Opinion leaders in the HR services space, particularly the workforce management arena, have all been saying the same thing – consolidation, consolidation, consolidation. Not a week goes by when you don't hear a journalist, CEO (of an acquiring company), or an industry analyst talking about the trend of consolidation in the HR marketplace, or give grave predictions of the vast numbers of HR service providers that will cease to exist (at least independently) in the next few years.
While there has certainly been more consolidation in the space during the last year (e.g., Oracle buying Peoplesoft, Workstream buying too many companies to list here, and many other mergers and acquisitions), most of these deals are in-space acquisitions (similar product categories like workforce management). In the broader HR space, we are actually seeing an increase in the number of HR vendors which we attribute to (1) the low cost of capital, (2) easier access to technology (a.k.a. decreased entry barriers), and (3) growing need for quality HR services and recognition of HR as a strategic component of the business.
HR is actually cool now (and a vital part of the business). There was no “seat at the management table” 20 years ago.
Not only is HR becoming a more strategic component, it’s more diversified than it has ever been. Today the HR industry includes a variety of pillars, each of which includes dozens of sub-pillars and hundreds and sometimes thousands of service providers. All told, there may be in excess of 50,000 HR service providers at any given time and this number is increasing from year-to-year. Some of the major pillars include recruitment and staffing, compensation and payroll, employee benefits, talent and workforce management, rewards and recognition, employee relations, training and development, legal and compliance, consulting, HRIS / ERP solutions and BPO / HRO outsourcing.
The enormity of the space can be appreciated by the fact that you can work in one pillar your entire career and never hear of or know the major vendor names in another pillar (which we experienced recently when talking with a major player in the benefits space who had never heard of a major player in the recruitment space – oh my!).
Most of the consolidation we’ve seen over the last year involves a few service providers in only a few pillars who are taking advantage of some attractive bargains in their quest for creating the holy grail of HR “end-to-end” solutions. But the fact is other pillars are growing, and the entire industry is seeing a steady stream of new entrants for the reasons described above.
One analyst recently pointed out that within the ERP pillar, enterprise sales have been slow in the software market in recent years but sales to small and mid-sized companies are growing rapidly. We agree and see this as an opportunity for many of the smaller and niche HR technology providers. For one thing, only a small percentage of employers will ever get to a point where they will select one or two major HR service providers for a total end-to-end HR solution. Of course when these deals happen, it makes headlines, the investment community talks it up (to push up the value of their holdings), and industry opinion leaders start predicting all companies will follow suit (hence the recent talk about major consolidation in the workforce management space).
We’re not saying smaller HR service providers should become complacent because of a few noisemakers – no business should ever do that or poof, you’re gone! But today's marketplace offers an abundance of growth opportunities for the smaller, niche providers, and that now is the time to acquire as much market share as possible.
Take the recently completed Oracle / Peoplesoft deal. We believe this will actually open up more opportunities for smaller HRIS companies. Why? Oracle will struggle to integrate Peoplesoft (it’s an enormous challenge they’ve undertaken and will take years to fully integrate the two companies – HP and Compaq is but one example) and you can bet there will be some new opportunities for the smaller HR software vendors to gain market share while Oracle struggles to absorb PeopleSoft.
So have no fear and focus on your core business because 2005 may be a great year for many of you in the HR space!