Recently there was a front page article in the San Jose Mercury News about how 10 years ago Netscape Communications went public, changing the face of business forever. And although the “Independent Netscape” is gone, innovative technologies today are “reshaping the Internet” – Google maps, desktop applications like iTunes, mini-applications called widgets, blogging tools like Blogger (which is of course what we use to post our blog), and a myriad of other on-demand web-based services.
The dot-com bust a few years ago created a black hole in cyberspace, and many industry experts predicted the Web would become extinct. It did not. And many friends and business associates of ours closed their eyes and shook there heads in sorrow when we launched HRmarketer.com in July 2002 – now we have over 300 HR service providers using our service!
On-demand HR applications are in demand today and will continue to grow (see last week’s posting entitled ASP, Online, Hosted, Web-Based, On-Demand HR “Supercalifragilisticexpialidocious” Applications), and as we said last week, the marketplace has accepted ASP, online, hosted, web-based, on-demand [fill in name here] applications. Few HR vendors have to sell the concept or value of these applications anymore so they can now focus on selling their solution which is a lot easier than changing buyer's attitudes about converting to such services.
But widespread adoption of these on-demand applications means that providers of such services have to find other ways to differentiate their products and gain competitive advantages. Michael Porter wrote in a March 2001 Harvard Business Review article, “Strategy and the Internet,” that "once a company establishes a new best practice, rivals tend to copy it quickly [and] the nature of Internet applications makes it even more difficult to sustain operational advantages."
As the market acceptance for on-demand HR and HR-related software grows, a couple of interesting things happen. First, if you do not already offer your services online, and your competitors do, your business model may be in trouble. An example of this in the CRM marketplace is ACT. They still do not sell a true on-demand application to compete with Salesforce.com and other similar on-demand CRM applications and this will cause them problems sooner than later.
Second, if you already offer an on-demand solution (which almost all HR software providers do), you cannot expect to maintain any significant ongoing operational advantage relative to your competitors who also offer such applications. As a result, you will see prices continue to drop as the cost of developing and servicing these applications continues to drop – partly fueled by outsourcing (see related blog posting entitled HR Products and Services: Sold in USA. Built, Serviced and Supported Elsewhere?).
So all things being equal, how does an HR on-demand software provider maintain a competitive advantage?
To answer this question, let’s define the "economic value" of a company's product. At its core this is the difference between price and cost. Ultimately, the creation of economic value is the final determinant of business success and most experts would agree that there are only two ways a company can increase its economic value – operating at a lower cost and commanding a higher price for services, relative to the competition.
1. Operating at a Lower Cost (relative to the competition): Referring back to Mr. Porter's comments above, "the nature of Internet applications makes it even more difficult to sustain operational advantages.” As access to the latest technology becomes less expensive and more widespread, on-demand providers will find competition increasing and prices decreasing. This is already happening in product categories within recruitment and staffing and employee benefit administration.
2. Commanding a Higher Price for Services: As operational advantages subside, suppliers of on-demand HR solutions will only increase their economic value by charging (and getting) a higher price for their services. A related strategy, but not necesarilly a long-term solution, is to generate more revenue through upselling more services to individual customers (share-of-customer) or penetrating new markets. But ultimately your best strategy may be to charge and get a premium by being different from the competition. In other words, offering a truly unique solution (having superior product) and/or all things being equal, have outstanding customer service.
Adopting this strategy also demands an effective marketing department that can (a) generate qualified leads and aquire customers at less of a cost than the competition and (b) clearly articulate and communicate the company's value proposition. These related tasks are critical for success and what's alarming is how few HR suppliers are good at it.
Unless, of course, they’re HRmarketer.com members!