This year’s HR Technology Conference (HR Tech) was impressive. The number of exhibitors alone had to have broken a record. By my (unscientific) estimate, there were over 400 HR vendors in the expo hall, with numerous firms occupying huge booths.
I personally conducted approximately two dozen 30-minute interviews with software executives and also informally chatted with approximately one dozen industry analysts.
While an attendee could score some swag at this show, vendors were clearly focused more on discussing their offerings and not handing out stress balls, tote bags, etc. For me, my only swag indulgence was a deck of playing cards.
The event this week versus pre-pandemic versions of this show differed in some key ways. There were a number of new-ish firms at the show and some of these have grown quite spectacularly since the pandemic. Additionally, you almost needed a decoder ring because of the sheer number of mergers, acquisitions, partner deals and other activities that make determining who really is behind specific products or companies difficult. For example, a number of vendors’ solutions are now more fully embedded and integrated with other companies’ products via white label arrangements.
Money, money, money
The venture capital world has changed a lot in the last few years. Valuations are more frequently running to unicorn levels (A unicorn is a company whose post capital raise valuation exceeds $1 billion.). The money that some HR vendors raised in recent years often ranged between $70 million to more than $370 million. Access to equity has not been a problem in the HR space. One proof point of that alone is just to see the size and number of new vendors in the expo hall.
On the other end of this capital spectrum though, I did speak with a couple of CEOs who took venture capital money seven or eight years ago. We discussed how venture capital money, like private equity investments, are not permanent. These investors want to see some sort of liquidity event usually within 5 to 7 years of their investment. As a result, readers should expect to see some of the HR vendor crowd to either complete an IPO, be sold and/or merged into another company. Additionally, we should expect some change in leadership in these HR firms as investors may want to remove a founder CEO and install a transactional CEO that will get a liquidity event done.
Likewise, we should expect to see some private equity firms enter the space and acquire two or more HR vendors so as to create a rollup solution. Whether any of these outcomes occur, a material change of control is almost always a reason for software buyers and customers to be concerned. A new owner may change pricing, kill off products, and/or gut the development and support staff of a vendor as they try to gain new economies of scale and/or prepare the company to be flipped once more.
On a different capital note, I got a great education in the capital requirements involved in supporting on-demand or daily pay. I’ve known for many years that payroll service providers have made small fortunes off of collecting payroll monies from their customers and investing those funds short-term until they have to pay taxes to federal and state entities. The float that this provides these vendors is quite significant and the importance of which has never been lost on Wall Street.
When an employer offers an on-demand payroll capability, the payroll provider or software vendor may need to acquire a commercial line of credit. This capital is needed because cash must be available instantly to make payroll on behalf of an employer. This line of credit is not insignificant either. One major player in this space has a half billion-dollar line of credit set aside just for this purpose. It goes without saying that the more popular on-demand payroll becomes, the more important this line of credit is and how much larger it may become. Cost to support this line of credit could become an interesting issue as interest rates climb, so will the cost to provide this service.
Lastly, you can’t have a discussion about on-demand payroll without also addressing a growing problem in the workforce: a serious lack of personal finance knowledge by many workers today. Any HR and/or payroll provider that does not have a personal finance education capability that comes with their solutions does not have a complete market offering.
Buying niche solutions – or suites?
During the pandemic, software buyers were often too busy putting out fires, changing business models, completing reductions in force or trying to find talent to work in their facilities to do any kind of major systems projects. Where we saw the most customer interest then was in buying niche solutions that solve a very painful need during the pandemic.
For example, a significant number of new cloud-based, multi-tenant and smart phone enabled payroll solutions got implemented in recent years simply to help work from home employees get paid and schedule time off.
With much of the pandemic behind us today, the question I asked of vendors and analysts alike was whether we would see a return to more firms buying larger suites of application software? While I and others have been fielding calls from HR executives expressing interest in material upgrades of their HR technology, all analysts, myself included, are wondering whether these grand plans may get scaled-back significantly when recession, cash conservation and other competing priorities may affect the budget for such deals.
I even polled a number of software company CEOs on this matter and to the one, they indicated that recession concerns are definitely there, but each was still projecting even stronger 2023 revenues.
Lots of integration issues to solve
Somewhat surprisingly, I did have a number of vendors approach me about integration requirements. I know integration issues are a proverbial thorn in the side of chief HR officers (CHROs). In fact, the HRMS suite of a major employer may often have 100 or more integrations. There may be numerous, country specific payrolls the must be integrated with the financial systems and the HRMS. There may be dozens of benefit providers that must be connected to the HRMS and payroll applications. There may be integrations to custom systems (e.g., a unique college tuition reimbursement application), collaboration software, work management software, training systems, and on and on and on.
Not only are these integrations numerous but few HR organizations have the technical talent within their team to deal with them. As a result, HR is constantly interacting with vendors – and their own IT group – trying to keep this tenuous group of technologies stitched together and interoperating correctly.
Smart HMRS vendors know integration issues are a hot button item. I appreciate vendors who don’t want to talk my ear off about how their system is the book of record or book of engagement, or is powered by a great platform, and instead address the integration problem head-on. In fact, I wish more vendors would make the second slide of any pitch deck to address which HRMS or niche solutions they have preconfigured and fully supported integrations with. Additionally, it would be nice if more vendors provided some color as to how the customer can very easily integrate other, non-supported applications to their HR mess products without requiring the need for outside consultants or internal IT.
It was encouraging to see several benefits, verification, performance management and other vendors discuss how they can take this friction point down to a more acceptable state for more and more companies.
Sadly, the payroll to general ledger integration problem still seems mostly unaddressed, unloved and underappreciated by vendors. CHROs would vividly agree.
If you are looking to achieve some gigantic HR transformation initiative near-term, don’t be surprised if you realize how many non-automated or poorly developed integrations with your different HR, ERP and financial modules exist today. It’s hard to transform HR when there are so many integration problems with the status quo.
Love for the SMB and mid-market vendors
Several vendors I met with a focus on the small and medium-sized HR software markets. And, to the one, they truly understand the budgetary, staffing and other challenges these companies face with regard to HR solutions and regulatory requirements. In short, these HR software buyers almost always have champagne tastes and beer budgets.
The nature of my conversations with these vendors illustrates this. We talked about an old graphic of mine that showed a pie chart with 13 or more slices. Each slice represented a critical activity that HR personnel are responsible for (e.g., recruiting, performance management, talent acquisition, payroll, regulatory and compliance, etc.). Unfortunately, the typical mid-sized firm rarely has more than one or two HR staff. They just don’t have the people to cover all of these functional and business needs effectively.
Of all HR vendors I spoke with, those that cater to this market really understand the importance of providing pre-integrated solutions across their entire partner ecosystem and marketplace. Niche midmarket HR tools (e.g., I-9 verification) talk about their integration with midmarket HRMS suites and vice versa.
A couple of vendors talked about how they can use talent management or talent optimization technology to help a customer, particularly those small and midmarket users, to get the best use and value from each and every one of their employees. Some of these firms can’t always attract the best talent but finding the best use for these people within an organization could be a game changer for those firms. (see more below)
The two big themes – the talent game is different now
Just a couple of years ago, pre-pandemic, business leaders everywhere were talking about the war for talent. The discussions involved a new generation of worker whose career or job needs differ from prior generations and how would companies build compelling employment brands and/or employee work experiences to captivate these new workers.
If businesses weren’t winning the war for talent before the pandemic, they are still losing it today via the great resignation, quiet quitting and/or forced back to office mandates. So in addition to continuing to lose the war for talent, businesses today don’t know what to do with the talent they have left. These are the two biggest issues executives and vendors seem to be discussing privately at this show.
Let’s begin our discussion around the difficulty in finding the correct or any talent today.
Finding the talent (or the optimal talent)
Software vendors and software buyers still seem to be confused as to the correct approach or even problem definition on this continuing sourcing issue. Is the issue that businesses cannot find an adequate quantity of skilled personnel or is it a question of the quality of the individuals seeking employment today?
I heard all kinds of pitches as to this issue. Some vendors think that companies need a better skills assessment tool to augment their recruiting/talent acquisition technology. But to do this, a CHRO will also need a skills taxonomy to make the assessment of use.
Other vendors think the answer lies not in skills assessments but rather in personality or behaviors. Of course, their tests will determine whether someone will be a good fit, culturally, for the firm and/or the role or team.
Some vendors believe that demonstrated, verified experience in certain tasks is the key to solving the talent shortfall. Some, like ATS vendors think you only need to look at the last job someone had and see if it aligns with your job description.
Other vendors think that personal attributes, as opposed to skills, are the key to recruiting well. They can help you find someone who is responsible versus skilled in Microsoft Excel.
All of the above may work in some situations but, in the end, recruiters need access to jobseekers. They need either databases of potential jobseekers or tools that optimize their advertising spend to attract applicants. I met with a couple of firms in the programmatic ad management space. These vendors do an excellent job of reviewing where your firm is spending its money on job boards, spot website ad placements and more. They can tell you which keywords in your ads are resonating with jobseekers and how effective competitors’ ads are at attracting talent to them.
If your firm is spending more than a few dollars on these kinds of advertisements so that you can fill the top of your recruiting funnel and ATS with applicants, you owe it to your firm to ensure you are spending your scarce recruitment marketing budget wisely.
But, you might not need to spend so much money if your firm only considered utilizing your firm’s alumni to fill its open positions. Not once did any vendor proactively mention how their technology could be used to better understand, reach out and cultivate a new relationship with a prior employee. Personally, I think this is a material failing on the part of many HR software vendors and for the HR executives they attempt to support. Recruiting your alumni is an obvious solution that is right under everyone’s nose.
I did see some innovation around reference checking. For those of us who’ve been around a number of years, employers used to expect job seekers to provide employment references. And, employers would call these references prior to extending you a job offer. It appears that reference checking may be making a bit of a comeback albeit digitally. Now there are firms that will compile profile information on jobseekers (think of social media posts, job board responses, payroll history data, etc.) and identify that you did work for a specific firm, when you worked there, at which location and what you were paid. They might be able to identify who you reported to and who reported to you. And, they can contact, digitally, past employers to get a quick assessment of your work, punctuality, etc. I suspect this could get some court challenges re: invasion of privacy but if the information is out there on public databases, then some of this is clearly fair game.
I also heard vendors discuss what an abysmal job HR and line managers do when it comes to interviewing jobseekers. One CEO told me that HR should be focused on finding the right candidates, asking the right questions, and then, see that the right business outcomes occur. While I love this concept, companies and line managers seem to have no idea how to do these things well. In fact, I didn’t hear any learning management people offer up courses on “So, you want to be a good interviewer”. Those might exist but I just didn’t hear or see of one last week.
Businesses are chewing through potential jobseekers with an incredible speed. Hiring ever greater numbers of people who will not stick around cannot, in any scenario, be an optimal solution. A couple of vendors acknowledged this and related how there are interesting causal factors in different industry verticals. For example, in retail, jobseekers care a lot about the location of the establishment and the potential for working a number of hours each week so that they can achieve a livable wage. In nursing, it’s the ability of a nurse to have control over a measure of their schedule as well as the ability to work somewhat close to where they live.
If these are indeed major factors in triggering early employment churn, then we should see a greater focus on these concerns in recruiting and talent acquisition technologies. To date, I’ve seen little focus here.
Related to this, one vendor wisely pointed out that companies should be more focused on ensuring that a jobseeker’s first 90 days on the job should be as painless, frictionless and enjoyable as possible. He opined that the first 90 days determine whether someone will stick around with the company or not. If you fix this, then you can reduce the churn going on within recruiting. This could be key to reducing the amount of recruitment ghosting and early quiet quitting or resignation.
Finally, I heard of a recruiting issue that had been quiet for a few years: Fraud. Apparently, with people able to apply and interview for work from home (WFH) jobs digitally and remotely, then there is an opportunity for people to commit employment fraud. Specifically, the person you think you’ve hired is not actually doing work for your firm while someone else you don’t know actually is. I’ve seen this problem before when people use freelancers. It’s a bait and switch problem that preys on recruiter desperation. This fraud can manifest itself in other ways, too. Your firm might actually be interviewing someone but someone else is actually taking their certification exams, skills test, etc. Caveat emptor recruiters!
Protect the talent you already have
So, if finding jobseekers is the first big challenge in winning today’s war for talent, retaining the talent you already have is the other side of the coin. I had a number of conversations with HR technology leaders on this subject, too.
I easily had over a dozen conversations where we discussed bad managers and leaders. Some of these are psychopaths who never should’ve been in positions of authority. Others are simply tone deaf or clueless. Regardless, they are as common as can be and represent possibly the single biggest problem companies have in protecting the talent they have.
Of course, at an HR show, there would be discussions around the return to the office. The justifications for such a move may be stronger for operational individuals than those in back office, support and other roles. Management that dictates a return to the office without fully understanding the potential impact of such a decision on retention is making a grievous error. In fact, it may be the stupidest management decision some people will ever make. Some of these mandates sound like the nostalgic chiding that older parents give their children (“Back when I first started work, I had to walk 10 miles in the snow everyday carrying a briefcase, a sack lunch and 40 pounds of product samples just so the boss would see me working near the water cooler. And, I was darn lucky to have this opportunity, too!”).
There’s certainly greater awareness that leaders must be more attuned to the needs and wants of a new generation of workers in a post-pandemic work world. For example, I heard how a single annual performance review just won’t satisfy people who want more frequent and real-time recognition for their efforts. I would agree with that. Managers may want to learn from an industrial psychologist about how human beings may be better motivated from praise rather than no communication or negativity.
Some vendors tell me that employees no longer want something like a five dollar Starbucks gift card when they really crave time spent with a boss that cares about that person’s career advancement or their work/life professional balance. One executive told me that he is not sure how many managers in business today actually know what a moment of recognition looks like. That’s a telling comment.
What I was learning in all of these post-hire insights from HR vendors is that too few firms really know who their top performers are and know how to retain them. They don’t seem to take any effort to get these great performers away from bad bosses. They’re not mindful of the different career velocities and career path needs of these great employees and instead let these assets be recruited away by firms with superior employee experiences.
My take – the initial summary
As I complete this first set of observations, it is clear that the implicit contract between an employee and employer is severely broken. This relationship was already facing a number of challenges pre-pandemic and now is more troubled than ever before. What each party wanted or needed before the pandemic has morphed a dozen times. Employers now must acknowledge that they, their firm, and their workforce have changed. Sometimes these changes have been in profound ways.
This is not business or HR as usual. This is a new world altogether.
When the gap between what an employer wants/expects and what employees will/won’t do gets too wide, then attrition, low morale and quiet-quitting will occur. That’s the world that recruiting, HR leaders and operational executives exist within today.