Sustainability Among HR Vendors

Several months ago, my partners and I were solicited by an HR firm who intended to sell their company.  The founding partners had built value over their ten years in the market, largely leveraging their personal credentials as a means of entry into very large public and private entities.  These relationships had bloomed and the client base was solid.  However, the leaders were ready to retire and wanted someone else to take the helm and run with what they had started.  In our market, this happens more often than you might imagine, although the catalyst for transition is not always so benign.  

They are well over 2,000 firms in the US alone that offer some form of HR service provisioning, and measuring the sustainability and risk portfolio of those firms has been an oft-neglected part of the due diligence process.  By our calculations, over 175 HR vendors “left” the market in 2007.  Why such a dramatic number of exits?

• Acquisitions: HR departments are attempting to limit the number of vendors with whom they contract directly, creating a Darwinian opportunity for those in prime position to gobble up niche providers via acquisition or subcontracted relationships.    
• Management Churn: One of the most amusing activities is to walk the floor of an HR conference and see where your old vendors and colleagues are currently employed.  Expectations for performance – especially among publicly traded HR vendors – have driven boards and investors to switch CxOs at a surprisingly high rate.  A dramatic example is the HR Outsourcers, with Keith Strodtman of Ceridian as the longest tenured president among his HRO peers.  
• Financing: With such broad competition, it takes a significant capital investment to sustain parity in feature functionality, geographic coverage, sales, marketing, support and thought leadership.  Many cannot afford to compete, and short of securing significant investment, are forced to either hunker down or enter a fire sale.
• Lawsuits: An issue that is top of mind given recent events with SuccessFactors and Softscape, lawsuits can lead to financial ruin in the HR market.  Buyers are risk adverse and do not want to bet on a losing vendors, especially in market with such tight budgetary constraints and limited room for failure.  These distractions can often paralyze sales efforts and create a self-fulfilling prophecy of loss, regardless of who wins or loses.
• Timing: We have the good fortune of seeing a great number of emerging vendors who have a tremendous amount of value to offer their HR buyers.  However, gaining access in such a noisy environment can be quite difficult, and often times the value proposition is lost in light of a senior HR executive’s need to fight an immediate set of priorities that distract from potentially longer term ROI.  

Inevitably, a vendor with whom you associate will fall victim to one or more of these issues.  The potential disruption to HR service delivery is significant, and later this week we’ll talk about what can be done to measure vendor sustainability preemptively.

Let’s keep the conversation going.