Investment in HR Technology has skyrocketed in recent times, with VC investment increasing almost fourfold from Q1 2020 to Q2 2022. In this short article, we take a look at some of the underlying factors behind this growth, and outline why we believe that HR Technology will continue to remain an attractive opportunity for investors.
Figure 1: Global VC Deal Activity in HR Technology
Segmenting The HR Landscape
The HR landscape is broad, spanning traditional areas such as core HR & payroll as well as areas such as corporate learning and financial wellbeing & benefits that are growing in importance given the heightened focus on employee experience (discussed later in this article).
Figure 2: HR Landscape
One way to segment this complex market is by looking at the breadth of offerings of solutions and the sizes of customers that they target. Providers of HR Technology usually focus on particular customers groups given their differing requirements.
Smaller customers are typically more price-sensitive and thus may forgo some of the more advanced features that are available in order to stick to budgetary requirements. However, larger customers’ budgets are often more accommodating and so providers can sell them a dearer solution, but in return, larger customers will demand the ‘latest and greatest’ in terms of technological developments as well as a high level of customisation. Strong UI and UX and reporting functions are becoming a base-level requirement for all sizes of customers, whilst AI capabilities, which are currently more important for larger customers, are likely to follow suit in the near future.
Providers of technology also range from those offering multiple solutions across the HR landscape to those focussing on a single area such as corporate learning which are typically ‘best-in-breed’ solutions. However, given the time and effort required to handle relationships with multiple providers, some customers may prefer to have all their needs fulfilled with a single solution. Having a company’s data all in one system also removes frictions, reducing costs and facilitating a deeper level of data analysis. Both of these are driving factors behind the increase in the number of bolt-ons acquisitions being made by ‘platform’ companies (detailed below).
Figure 3: HR Technology Landscape
What is behind the increased interest in HR Technology?
Firstly, given its business-critical nature, HR Technology is relatively recession-resilient with businesses likely to continue purchasing it during economic downturns, although upgrades and purchases of new modules may be deferred. Furthermore, revenue is typically recurring and relationships with customers are sticky, especially at the larger end where switching HR Technology providers is difficult due to the large amount of effort and quantity of resource required to execute the switch.
In addition, the importance of HR Technology is likely to continue to grow. Hybrid working has presented new challenges for the workforce and performance management, and HR tech software is an attractive solution to help manage these challenges, meaning its adoption is likely to increase. Despite the economic backdrop, there were 1.2m job vacancies in the UK in November 2022, c.50% higher than in November 2019 (the most recent annual comparison before the pandemic). Recruitment software can be crucial in helping businesses plug ongoing gaps in their workforce as it can market jobs to a wider audience and can help recruiters focus on the most effective channels of recruitment marketing. Furthermore, job-switching behaviour increased after the pandemic; 3.1% of the workforce made job-to-job moves in Q3 2022, compared to 2.3% in Q3 2019. While job moves are likely to fall in the near future due to the economic outlook, job-switching behaviour is most prominent amongst the younger generations 1 who will make up a larger proportion of the workforce in the future, suggesting that the long-term trend for job-switching is increasing. As such, as well as attracting the best talent, companies also need to retain existing talent. To achieve this, companies can focus on issues such as maintaining generous benefits offerings, strong employee engagement (e.g. employee satisfaction surveys, team development events and workplace culture activation) and having an array of learning and development (L&D) tools to remain competitive.
Figure 4: Quarterly Number of UK Vacancies, Seasonally Adjusted; Quarterly Job to Job Move Rate
What is driving growth in the HR Technology market?
The HR Technology market appears to be growing quickly, with the increased adoption of AI and increased importance of reporting and employee experience, amongst other factors, likely to be key drivers of any future growth.
Figure 5: Top 10 Current HR Challenges
Artificial Intelligence (‘AI’)
Buzzwords such as ‘AI’ and ‘machine learning’ are unavoidable in any discussion around the future of work and widespread focus has again been drawn to AI recently due to the release of ChatGPT. HR Technology powered by AI has the potential to significantly disrupt talent acquisition and retention, and recruitment in particular is an area of HR Technology where the benefits of AI can already be seen.
AI is prevalent across all stages of the recruitment process. Job posting is one of the first stages of recruitment, and here, sophisticated software can be used to scan job-ads, identifying words or phrases that may appeal to one gender more than others and can suggest more neutral alternatives to help increase inclusivity.
Figure 6: Recruitment Software Functionalities
Currently, the most advanced software products can scan a person’s CV and assess their suitability for a vacancy with a reasonably high degree of accuracy, encompassing factors such as the quantity and quality of a candidate’s experience and the skills that they are likely to have developed which would make them a good fit for the job.
AI is also becoming increasingly important in candidate assessment. During the first weeks of the Covid lockdown, Tesco received over 1 million job applications which appeared to have created an insurmountable task for the HR department who would have to sift through these applications. However, through leveraging the AI capabilities of its recruitment software, Tesco was able to filter out a large proportion of these candidates, transforming this task into something much more manageable. Psychometric assessments are also becoming increasingly complex and can more accurately predict a candidate’s suitability to the vacancy.
Only two and a half years ago, video interviewing was considered a ‘nice-to-have’ feature when assessing recruitment software solutions. However its importance has increased exponentially as a result of the pandemic, with virtual interviews used by 77% of recruiters. While AI is still in its embryonic stages in the video interviewing field, software can pick out key words from transcripts of candidates’ answers to assess their quality. AI can also assess facial expressions and can put together a personality profile of the candidate, although doubts remain about the current reliability of this capability. However, one could certainly expect an improved version of this technology to emerge.
All-in-all, the level of human input required during the recruitment process looks set to continue its decline.
Figure 7: Tools Used By Recruiters
“In the past year, which, if any, of the following tools have you implemented to screen potential candidates?”
Reporting and Data
Increased data capture and analysis means HR Technology is providing a higher level of utility to its users, driving higher industry-wide adoption of the technology. This again can be witnessed in the recruitment space, where customers are now demanding sophisticated reporting capabilities as a base-level requirement. Technology can uncover insights on a range of areas including identifying the methods of recruitment marketing which produce the most successful candidates, which recruiters are the most efficient, and where any bottlenecks in the recruitment process lie. Reporting insights can also help to monitor and track Diversity, Equity and Inclusion (DE&I) performance. For example, it is now possible to track which stage of the application process different demographics of candidates drop out at and organisations can then implement measures to tackle this. Overall, HR Technology and its use of data is helping to transition HR from a back-office support role into a crucial, strategic role, that can drive investment decisions and impact the bottom line for businesses.
Employee Experience
With job vacancies high and job switching behaviour becoming more widespread, the HR space is becoming increasingly employee-centric. More than 90% employers indicate that enhancing their employee experience (EX) will be a priority over the next three years, up from 52% pre-pandemic 2.
During the recruitment process, candidates expect a seamless UX and an attractive UI. Candidates are more likely to drop out of the recruitment process if it is inefficient or overly time-consuming; having to manually input data that is already contained on their CV is an example of this.
Once hired, employees want options to accelerate their L&D, and most employees are likely to want this to be in the form of an amalgamation of their favourite social media platforms and gaming consoles. Many employees want an AI-driven customised learning pathway, tailored to them and based on their interests and targeted areas for development, akin to YouTube’s suggested video feature. Attention-spans are waning; almost half the public feel their attention span is shorter, possibly a result of distractions from social media and smart phones 3. This means an increased demand for micro-learning where employees receive short, sharp bursts of training. Employees may also require more motivation to complete training, hence gamification is becoming increasingly widespread. Finally, some L&D platforms allow users to create and share content, drawing strong parallels to the ‘creator economy’ championed by TikTok. The use of VR certainly features in the future, and so it may not be uncommon to walk into an office and be met by goggles-clad employees, immersed in the world of learning and development.
Users of HR Technology also increasingly want to be self-sufficient. As such, training users on how to customise workflow and processes is becoming a fundamental part of the implementation process. Whilst the software provider will have a technical support agent on-call in case a problem arises, this ‘light-touch’ approach is favoured by both parties, since it saves businesses time and reduces the number of support staff that software providers require, thus reducing their overall cost-base.
What is behind the flurry of bolt-on acquisitions?
Figure 8: Selected M&A Activity in the HR Technology Space
| Company | Area of HR | Acquirer | PE-Backer | Date of Investment |
|---|---|---|---|---|
| Vivup | Employee Benefits | MBO | Omni Partners | July 2022 |
| MSite | Workforce Management | Infobric | Summa Equity | May 2021 |
| Harver | Talent Acquisition | OutMatch | Rubicon Technology Partners | May 2021 |
| Peakon | Employee Engagement | Workday | n/a | January 2021 |
| Mitrefinch | Workforce Management | Advanced | BC Partners and Vista Equity | October 2020 |
| Saba | Learning & Development | Cornerstone OnDemand | Clearlake Capital Group | April 2020 |
| Sage | Core HR & Payroll | iSolved | Accel-KKR | February 2019 |
| Mo (formerly Thanksbox) | Employee Benefits | NVM Private Equity | n/a | February 2019 |
| 31 Acquisitions | Multiple | The Access Group | TA Associates | 2021 – 2022 |
| 7 Acquisitions | Multiple | IRIS Software Group | HG Capital & ICG | 2021 – 2022 |
| 4 Acquisitions | Multiple | Advanced | BC Partners and Vista Equity | 2021-2022 |
Fairgrove advised on the Vivup, MSite, Mitrefinch and Mo deals.
Over the past couple of years, we have seen a significant number of HR tech bolt-ons, with The Access Group and IRIS amongst the most active players in the market. A common path taken has been for private equity firms to purchase a core HR system provider and then bolt-on smaller specialists. Fairgrove has advised on a number of deals in this space (detailed above).
There are a number of drivers that underpin this activity. Firstly, the acquisition of an HR Technology specialist can add a new product to the existing HR suite. It is often easier to address a gap in your current HR portfolio through acquisition rather than developing a solution in-house which is costly and time-consuming. Secondly, the acquirer may have developed a product in its suite which is lagging behind the specialists in the market. Again, it is often easier and quicker to purchase a solution rather than spending time and resource on improving the in-house product. In a rapidly growing market, speed-to-market is essential as there is often a battle for ‘white space’, especially as products are sticky and it can be difficult to dislodge incumbent providers. Thirdly (and potentially most importantly), an acquisition offers significant cross-sell opportunities. Customers of the acquired company are likely to be interested in using the acquirer’s HR suite given the benefits of using a single HR system. Similarly, the HR suite’s customers may no longer need to look elsewhere for the solution that the acquisition target provides. Finally, other customers who may not have considered using the acquirer’s HR suite at all due to the previous gap in its offering may now view it as a much more viable candidate in their selection process.
The benefits of cross-sell opportunity can be witnessed by looking at Workday, which has high and increasing product attachment rates 4, having made acquisitions and also having significantly invested in the in-house development of elements of its HR suite.
Figure 9: Workday HCM Software Product Attachment Rates
Percentage; SOURCE: Workday Financial Analyst Dat, October 2019 and September 2022
Customer relationships are also stickier with providers that offer multiple HR solutions. As customers become more ingrained with their suppliers, the associated switching costs (which include time, money and effort) become substantially higher.
Conclusion
All-in-all, the recession-resilient nature of HR Technology, its increased importance given the rise of hybrid working and job-switching behaviour, the increased utility that HR Technology can provide to users through developments in areas such as AI and reporting and the numerous benefits of bolt-on acquisitions suggest that M&A activity levels in the sector will remain high.
Our Experience
If you would like to discuss this article, please contact Paddy Woods Ballard.
Footnotes and Sources
1 Gallup, How Millennials Want to Work and Live,
2 Willis Tower Watson, 2021 Employee Experience Survey
3 King’s College London, Are Attention Spans Really Collapsing
4 % of core HR customers that purchase other products
Photo: Panchenko Vladimir, Shutterstock
