The HR Software Slump

I was recently getting caught up on some blog reading and noticed Josh Bersin’s post on the Talent Management Software Slump.  I’m not sure if I’m just a pessimist, but I thought I’d post a reply.  (granted, Josh wrote his post in early May…

Despite this difficult Q1, we believe the market is going to come roaring back in Q2 or Q3 of 2009.  Most of the private companies we talk with (Plateau, CornerstoneOnDemand, Learn.com, GeoLearning, Halogen, and others) tell us that while they had a weak Q1, they have seen tremendous growth opportunities in Q2.

First, the mid-market and small enterprise segment of talent management is starting to grow rapidly.

Fourth, there is still tremendous demand for talent management software.  In today’s rapidly changing workforce (from layoffs to restructuring to rapid growth), the value of this set of software is greater than ever.  While Q1 was tough for vendors, most buyers only postponed their purchases – giving themselves more time to evaluate options and improve their own businesses.  In Q2, Q3, and Q4 these companies will buy these systems.

So my thinking on the slump basically reflects back to 2001 when the dot-com bubble “burst.”  When that happened, basically, HR technology spending totally dried up.  It actually took about 3 years for HR technology spending to come back, and when it did, spending came back with a vengeance.  My theory on this was that when spending cuts happened in 2001, HR technology was among the first to be cut.  Then as the recession ended and things got better, neglected business critical technologies were upgraded, implemented, and restored.  Things like CRM or supply chain that didn’t get needed upgrades for months or years got the first funding dollars.

As we all know (or think), in most companies HR funding is a lower priority than other business functions.  I don’t see any reason to see this to be any different as the economy recovers this time.  As organizational revenues recover, employees will be rehired or returned from furloughs, business critical applications will be maintained first, and budget cycles will still lag a year behind needs.  Before an organization goes out and spends $100K or even $1M on any HR application including talent management, there are a whole lot of other unspent business critical dollars that will probably come first.  HR budgets that got slashed in 2009 will still remain slashed in organizations with any governance at all.  Perhaps some organizations will get dollars in their budgeting cycles at the end of this year, making dollars available in 2010, but I’m guessing that 2010 budgets will focus in other areas than HR.

Perhaps Josh is a better judge than I am though.  It may indeed be possible that certain talent applications will actually fare better than most other HR technologies.  Performance and Succession ran such high profiles in the last few years that we can only hope executives remain enamored with those technologies.  I’m not a big fan of looking at vendor pipelines for guidance on future sales.  Every vendor (application, outsourcing, or consultancy) has great looking pipelines right now.  Salespeople seem to be sandbagging as much questionable prospecting into their pipeline portfolios as they can right now, as much to remain optimistic as to try and keep their jobs.  Pipelines are also more robust in number of prospects, but smaller in terms of deal size.  The mega deals that have kept vendors going for years will be slower to rebound.  I think that most organization will have to deal with the technologies they were able to install in the last couple of years and hope they continue to work for a couple more years.

Core HR in a Point Solution World

Perhaps the statement that we now live in a “point solution world” for HR is a bit bold.  Certainly in large and medium sized organizations, ERP deployments are still strong.  However, we do know that these same organizations are increasingly looking at point solutions even if they have had long term ERP strategies.  Current day economies combined with lower short term costs for SaaS provide good business cases for deployments that have to happen in the next couple of years, or as bridges of functionality until a long term solution has been developed.  The question in the marketplace is now “what is happening in core HR?”

Core HR is more of a commodity than ever.  Truly it has simply turned into a specific set of functionality, and that which made it strategic before has been ripped out of core and placed into other applications or engines.  First, let’s look at commoditization.  At one time, the ability to provide table driven data validation, full effective dating, and robust compliance was the domain of a few major players.  Now, these functions are a part of almost all major HRMS solutions offered at any price.

Second, we look at functionality that used to make core HR solutions strategic.  I’ll call these workflow and analytics.  From the process standpoint, end to end solutions no longer exist in the HRMS application.  Indeed, end to end workflow barely exists at all.  Point solutions have virtually disabled the ability to flow work and approvals through multiple products with different approvals in each.  While it is possible to utilize a workflow engine to accomplish this, the cost is prohibitive to all but a few very large organizations, and I have not seen HR a high enough priority anywhere to deploy it.  Analytics on the other hand have almost been fully removed from the HRMS application.  Value can’t be provided by core HR if none of the talent, payroll and benefits data sits in other applications or outsourcers.  Indeed, as the value of analytics comes from cross functional data analysis, business intelligence is really the domain of massive data warehouse applications.

Third, the old employee and manager self service systems are mature and ubiquitous.  Having employees enter in their new phone number is not very exciting anymore, and the real self service functions of performance reviews or compensation processes are generally removed to the talent systems.  Instead, we move to massive portal environments that remove the existing self service functions from each individual application and centralize the user interface.

If indeed the HRMS application has been commoditized in terms of functionality, then the lowest price point that offers scalability and good data architecture (not all applications out there are very pretty from the backside) would seem to suffice.   Scalability obviously so that your organization can not only grow, but store greater amounts of employee effective dated rows over time.  Good data architecture because the ability to port data into data warehousing applications as well as integrating to other point solutions will be made much simpler.

The Money Multiplier

I’ve put a lot of faith and hope in businesses as the economy continues to trend downward.  I had initially thought that this time around we would be smarter.  Smarter than in 2001 when the bubble burst and HR technology spending almost completely stopped for 3 years.  In that time, there was virtually no growth in development as there were no sales to fund it.  But this time would be different.  We were smarter, and would continue to spend on our infrastructure, not allowing a pessimistic view of the future to delay our long term strategies or the enabling technologies that preceded strategic fulfillment.

I think I was wrong.

Perhaps my being wrong has nothing to do with our NOT being smarter.  Perhaps we had every intention to continue to prepare our HR infrastructure.  But that fact of the matter is that cash is tight.  Nobody is lending money, and few people are making enough money to spend freely.  With that, HR budgets are being reigned in and once again, HR technology spend is down.

The money multiplier is a simple macroeconomic theory.  For every actual dollar (unit of printed currency) in circulation, there is a multiple of that dollar that becomes a portion of GDP.  For example, if HR has 1 dollar to spend on software, a software vendor will in turn spend a portion of that dollar on R&D, which in turn may go to HR consultants, etc.  The idea I’m trying to put forth is that in a good or bad economy, the money multiplier fuels the HR industry.

The problem is that in a good economy, the HR industry has funding from corporate budgets.  In a bad economy, HR budgets are cut to the bare bones for continuing basic operations.  HR is not a self funding industry – we rely on the rest of the enterprise to provide is with the cash we need to fulfill our objectives.  Without cash from the enterprise, the entire industry goes into a lull.  Without the seed cash from the enterprise, the money multiplier stops working.

I’m not sure what happens next.  We know that the applications providers have been doing some massive layoffs.  We know that sales are slowing.  We know that consulting operations for both the vendors and traditional consultancies is slipping.  What we don’t know is how quickly the enterprise will start fulfilling our budget requests when cash starts to flow again.  I’m still hoping that even if we don’t continue spending right this minute, that ultimately we are smarter than last time.  Let’s get in front of budgets and make sure there isn’t a 3 year lag before HR spending comes back.  Let’s make the case now that our priorities are still enterprise priorities and can’t wait until 2012 to get started again.