HRTech is more popular than ever. What started as a set of tools and processes to manage administrative employee data has evolved to become a strategic game-changer for organisations.
In this three part article Ryan Dillon and I attempt to retrace the evolution of the HRTech stack, provide analysis of the current landscape and predict the exciting future ahead.
See Part I here
Today’s HR stack mirrors the employee journey. HR departments are tasked with supporting an employee from recruitment to the time they exit the organisation. This is a massive undertaking and requires multiple dimensions of functionality. To make sense of the many players in this space, startups can be broadly grouped into 5 categories each supporting the needs of key HR activities:
- Culture & Engagement
- Strategy & Analytics
Companies today are highly concerned with attracting and hiring the ‘best’ talent. It is not uncommon to hear of enterprise companies signing multi-year and multi-million dollar recruiting software contracts with the likes of Oracle and SAP. Enterprise companies typically spend a third of HR OPEX to attract the right talent, while early stage ventures spend even more (as a % of HR OPEX) in our experience on pre-hire activities.
Additionally, recruiting can be one of the most challenging processes from both the perspective of the organisation and the candidate. Most of us can relate to waiting endlessly to hear back from a recruiter as a applicant, while hiring managers often complain about slow recruiting processes and wasted cost. Given the sizeable investment HR leaders make in this space and the pressing problems to solve, it’s no surprise to see this category ballooning with entrepreneurial attention.
As a result, VCs have poured capital into this section of the stack leading to an overcrowded market. In our survey of the European landscape we came across 90 startups building business in applicant tracking systems, marketplaces, and sourcing software, with 60% having received VC funding.
While there are host of products out there that claim to use AI to lower cost per hire and time to hire metrics, none have proven that their services improve organisation outcomes in the long run. Thus, what we found most interesting in the recruitment space were startups trying to solve for this by connecting the pre-hire to the post-hire. This means placing a greater emphasis on effectiveness of the product over a pure-efficiency play. This also means focusing on the candidate experience throughout the recruiting process as opposed to the traditional ‘employer-first’ mindset common in the space.
One great example is Applied, a blind hiring platform organisations use to improve the diversity and quality of candidates they hire. The sourcing and recruitment process is one highly susceptible to cognitive biases, leaving room for selection bias. Applied solves for this by dropping the traditional cover letter and CV in the job application and asks candidates to respond to a series of short questions customised for the role they are applying for. We believe (and wish) that CV driven sourcing decisions will be a thing of the past in the near future and Applied is well placed to lead the charge in building diverse and higher performing teams.
On the topic of the CV demise, we have also seen interesting developments in skill-based tests as part of the applicant screening process. Some startups offer candidates the chance to both prove and improve their skills through testing, all the while demonstrating their capabilities to potential employers. Currently, the majority of these products are focused on technical roles. In the future, we see this service expanding to further job profiles.
Another company re-imagining the recruiting process is Snap.HR. For developers, designers, product managers, and data scientists, demand outpaces supply. This means that employees with these skills are pestered constantly by recruiters adding additional cost and complexity to their hiring process. Snap.HR has reversed the traditional applicant process by having employers apply directly to technical talent. As a result they have cut out the middleman (‘i.e. the external recruiter’) improving matching, transparency, and communication between businesses and tech candidates.
Finally, we have seen a sharp increase in mobile native marketplaces serving the developing needs of the gig economy. These platforms have a natural fit for gig economy work and find an avid audience in generation Z who are now graduating, joining the workforce and expecting an omni-channel experience in their career search.
Admin is the foundation of an HR function. Often it is a thankless job, but without a team and/or set of tools to manage an organisation’s payroll, on-boarding, benefits, and time management, your company would be at a significant disadvantage (not to mention legal trouble). Given its importance, it is typically the first responsibility of HR leaders in a start-up and a core aspect of large enterprise HR shared service delivery.
We have seen four types of start-ups in this section of the stack: multi-purpose platforms, benefits administration, staff management systems, and on-boarding/scheduling services. We think this new generation of admin HR software players can win by capitalising on a sizeable market of small to medium sized businesses passed over by older generation HR players.
The focus on small to medium sized companies is often a starting point for this generation. They offer products that are cloud native, mobile access subscription services at an affordable price. The real selling point is that current generation admin products strip out complex functionalities that exist in older generation products. One such example we came across is Charlie HR, which offers features to manage time off, employee records, performance reviews, company structures, on-boarding, and reporting all for £4 per person per month. For lean HR teams, technology can be a source of tremendous value both to control costs and scale with as the company grows.
We are starting to see a ‘platforming’ of HR Admin tools whereby employers, employees and third parties can all access information. One such example is using payroll as a benefit. For gig economy, retail, or contracted workers, companies like Wagestreamoffer organisations the means to pay employees on demand and employees the opportunity to decide when to be paid. For workers living from pay check to pay check, having liquidity when needed can be a strong reason to seek a job at that employer and also stay for a long period of time. We expect the democratisation of pay to be a common theme amongst employer benefits programs in the coming years.
‘Health as a benefit’ is also a growing admin category. Employee healthcare is no longer just about providing private medical insurance. HR teams today are procuring preventative care for their companies spanning areas of mental health, physical health, and personal therapy. The mental health space is specifically an area we have seen traction around as employers fear burnout among staff. Unmind is a great example of a platform delivering clinically backed mental health tools and training for employees in an easy to use mobile format. Following the completion of their course, they have shown significant increases in employee wellbeing and thus productivity for the company overall.
Admin may be the oldest category in the HR tech stack but that does not mean it is lacking in innovation. The largest challenge for this category will be competing with the entrenched incumbents when these startups choose to focus on enterprise level customers. While their price points may be lower and user experience superior, proving that the product is scalable across geographies will be a real test.
Culture & Engagement
Recent findings from Gallup suggest that only 15% of employees are ‘involved’ in their work. This has lead to an estimated $65-$90 billion loss in productivity in the UK alone. To better understand their own organisations — starting in the mid-1990s — HR leaders designed the infamous ‘annual employee survey’. To put it gently — these surveys were mostly useless. They were not designed with the employee in mind nor were they designed to address issues real-time. As a result, in more recent years, HR professionals have turned externally for consulting and software solutions to improve the way they measure culture and engagement in their organisations.
In the US alone, the employee engagement market is estimated at a whopping $74B (this includes consulting services along with software companies) with over two thirds of that coming from companies larger than 500 FTEs. Traditionally the dominant players have been consulting agencies like TowersWatson, Gallup, and Aon Hewitt, however tech startups using real-time software analytics have gained momentum. Currently we see two types of culture and engagement organisations active in this space: Pulse Check surveys and Rewards/Recognitions services.
Peakon (a Balderton Capital portfolio company) is a leader in the culture and engagement category. Peakon automates employee data collection through pulse check surveys allowing a variety of users among management to monitor the health of their organisation in real time. Additionally their products allow users to benchmark engagement and retention levels vs. peers. What Peakon has done extremely well is to make the measurement process real-time, create a compelling UI/ data model, and build a complete product with features HR leaders can use to actually drive change once engagement levels are understood.
On the rewards and recognition side, a recent startup Portify is rethinking what it means to provide financial rewards and recognition to gig-economy workers. As we stated in our trends section the rise of various forms of work and lower retention levels have put engagement levels at risk. Many employees today feel tied to their workplace because of the access to a full benefits package. Engaging the gig economy has had to take a different form. Portify’s first product is meant to help contracted workers save money, earn rewards through their work, and get access to zero interest, zero fee financing in times of need. There is room for new actors and innovation in this category and we think this is a space to keep a close eye on in the coming years.
Culture and Engagement is a category here to stay; especially as it is key for employee retention. We are slightly concerned by the low barriers to entry from a technology standpoint. Additionally this category is often the first to face budget cuts as the ROI is not always so easy to quantify. Employee surveys also still face fair criticism that they are prone to error. With the above risks in mind, we still expect this category to continue its growth trajectory as real-time software tools improve the way companies connect to their organization.
The ‘dreaded’ performance review has had a long history of scrutiny by employees and employers alike. In 1976, HBR tried to make sense of the performance review process defining three core components:
- To provide adequate feedback to each person on his or her performance
- To serve as a basis for modifying or changing behaviour toward more effective working habits
- To provide data to managers with which they may judge future job assignments and compensation
Since then, the core definition remains the same but more emphasis has been given to (3) over (1) or (2). Based on our survey of the landscape, much of its development can be attributed to changes in the actual performance review process itself. For example, annual check-ins have been replaced with quarterly, monthly, and even continuous ‘check-ins’. The archaic 1 to 10 top-down employee review system has been supplemented with anonymised peer-reviews. Furthermore, companies today are actively seeking ways to better align individual performance objectives with company objectives.
Despite these developments, employees and employers generally remain unhappy about performance outcomes. Performance ratings at the end of the day, are highly subjective leaving a great deal of room for error, bias, and misinformation. In fact, within the last 10 years, some of the biggest corporates like Accenture have decided to abandon the process altogether.
As a key component of employee development and firm performance measurement, we feel company leaders should not abandon performance management all together as others may suggest. Instead, performance should be re-designed for an employee-centric experience. HRTech 4.0 is following in the footsteps of companies like Google who have re-engineered the performance management process. In How Google Works, Eric Schmidt and Jonathan Rosenberg explain how the OKR system (adopted from John Doerr’s experience at Intel) is an open platform empowering the employee to own their performance management goals and to “judge their own performance honestly”. By placing the employee at the centre of the process the performance review becomes just one step in a true feedback loop — which is also closely linked to an individual’s learning and development opportunities. To make this process work seamlessly companies like PeopleGoal allow employees to set their goals in-line with the growth strategy of the company. Impraise offers employees the opportunity to request real-time feedback from peers to help them improve performance or get validation of their progress.
Where we see a lot of action happening in the performance vertical is in the Learning & Development (L&D) space. L&D is an integral part of performance management. HRTech 4.0 companies are moving away from static self-maintained internal wikis by diversifying the medium of distribution of knowledge (mobile, VR, video, podcast, ebooks). Additionally L&D departments are improving the quality of content accessible to staff by opening access to both internal and external resources and creating an engaging learning experience through gamification and expert learning design.
The main challenge in the space is to build a product which will be able to keep content relevant without requiring significant time involvement on the client-side. Employers want to buy into L&D platforms which will give employees access to up-to-date knowledge about the company, official compliance and regulatory trainings and general development trainings which have an ROI for the firm’s bottom line. One solution is specialisation. Refract AI is deploying its voice analysis and ML technology to sales team to create personalised coaches for every team member.
Performance reviews are estimated to cost $3,000 per employee per year which means that the budget for performance management alone can easily reach 7-digits a year for a single firm. At such a hefty price tag, buyers have high expectations for solutions in this space and thus we see further opportunity for development in the future.
Strategy & team analytics
Team analytics, also known as HR or People analytics, is the application of data collection and statistical analysis to help management make the best people decisions. The most recent space in the HRTech 4.0 is quickly becoming one of the categories receiving the most attention. This is explained by easier access to employee data and management’s desire to use this data to inform strategy.
Advances in big data analytics, data visualisation and the democratisation of public cloud have opened the gates for people analytics. Currently we see the space broken down into 5 core use cases: talent allocation, culture analytics, team analytics, psychometrics, and predictive analytics. All five use cases share the business objectives to improve resource allocation, cut costs, and optimise company spend.
In recruiting for example, analytics solutions can help bring down the cost of hiring while also improving the quality of candidates interviewed. Solutions like Kultify help companies analyse their culture, develop an employer brand and improve retention.
One of the most complex challenges companies are trying to solve for today is how to map expertise and skill sets within an organisation. The goal is to use these insights to assemble high performing teams. We think this area of team analytics is particularly promising. Using data to inform decisions on when an employee is likely to leave or how to build teams with the right blend of hard and soft skills can add significant business value. Aspirant analytics is applying their analytics expertise to help law firms drastically change the way they make talent decisions.
As promising as the space is, we also think it still has a long way to go. Companies in the space often wield a suite of buzzwords like big data, AI, ML, predictive analytics to sell their solutions to companies desperate to make better sense of their HR data. Any applications of AI and predictive analytics are still very early in their development. Early enough for employers to apply additional caution when using such solutions. In our discussion with Jason — the co-founder of Aspirant analytics — we have learnt the tremendous power and insight HR data analysis can have for leaders but also the complexity that it entails. Despite improvements, HR data today remains extremely siloed, badly structured, complex to model and extremely sensitive. In addition, bad interpretation of such analytics can have more harmful consequences for the business than no analysis at all. Which means that startups in the space will need to pay additional attention to transparency and user education. We think that the advances of startups in the other parts of HRTech 4.0 will contribute to solve some of the challenges currently holding back the team analytics space at which point talent analytics solutions will be able to be fully embedded in the daily decision making process of companies.