9. HR tech today: not your granddaddy’s payroll

I’ve been thinking about tech’s role in HR. Two years ago my friend Jack Altman started Lattice to redefine how companies and employees set and meet goals, and conversations with him led me to try to understand this space. After some research and chats with founders and experts, it’s clear new tech can greatly impact this growing $15 billion market, helping us work better and more productively.

So, here are initial thoughts around what’s making this a particularly exciting space for startups, including (1) a changing set of HR needs, (2) the improvement of tech for enabling solutions, and (3) industry forces opening space for defensible innovation.

Shifting views and needs

At b-school, I’ve had a chance to study the history of management. Starting from Taylorism’s scientific focus to an emphasis on employee empowerment to today’s rise in analytics, one can trace the evolution of how management and employees interact in organizations. It’s fascinating to see the HR thought that goes into incentive and org design to maximize productivity and wellbeing. Suffice to say, Henry Ford’s management style made different human behavior assumptions than does Google’s team focus.[1]

Changing practice has led to a shift in HR tech’s role. In his latest annual report, industry guru Josh Bersin outlines HR moving from basic “talent management” — automation and integration of core HR business processes with minimal employee engagement — to “people management” for engaging and empowering employees through fit, culture, and analytics. It’s a shift from basic process efficiency to tech-enabled productivity improvement, transforming HR as a cost center to a hub of actionable talent intelligence.

Add to this a new generational workforce seeking that kind of engagement, and exciting use cases emerge:

· HR management: Companies are seeking to transform typically painful standard processes (e.g., reimbursements, employee updates), and in response startups are creating tools focused not only on easing HR admins’ use but also delivering “delightful” employee experiences. It might seem a boring category, but it’s one of the hottest spaces for good reason: it’s a $6.8 billion market growing 6% annually with nearly half the market consolidated in ADP, SAP, and Workday.[2] If that doesn’t scream disruption to you, I’m not sure what does.

· Performance management: While nearly 90% of enterprises use performance reviews, nearly 60% of HR leaders are unhappy with their review process and believe they don’t drive results.[3] There’s a shift away from drawn-out, quarterly processes towards frequent touchpoints emphasizing feedback (led by behemoths like Deloitte). Startups are enabling the transition through new platforms facilitating manager-employee dialogue. Companies are receptive; even Wall Street giants like JP Morgan and Goldman Sachs have changed their review processes.

· Optimized recruiting: The thing about an increasingly fluid workforce that job-hops more frequently is that it’s expensive for enterprises to find, onboard, and retain high-performing employees — by one estimate, it costs as much as 213% of annual compensation. There’s also the fact that tech talent is increasingly in demand but supply isn’t keeping up, so companies spend significant effort finding that next great developer. New companies seek to ease these pains by optimizing the talent pipeline through smarter discovery and recruit management, all the way through to accelerating and easing onboarding and engagement.

· Talent mobility: The flip-side of a more fluid workforce is that companies can more easily contract “on-demand” work. Multiple startups are helping customers quickly and easily contract talent through “flexible hiring” solutions like job boards or staffing and scheduling tools.

· Employee engagement: Companies want to better engage employees and improve productivity by building the right culture, surveying teams, and providing more recognition. Culture is increasingly discussed as a factor for company success (a Deloitte survey found it’s the #1 priority for HR leaders), and one can see the need for this type of awareness in Uber’s recent HR troubles.

Better enabling tech

Changing customer needs aren’t the only variable driving growth in the HR space, though; better enabling tech is making more HR solutions possible for a growing number of customers.

HR everywhere

Cloud and mobile have had a deep and disruptive impact on the design of best-fit solutions for the modern workforce. The case for cloud solutions is clear — central storage eases that burden on an enterprise, reduces cost, and facilitates scalability, analytics, etc. The high rate of HR SaaS adoption is proof, but challenges remain around integration with in-house and legacy systems.

In the same way, companies are now focused on deploying mobile solutions to ease cumbersome HR processes like expense reimbursement or employee information updates, and streamline other processes like performance reviews and recruiting interview prep. A survey of HR and IT leaders by the Society for Human Resources Management found adoption of mobile HR tech grew 21% in 2016 and is projected to grow another 17% in 2017, with half of respondents reporting they’ll adopt mobile processes next year.

The potential for mobile solutions is huge — imagine reimbursement with a simple iPhone photo of a receipt, or enrolling in a health plan with a few Android taps. However, according to Gartner, buyers of such mobile tech should be quite discerning around engaging user experiences and integration with existing mobile tools, suggesting there’s room for improvement in the space.[4]

In any case, both the continuing move to cloud and further mobile integration will help drive down cost for HR management and make even sophisticated solutions more accessible for a broader customer base.

Smarter tech, smarter humans

HR’s move to the cloud and mobile means there’ll be more and better data generated around today’s workforce. Tech can analyze this to arrive at actionable insights around human capital decisions like performance drivers, recruiting, and team dynamics. Even “soft” factors like culture can start to be boiled down into concrete text analyses and network studies. That said, numerous challenges to these sophisticated tools exist, including a lack of analytical skills in the HR office, poor data quality, and potential employee pushback.

One can expect, then, that successful tech solutions will design around these concerns and include an analytical layer to facilitate an HR admin’s decision-making. From a competitive standpoint, this can only help companies build deeper moats with their proprietary datasets, and will likely make cross-platform integration that more critical and potentially difficult.

The next frontier

If the prospect of tech companies knowing more about you turns you off.. skip this part. Multiple startups are working on integrating sociometrics — that is, data from IoT devices like accelerometers and wearables — to gather even more performance information. It’s not far off: Bank of America trialed this in 2008 when it used badges to track call-center employee behavior.

Clearly there’s privacy concerns and a certain ickiness factor. [5] (Phrases like “Moneyball for business” and “digital Taylorism” don’t help.) That said, incorporating this into a workforce could be truly revolutionary, and industry is already taking note: Microsoft purchased leading sociometrics company Volometrix in 2015, and BCG is partnering with Humanyze to bring sociometrics to their consultancy.

Industry forces

Changing customer needs and better tech don’t alone make a market opportunity. Thankfully there’s several HR tech industry factors creating opportunities new companies to seize on these market openings.

Cyclical innovations

The last two decades illustrate HR as one of the more dynamic spaces in tech. Multiple waves of innovation have been driven by tech and management shifts like those above: the spread of talent management consolidated players like PeopleSoft, the move to cloud accelerated companies like Workday and SuccessFactors, and today’s transition to SaaS and people management is lifting many startups.

Through each wave, startups seem to either get gobbled up into integrated suites (the Oracles and SAPs of the world) or carve out defensible specializations — Cornerstone in recruiting and learning, Saba for learning and performance, etc. (For more on this, check out Bersin’s awesome HR tech history.)

Early stage activity heating up

Today’s no different. CBInsights regularly reports on a large set of HR tech startups. (I’m also building a database of HR startups; I’ve already crossed the 200-company mark and have lots to uncover.)

VC money is chasing quickly. Deal activity in the space reached a record $2 billion across 350 deals in 2016, with a large chunk of that from smart money like 500 Startups, NEA, and a16z. You can’t blame them: there’s a strong stream of exits recently, with shy of 40 in 2013 and reaching 57 (including 4 IPOs) in 2016.

Superhuman outlook?

In sum, HR tech seems like a ripe industry for an ambitious entrepreneur: a large, growing market with changing customer desires, better enabling tech, and a favorable industry and funding climate. (How to win is a different matter: it’s a difficult environment (try and uproot legacy systems) but one that startups seem to be thriving in, with strong product and design focus and excellent branding, sales, and marketing.)

I’ll keep digging into this stuff, and hope to develop a market map like my next-gen telecom landscape to understand gaps in the market and who might come out on top. ’Til next time.

[1] To clarify a potential rebuttal: one might assume this shift in management practice is driven by the changing nature of work in the developed world: managing an assembly line is a fundamentally different management task than forming and managing teams to develop software solutions in fast-paced and ambiguous environments. Yet still, we see similar new management practices focused on employee empowerment at legacy industry companies like Southwest Airlines and Toyota Motors.

[2] IBISWorld. Gavan Blau. “Getting paid: The industry will benefit from investment in software and adoption of SaaS.” February 2016.

[3] Gartner. Yvette Cameron, Helen Poitevin. “Rethinking Employee Performance Management in the Digital Workplace.” 25 August 2016.

[4] Gartner. Sam Grinter. “Hype Cycle for Human Capital Management Software: Mobile HCM.” 21 July 2016.

[5] This is certainly a thing. Forrester has a report dedicated to the topic, “Be Cool, Not Creepy” and already has a “Digital Creepiness Online Survey.” It’s a real issue companies in the area face.