is a co-founder and managing director at Carrick Capital Partners in Newport Beach, Calif., and San Francisco.

May 2, 2016
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