The Human Capital Management Market—Hot, but also Overpopulated?

Tactical and administrative human resources (HR) management is morphing into strategic human capital management (HCR). In the US, we live in a litigation-happy society that makes any company more likely to be sued by an employee than to be audited by the Internal Revenue Service (IRS). US regulatory requirements and corporate governance issues thus certainly vouch for the modestly increased demand for transactional HR systems that provide tools to produce (for instance) W-2 and 1099-R forms, the maintenance of data in compliance with immigration laws, and Americans with Disabilities Act (ADA) disability information. Also, there will be an ongoing need for support for the Health Insurance Portability and Accountability Act (HIPAA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), the Occupational Health & Safety Administration (OSHA), and Sarbanes-Oxley Act (SOX) compliance. Another key driver, especially in large companies, is the need to consolidate multiple HR transactional systems for efficiency and global workforce visibility.

Part Four of the series Thou Shalt Manage Human Capital Better.

Still, enterprises will likely invest less in integrated complex suites, as a result of their customarily high upfront cost, lengthy implementation, and hard-to-achieve return on investment (ROI). Instead, many are now looking at hosted service models where companies pay per-employee-per-month fees, bear no responsibility for hardware and software upgrades, and have complete control over their own talent management processes. Additionally, they might want to invest in point solutions that target line of business (LOB) users, and that provide proven, short-term payback in the form of direct cost reduction, process improvement, and increased user satisfaction.

Certainly, the latest technology advancements have also been a catalyst for a transformation in the way HR services are delivered to and adopted by employees and managers, allowing HR administrators to trade the largely transactional and administrative work they have been burdened with in the past, for more time to work on critical business-facing initiatives. To that end, a raft of best-of-breed solutions have automated HR workflows, reduced costs, and improved data quality.

Many software tools and applications have recently been designed to align and heighten employee and corporate performance, making the emerging human capital management (HCM) software category (sometimes also called workforce productivity or workforce optimization) especially fertile and crowded. Vendors abound, from as many directions as there are HCM subcategories. Many more vendors try to cover most of the bases with broader product suites that address "employee life cycle management" in its entirety. However, while there have been noticeable consolidation moves, which vendors will dominate the space in the long run cannot be exactly stated at this time.

Even long before being acquired by Oracle, former HCM leader PeopleSoft had methodically rounded out its HCM capabilities and reached critical mass with most of its capabilities, which has prompted many point solution providers to merge and marshal a broader HCM offering. But then, immediately after the PeopleSoft acquisition and the inevitable uncertainty about the product's direction under Oracle, the market has seen prosperity and higher profiles of several niche HR- and HCM-related special applications providers, although Oracle (including its original and PeopleSoft and JD Edwards HR products) remains an undisputed leader in all HCM software categories except for time and attendance (T&A), where Kronos rules.

One should again note that T&A is a segment of broader strategic workforce/talent/human capital management suites, that in most definitions includes at its core the HR, payroll, and benefits modules, which have lately been bolstered with self-service for employees and managers, and similar intuitive applications like a centralized workforce portal that conducts on-boarding and other pertinent functions. Additional applications might include recruitment and staffing, performance and compensation management, appraisals and assessments, learning management, succession planning and career paths, workforce scheduling, and (sometimes) pension administration.

For background information, see Thou Shalt Manage Human Capital Better, Tactical Human Resources Evolves into Strategic Human Capital Management, and Performance and Compensation Management at the Core of Human Capital Management?.

The HCM Providers' Medley

Thus, one can define three families of HCM solutions providers:

1. traditional ERP vendors like SAP, Oracle, Lawson, Microsoft Dynamics, Agresso, Sage, Deltek, etc.;
   
   
2. former best-of-breed niche human resource management systems (HRMS) vendors that are evolving into best-of-breed HCM suite providers, such as Hewitt Associates (including its recent acquisition Cyborg), Ultimate Software, Employease (recently acquired by its long-term partner, ADP), Extensity (formerly Geac HR, now part of Infor), Kronos, Meta4, Taleo, BrasRing, Czanne Software, Genesys, Workstream, and including traditional payroll or HR service providers like ADP and Ceridian, which have also encroached on the realm of HCM lately; and
   
   
3. the plethora of niche HCM providers (most of which have been mentioned earlier) in areas like performance and compensation or incentive management, e-learning, employee development, competency modeling, succession planning, workforce scheduling and optimization, and so on.

What may work in favor of the best-of-breed applications is their complementary nature to an installed enterprise resource planning (ERP) system, and increasing ease in integrating these and orchestrating processes via service-oriented architecture (SOA) and Web services developments (see Understanding SOA, Web Services, BPM, BPEL, and More).

Some industry data and first-hand observations indicate that many enterprises which have deployed an HRMS system from one of the leading ERP providers might gain better results and increasingly deeper functionality by working with a best-of-breed provider, such as those for core workforce management functions like compensation planning or employee performance management. This is largely because many best-of-breed HCM vendors excel at delivering tools that are configurable to support a customer's existing business process, and that are highly intuitive and easy to use, ensuring high rates of adoption by the most important user communities: employees and managers. Additionally, the proliferation of merger and acquisition activity in the HR vendor community is helping best-of-breed suite providers gain additional functionality fairly quickly, a trend that makes them even more formidable competitors to the large enterprise vendors.

Yet although pure-play vendors can sometimes provide more robust functionality, where they typically lack is in the integration with core HR employee data and back-office financial applications. ERP vendors tout the inherent strength of their comprehensive integration across the organization. For example, if a customer runs Oracle Financials and then implements the Oracle HRMS and Oracle CRM (customer relationship management) applications, it should get the added benefits of seamless integration and lower maintenance costs, and less downtime any time the company upgrades the software or installs dot-release enhancements. But if the customer chooses the cobbled approach and runs Oracle Financials along with Taleo, SumTotal, Callidus, ADP, Authoria, etc, one can imagine the inefficiencies, downtime, and strain on the information technology (IT) department created by the need to continuously make sure that all versions of the diverse niche software applications are integrated with the back-office financials applications.

While ERP vendors will continue to move toward one-stop shopping, thereby adding a wide variety of applications to their suites, best-of-breed HCM providers will gain strength through consolidation and by focusing on meeting specialized client needs in certain industries. For that reason, the likes of Authoria, Workscape, and Kenexa have lately promoted themselves into broader HCM suite providers from mere niche players.

The overall HR and HCM category is also experiencing a continuation of a shift to a subscription model, which is already well established in some segments, and often suitable for companies with variability in demand (see Software as a Service Is Gaining Ground. Some providers, like Ultimate Software, have lately reinvented their license businesses, and achieved stellar financial performance owing to the subscription-based model.

User Recommendations

Enterprises are advised to embrace HCM as a holistic business strategy that should make every employee a competitive asset for delivering better operating and financial results. While the traditional HR key performance indicators (KPIs) such as rates of sickness and absenteeism, staff turnover, the number of training days per employee, and even employee attitude surveys will remain important, HCM focuses instead on outcomes. In other words, it focuses on how a best-run business drives operating performance through its people. Conventional HR metrics will only be useful when one can establish a clear, causal connection to a corresponding improvement in the user enterprise's market value—that's to say, added monetary value for the company per employee. This is just a way of saying that the lessons learned from managing trading partners (suppliers and customers) should be likewise applied to better managing employees.

For HR departments to become more strategic within any organization, companies should investigate deploying HCM tools in order to free HR managers from time-consuming yet tactical record-keeping functions. One should ensure that all stakeholders are committed, since the realization of HCM benefits depends on IT departments implementing the appropriate infrastructure, on HR departments communicating the goals of their programs and reengineering the processes for improved output, and on employees and managers changing their approach to HR administration. There is a perception of HR as a department that hires and terminates employees and performs benefits and compensation administration, but that is not involved in business. This perception should be steadfastly changed, however painstaking it may be.

To that end, HR leaders should be actively invited to discussions upfront (so as to avoid any problem, rather than trying to solve problems after the fact), whether the discussions are on workforce demographics, training and development, or retention. The HR department has to provide the platform to set clear expectations for employees, to measure their performance, and to relate performance to compensation and recognition. But it also has to know the organization's "ins and outs," so as to be able to think about strategic issues upfront, and to be able to adapt on the fly to anticipated business changes (rather than after the changes).

While often overlooked, HR and other departmental managers are the key to unlocking the potential of strategic HCM. Exceptional managers are the lynchpin of great corporate performance, and must be aligned with corporate objectives. Engaging managers in the process is the key to achieving this alignment, and to ensure that managers are engaged, organizations must provide solutions that help managers do their jobs more effectively and efficiently, all while ensuring corporate compliance.

To be successful, organizations must provide strategic HCM solutions that deliver integrated compensation and performance management with readily available knowledge and coaching for both employees and managers. In summary, strategic HCM solutions should allow organizations to cascade goals and objectives from the corporate level through to managers and individual employees. The ultimate winners will be the enterprises that understand the connection between people and corporate performance, that understand how to manage changes within the organization, and that have applied processes and systems to connect their employees to the corporate strategic initiatives. All enterprises should thoroughly conduct their IT assets stock-take with combined ownership between HR and IT departments, outlining how each asset supports the business goals, and what gaps still exist. Also, thorough HR-related data beyond mere payroll and compliance reporting should be collected, such as skills, experience, degrees, licenses, certifications, training, language proficiency, career goals, current (and desired) job locations, etc.

There should be no automatic selection decisions for add-on modules favoring incumbent ERP, HRMS, or HCM providers, but rather the development of a defendable list of HCM requirements for each user enterprise that every contesting vendor has to demonstrate. Of course, learning about new features and attractive pricing would be beneficial, at least for information and for leverage with other vendors. We suggest evaluating the bells and whistles, price, reference sites within the user's industry, and the corporate viability of other vendors as well, before making a selection. ERP providers are offering much deeper HCM functionality than ever before, and should be given a serious look by both current and prospective customers, bearing in mind that some best-of-breed HCM vendors might still excel with depth and experience in their horizontal and vertical niches.

In addition to the traditional on-premise perpetual license model, a host of providers offer a per-module/per-employee/per-month fee that can minimize up-front costs (and deployment times), and scale as needed. Customers should explore how such services integrate with internal systems, and with the outsourced services they may rely on. Shared services, increasingly in a hosted mode, might be an especially effective strategy for businesses that vigorously pursue merger and acquisition opportunities.

This concludes the series Thou Shalt Manage Human Capital Better.