Why HR Technology is a Good, but Not Great Category

HR Technology is a noble software category that almost everyone can rally around its mission: To improve the efficiency and effectiveness of organizations.  Whether it is talent acquisition, performance management, learning or compensation & benefits, no one can dispute that technology to enable HR organizations can have real impact on people’s lives.   In general, as an employee of one of the HR Tech vendor you can feel good about the problems your firm is solving for your clients because you can related to the product or service you are selling.

The HR Tech industry is booming which can easily be seen by the number of startup companies being created every month, the growth of the HR Tech industry conferences  and the record amount of funding invested in the HR Tech category.   Because just about everyone has encountered some type of HR problem that needs to be solved during their career combined with the incredibly low costs of starting a SAAS business these days, everyone and their brother have started an HR Tech company in recent years to solve some piece of the HR puzzle. Many folks have dedicated themesleves to the HR Tech industry and there are certainly many opportunities to have a long career as an employee, industry expert/analyst or vendor.

However, after spending almost four years in the space, I have peeled the onion and found that it really isn’t such a great industry when it comes to profits. If you want to get disproportionate returns on your investment of time or money as an investor, founder or employee this probably isn’t the first category you would pick.

While there are clearly various pros and cons of the industry and everyone must decide what is right for their personal situation, at a macro level here are….

The Top Three Reasons Why HR Tech Is Not a Great Category:

  1. Unusually High Sales Friction: Hard to prove ROI in order to get budget approval

By definition, the HR function is not directly tied to revenue like sales, marketing or product; it is an enabling function.  While there are some roles (for example, professional services organizations) there is a clear connection to revenue to filling sales-related roles, in the significant majority of situations it has hard to show how much more money you will make for any direct HR investment. The vast majority of HR tech investments are justified based on compliance or real cost reductions (e.g. applicant tracking systems or payroll). These types of investments are considered either ‘cost-of-doing-business’ budgets or somewhat easily quantifiable via a reduction in an existing budget.   However, tools which improve productivity or quality are much harder to get approval without significant, measurable benefit data to prove the business case for a sizeable budget. This takes time, effort and commitment from a champion within the organization. Since HR budgets don’t tend to grow disproportionately to a company’s growth, most of the time getting a large budget approval for a new system is dependent on a significant change to another part of the HR budget (e.g. no longer investing in another system).   At the end of the day, the sales friction for these types of quality or productivity solutions makes it harder for HR tech companies to grow quickly.  During my years in HR Tech, this is consistently the most common frustration my fellow founders have echoed: not being able to close new customers at a faster rate due to the challenge of getting a piece of the HR IT budget.

  1. Highly competitive unless you have a moat

If you look at the most profitable companies in the Fortune 500 they have incredible scale (e.g. banks, ExxonMobile), low marginal costs (e.g. biotech)  and/or are fortunate to be in a category with ‘winner take most of the profits’ economics (e.g. Apple and Google).  In addition, having network effects helps create a moat which inhibits others from re-creating the scale that the winners have secured.  With the odd exception (e.g. Oracle, LinkedIn) there not many companies in the HR Tech category that have been able to build a moat and achieve disproportionate profits.  While there are certainly some excellent companies who have achieved scale (e.g. ADP, Workday), their margins are good but not great.  Almost all companies in HR Tech have (or will have) competitors that provide buyers multiple options.  So while there may be ‘lock-in’ to a solution for a large enterprise software platform for a few years, the acquisition costs, competitive pricing and cost-to-serve limit margins and growth potential.  Network effects are pretty rare in HR tech (LinkedIn being a notable exception).  The majority of IT budgets for the HR department are spent on enterprise software solutions and they usually involve traditional sales teams with big price tags and complex implementations – not viral adoption.

  1. Profitable but not liquid: Limited exit options

In the past 10 years, I am only aware of a handful of billion dollar exits in the HR Tech space.  LinkedIn, Workday, SuccessFactors, Taleo and Kenexa-BrassRing. The limited true M&A in the space makes it challenging for traditional, big name venture capital firms to be interested in the space.  If you look at most major HR tech funding announcements they do not typically include well known VCs. While there are some exceptions here and there, what I have been told the challenge in picking early winners (since HR has so many problems companies are always willing to pilot something new) combined with the lack of exit opportunity drives venture partners to prefer investing in other categories.

At least a couple of times of month I get an unsolicited email from some boutique firm offering special services to help HR Tech founders either raise non-traditional venture capital or assist with some type of creative exit opportunity for later stage companies (e.g. at least positive EBITDA or >$10M in revenue).  From someone who is pretty knowledgeable with the traditional Silicon Valley startup path where you continually raise more VC funding until you either get acquired or if you are early lucky, IPO. However, what I have learned the last couple of years, it that there are literally hundreds of HR tech companies who have achieved a reasonable level of success and likely profitability, but they are tweeners who are not big enough or growing fast enough to IPO or be an acquisition target but at the same time, they have real businesses that generate positive cash flow.  This creates a conundrum for the investors and any founder/long-standing employee holding a good chunk of equity about how to liquidate their shares. While dividends are certainly one option, that is usually not the preferred choice.  Imagine putting in many years to build a reasonably sized going concern generating millions in revenue, but not having a clear exit path.  This lack of liquidity options is something that many folks who are vested in HR Tech need to consider when committing to the category.

Conclusion

There are many factors I truly love about the HR technology industry.  It starts with smart, passionate, caring folks who are committed to makes things a little better every day for the working folk.  But, depending on your role, you should know exactly what you are signing up for if you are committing to a career in HR Tech.  It may not be as financially rewarding as you might expect.  If you are looking to hit the jackpot in HR Tech as a founder, investor or early employee, you might want to explore other options or categories before this one.

Startup Challenges – Deep Experiential Training

It took me a while to write this post because I wanted to cram so many thoughts and ideas into it and could not find a good framework for it all to make sense. Finally I settled on two organizing thoughts:

  • What kinds of skills and experience should you want to get at a company?
  • How should you develop these skills?

These two questions are related to my recent posts about startup challenges.  At a large company these two questions are much easier to answer since they tend to have somewhat-defined career paths. But if you are just starting your career and joining a startup there is no handbook that you get when you start out with a track for you to follow. The following is intended for people who have a goal to reach a high-level role in their career, whether it is a VP or CXO role, or for someone who strives to achieve a high level of responsibility and manage large teams.

What kinds of skills and experience should you want to get at a company?

As I look back on my career, I think about the various sets of skills I developed and I have bundled them into three groups:

1. What’s Important Skills

This is basically a re-adaptation of the ‘What Counts Factors’ framework I learned at Procter & Gamble.  It was basically a set of 7 or 8 skills that all employees are looked upon to demonstrate and perform at a continually improving level throughout their career.  As you can see these are fundamental abilities that can be applied to just about any role and is not functional specific:

  • Leadership
  • Problem Solving
  • Creativity
  • Team Work
  • Communication
  • Priority Setting
  • Initiative
  • (Technical Skills)

Many large companies have centers of excellence with specific training courses and leaders to help you continually improve on each of these skills.

 

 2. Functional Skills

This refers to developing a deep, core set of technical skills required to be successful in a role. If you are a computer programmer or a marketer, there is a huge breadth and depth of knowledge and experience required to master a particular function.  When you meet someone who has mastered a function, you know it right away by their ability to go into depth about just about any topic related to that function.  Not only does becoming a functional expert include understanding the foundational and traditional attributes of a function, but it also includes being familiar with the latest methods and innovative tools that are currently being adopted and have become new standards.  Example in marketing would be social media and online marketing tools. In computer programming it would be open source toolkits and mobile app development. Becoming a functional expert is critical to achieving a high level with a large amount responsibility within an organization.

Similar to going to school, many large organizations have various training opportunities to develop a breadth of knowledge and experience in a function.

3.       Performance Management & Career Development

Having solid performance management experience means both receiving great feedback from your manager and includes having your work evaluated against a tangible process and framework.  On top of being on the receiving end of this process, you should also be given an opportunity to manage others and giving performance-related feedback relatively early in your career.  While having direct reports is more ideal sooner than later, managing the performance of others does not necessarily mean having people reporting up to you, it could also include cross-functional teammates with whom you are their ‘customer’.

Learning how to develop your own performance and skill and then developing a career plan help with self-awareness and career satisfaction.  Helping others improve their results and manager their career path are critical skills to have as both a leader and a manager. This also includes discussion about future roles and levels of responsibility employees are seeking and other developmental opportunities needed to achieve both company and individual success. It is amazing how few organizations have processes and training on such a foundational set of skills.

 

How should you develop these skills?

The challenge in going to work at a startup early in your career is that there is a very good probability that you will not get good exposure to the three groups of skills and experiences above.  The focus and first priority for a startup is not to develop great talent, it is to grow and scale the company.  Now this doesn’t mean employees aren’t important nor that you can’t grow and develop within a startup, I am just saying that creating these training and development programs is usually not a priority early on in a young company’s life. If you are a computer programmer and never learned some best practices in coding it is very likely you are creating engineering debt for your organization that will need to be addressed at a later date. Learning the proper way to be a functional expert early in your career will be catalyst to your success.

So here are some thoughts on how to acquire these critical skills and experiences early in your startup career.

1.       Find great managers and mentors to work with

It doesn’t matter what size organization you work for, if you have a great manager who has deep knowledge and expertise you will learn a lot and improve your own skills. The key is to find several such leaders within the same organization that you can learn from.  No single manager will have demonstrate all the attributes you will want to acquire, so you need to plan on finding other sources to help supplement both within your current role and as you plan your next career move.

 

2.       Read a lot… learn your discipline

Don’t just learn how to do your job. Depending on your educational background you may or may not have had formal, academic training in your area of work. If you haven’t it is becoming of you to find the top books, articles, online tools and thought leaders in your field to learn the breadth and depth of your function.

 

3.       Take on different roles  

If you work in online marketing don’t just do a role which is about data analytics, also take on roles related to uncovering customer insights by talking to customers, or working on new distribution channels.  These days I see many young people who have become experts in a single aspect of their function but have tremendous difficulty extending themselves to other areas within their function. This myopic skill set really limits their career potential and their role flexibility.

If you are in Brand Management at a large CPG companies, the experience is a bit of an apprenticeship. Over the course of 3-5 years an employee in brand management will typically work on several brands in different categories with different managers, functional experts and outside agencies.  For example some brands are more advertising focused versus trade/retailer focused vs. R&D focused. This upward spiral of roles exposes brand managers to a variety of experiences to round them out as they develop into a true brand manager.

Not all startups give you the opportunity to change roles after a period of one to two years based on organizational size and needs. You might be the only person who knows how to do your job and the company may not want to move you. These are important factors to consider when working at a startup and whether or not the company is a good fit for your career.

This posting was based on my experience working with many startup employees who have not demonstrated the same level of well-rounded skill sets as others who started their careers working for larger companies.  I am not saying that you cannot develop these skills working at a startup, however, the effort (and sometimes luck) required to gain those talents and be successful using them is non-trivial and requires a thoughtful career path strategy.