The Evolution of HR Systems: Update from HR Technology Conference 2010

We just returned from the 2010 HR Technology Conference in Chicago, where we met with 30+ solution providers and more than 60 different corporate buyers and implementers of HR technology and solutions.   We also introduced a preview peek of our 2010-2011 Talent Management Systems Customer Satisfaction research, which is now available to research members.

I walked away with two big findings about this important market.

“Integrated Talent Management” is officially the new product category.

The days of “standalone” talent management systems is coming to an end.  With the recent consolidations of Taleo-Learn.com, SumTotal-Softscape, Stepstone-MrTeds, ADP-Workscape, Kenexa-Salary.com it is now clear that “integrated talent management” has become the new product category.   Here is some data to back this up:

• Our soon to be published customer satisfaction research shows that around 35% of all buyers are now willing to sacrifice features for the benefits of purchasing an integrated, single-vendor solution.  This is double the percentage of last year.  So many of you, the buyers, are now willing to forgo fancy features for a single vendor, integrated solution.
• When asked how they plan to integrate their systems, 75% of buyers told us they want an integrated solution.  This percentage is triple that of last year.
• Finally, when asked if buyers would select their ERP vendor, only 15% said yes.   The ERP solution providers today have not yet brought together the integrated talent management software needed to meet buyer needs.

Now the unfortunate news.  Very few “end to end” talent management products are fully completed yet.  With the exception of Softscape (which was built to work together), most of the product sets in the market come from multiple acquisitions, so each vendor is going through a range of product roadmaps to build an end-to-end solution.  I spoke at length with a large defense contractor in Chicago who uses SumTotal for LMS, SuccessFactors for performance management, and Taleo for recruiting – and he is having quite a challenge integrating data and workflows between these systems. He could chose Taleo or SumTotal as an end-to-end provider, but would probably lose a lot of LMS functionality. He could select Softscape, but this technology would be brand new. So the decision of “which vendor” has the right end-to-end solution is still very difficult.

One would expect, given these trends, that the HRMS providers would be coming on strong.  Our research shows that something very different is happening:  Oracle’s product strategy has taken many years to evolve and still leaves customers with millions of dollars of upgrades to contend with.  SAP’s HR solution is quite elegant and well engineered, but unapproachable for all but the biggest SAP customer.  So the market for “integrated talent management” software continues to be open to the existing players (whom are being consolidated more and more each day.)

As the market shifts in this direction, companies are now differentiating themselves with the newer areas of talent management:  analytics, workforce planning (a new beachhead), onboarding, and social networking.  Both Saba and SuccessFactors have invested heavily on collaboration tools within their system and I think these features are likely to become very important differentiators in the coming quarters.

Companies that are now very well positioned in this space include Taleo, SuccessFactors, Cornerstone, Halogen, Kenexa, Sumtotal, Saba, Plateau, Stepstone, ADP, Ultimate, Lawson, and Silkroad.   Every one of these companies has an end-to-end solution that covers enough of the bases to become one of a company’s “end-to-end” talent management providers.  I won’t comment on all the wonderful things each of these companies is doing – but suffice it to say that each one is innovating in product, channel, and marketing in quite exciting ways.

Now my second “big walkaway” from the conference this year.

The Next Generation HRMS Market is Emerging

For the last year we have been using the words “People Management” to convey the fact that these new HR systems are now doing much more than “talent management.”  Some of the fast-growing new beachhead applications for HR software now include integrated workforce planning, onboarding and transition management, employee self-service portals, social learning, collaboration, integrated career portals, employment branding, candidate application management, integrated sourcing, and more to come.

So when you look at what a typical “Director of Talent Management” is responsible for, these software platforms go far beyond their scope of responsibility.  This means that the original vision of a “talent management” system that focuses on performance management, succession, and compensation, is now giving way to a real end-to-end people management system.

Ultimately this is what organizations do want and need is a complete HR platform strategy that integrates all these various applications, stores data in one easy-to-find place, and enables employee access, HR administrative access, payroll and benefits administration, compliance management, and security.  And it would be very nice if this platform was delivered in a SaaS model that doesn’t require million dollar upgrades every few years.  Does this sound an awful lot like a next-generation HRMS?

Which is really my point.  The “next-generation” HRMS market is now starting to emerge.  SuccessFactors (Employee Central), Ultimate Software, Silkroad, Lawson, and Workday (as well as Oracle and SAP and ADP) are now fully committed to delivering talent management from the bottom up.  These companies are now coming to market with a strategy which says “start with your core employee system of record and implement a next-generation, highly flexible underlying platform, from which you can deploy lots of interesting and integrated talent management applications.”

We just completed a major industry research report on this market, and the findings clearly show that many next-generation capabilities (highly flexible workflow rules, extensible organization models, integration with financials, etc.) are now available.   So as the integrated talent management market comes to maturity, we are seeing a significant growth in the market for replacement HRMS systems as well.

There are three real ways companies upgrade or replace their HRMS.

1. They do a “forklift” replacement.  This is the Workday approach:  take all your existing HRMS systems (and most companies have many) and slowly but surely put in place a process to move all the data, transactions, and related applications over to a new platform.  This is an expensive and time consuming process, but ultimately it is like replacing the foundation of your house.  You might not like doing it, but after you’re done the house is much more stable and easy to build upon.
2. They build a mid-level software layer to slowly replace the HRMS.  In this model (the strategy which SuccessFactors is using with Employee Central), a company leaves their HRMS in place (these are “legacy systems – they work well now) and adds a new product in the middle which collects data from the HRMS and creates a new transactional system of record.  The benefit of this model is that the old HRMS systems (which are often government verified and run hundreds of legacy reports) can be maintained and slowly replaced, while the company builds a new, dynamic system of record for employee-facing HR applications.  The employee directory, compensation system, etc. are all maintained in this new system, and the company slowly moves data elements out of the HRMS to the new system of record.
3. They build a middle-ware solution that co-exists with the HRMS.  And the third strategy is that this mid-level HRMS system coexists with the legacy HRMS’s for a long time.  This model enables companies that have major investments in their HRMS to keep them, but simply avoid the whole problem of upgrading every few years and moves the new transacational applications to a new layer of software.

In many ways, option 3 leads to option 2 which eventually leads to option 1.  Since so many companies are tired of spending millions of dollars on the upgrade of their licensed HRMS software, each of these new vendor solutions looks attractive.  Ultimately our research shows that the total cost savings of a new HRMS still takes 5-7 years or more to pay off (depending on how much investment is made in the legacy system), but the market is clearly shifting in this direction.

There are two factors causing this shift.  First, the market for integrated talent management software has now taught all HR departments that data integration is far more valuable than we might have believed.  The new applications now available in talent management (workforce planning, dynamic decision-making during restructuring, HIPO and high performer analysis, end-to-end succession and talent mobility planning, expertise directories, etc.) are very powerful – and they reinforce the fact that ultimately HR systems are not here to automate transactions, but rather to give us insights and intelligence about people.

Second, there is a tremendous amount of innovation now flowing into the HRMS market.  Partly fueled by Oracle and SAP’s slow adoption of SaaS, a lot of venture capital and smart minds are now “reinventing” the HRMS market in the SaaS model.  Workday is one of the most visible of these companies, but in some sense they are also the most predictable – they are going after the original Peoplesoft market – big, complex, HR departments.  The bigger markets are among mid-sized companies, fast-growing companies, and newer organizations who are very willing to start over and implement a better solution.  These include the tens of thousands of businesses in professional services, healthcare, manufacturing, and other industries that never really bought off on the Oracle, Peoplesoft, or SAP end-to-end HR story in the first place.  One important player in this market is ADP, who is in the middle of introducing a very exciting new integrated talent management solution which will sell very well among mid-sized enterprises.

Remember also that even though the Talent Management software market seems big (approaching $3 Billion and growing), the HRMS market is almost 5X larger, so there is a lot of money spent on operational HR systems which can be diverted to new technology.

Bottom line:  industry consolidation, continuous innovation, and SaaS together are continuing to change the market for core HR and talent systems.  Come listen to our webinar “The Battle for your Mind and your Wallet” on the topic and learn more.