| INTEGRATIVE INSIGHTS ON EMERGING OPPORTUNITIES |
Integrative research means our extensive company research informs every thesis and perspective. The result is deep industry knowledge, expertise, and trend insights that yield valuable results for our partners and clients.
cgreendale@firstanalysis.com
cmorgan@firstanalysis.com
- Due to cyclical pressure on budgets, corporations in 2023 have tended to buy human resources (HR) software suites rather than best-of-breed solutions. In coming years, however, we believe long-term secular trends, such as increased demand for HR data insights and lower costs to develop purpose-built software for specific HR functions, will drive a reversion toward buying more best-of-breed applications.
- Seamless integrations are key to adopting best-of-breed solutions, as they enable data transfer and visibility among systems, cost-effective implementation, and harmonized workflows.
- Given the compelling return on investment from HR tech solutions and employers' growing interest in tailored HR tools to address the long-term challenges they face in building and maintaining their workforces, we expect to see strong demand for software that enables cost-effective, continuous integration of HR tech solutions.
- We review some of the near-term and long-term trends driving this demand, discuss how integration technology will help companies shift to best-of-breed HR tech solutions, and profile several innovative HR integration tech platforms.
TABLE OF CONTENTS
Includes discussion of six private companies
Two themes shape the current contours of the battle
Integrations key to adopting best-of-breed solutions
New technologies solve the integration challenge for best-of-breed systems
Large and growing market for integration technology
Winning the best-of-breed vs. suite battle with integration
Future of work index closely tracking S&P 500
Future of work M&A: Notable transactions include Parchment and ClearCompany
Future of work private placements: Notable transactions include HiBob and Employment Hero
Two themes shape the current contours of the battle
At the annual HR Technology conference earlier this quarter and in subsequent conversations with industry players, we have heard two consistent themes:
- Artificial intelligence (AI) is poised to add significant value to HR, though HR practitioners tend to be mindful of ethical considerations, given the "H" in "HR" stands for "human."
- With corporate budgets still under pressure, HR software suites tend to win over best-of-breed, all else equal.
The latter has, for some time, been a cyclical phenomenon, and at some point, the pendulum will swing back toward purpose-built, innovative technologies, rather than "check-the-box," less-effective solutions that are components of larger suites. In the meantime, some best-of-breed companies are helping overcome the suite bias with an "if you can't beat them, join them" strategy of partnering with larger companies. Many HR tech leaders use a platform-as-a-service strategy and partner with players that have more specialized functionality to fill gaps in their systems. ADP has long led this approach, providing fertile ground for the initial growth of partners like employee expense management tech leader Concur and talent development tech leader Cornerstone OnDemand. Joining a larger platform's marketplace, or, even better, becoming the default partner for certain functions, can not only be a cost-effective and powerful growth strategy in good times, but also a buffer against shifts away from best-of-breed in tougher climates such as we are experiencing today.
We believe the secular trend toward more specialized HR applications will prevail in the long term. A survey of organizations with 200 or more employees from SaaS operations company BetterCloud, which helps companies manage their technology stacks more efficiently and cost-effectively, found that in 2022, organizations used an average of 130 SaaS applications, up from 110 in 2021 and a 16-fold increase from eight in 2015. As the ecosystem of application programming interfaces (APIs) that increasingly underpin today's economy becomes more robust and as the cost of developing software continues to decline (aided by AI), we expect entrepreneurs with unique experience and insights will develop HR applications that solve specific challenges for specific corporate functions and roles that currently must settle for more general, suboptimal solutions. We believe addressing some of these challenges could open large market opportunities that aren't obvious today.