What Happens to HCM and Talent Management Investments in a Recession?
That seems to be the question I’ve been getting more frequently from vendors, financial analysts and enterprises alike. The fear of a recession is everywhere, including Europe as witnessed last week while I was travelling through the UK and Germany.
Although a recession in the US is becoming very much a reality, I think we are far off from a global recession. Sure…many other markets are also over-inflated including Russia, China and India, but that doesn’t mean the US will trigger a global recession. A weak dollar can actually have some benefits — including increased tourism in North America (try booking a flight or getting a hotel in NYC these days) and increased spending from Europe and APAC on American products (including software).
So what happens to the HCM and talent management space if the US goes into a recession? Here are my predictions…
- Large ERPs spending is more at risk than most upstart SaaS vendors. ERP investment is typically well-planned, drawing from budgeted capital expenditure. In a recession, one of the first line-item that companies typically cut is capital expenditure. In the last recession, capex in many companies was slashed in excess of 70%. Why do SaaS vendors have less-risk? They draw their revenue through a subscription service, or more specifically a operating expenditure (opex), instead of larger capital expenditure, minimizing the threat of stalled projects. Most of the SaaS vendors negotiate anywhere from a 1-3 year contract based on usage therefore locking in price and having the ability to predict future client volatility and risk.
- Global vendors are more insulated. If companies in North American stop spending money, that doesn’t mean other countries and regions aren’t thriving and will also stop spending. Sure, North America still dominates HCM and talent management spending, but many of those North American-centric companies are also global enterprises. Downsizing employees in North America may open the doors to increasing headcount outside the US. Countries like China and India are continuing to grow aggressively and spending money accordingly. Those vendors that are either selling globally, such as Stepstone, or working with large global clients are at less risk than those solely focused on one region.
- Consolidation will escalate…quickly. Right now, capital is still free flowing in the HCM space from public (IPO) and private sources (venture capital and private equity). In a recession, investors become more risk-averse and tighten access to capital. This means it will be harder for companies to generate capital if they cannot generate it themselves. I personally think consolidation is a good thing as many vendors can use a recession to come out stronger than ever.
- Fear of mass layoffs is over-inflated. One of the presumptions with HCM spending is that if companies begin reductions in force (RIFs), they no longer need HCM technology. Or they many not need as much and, since SaaS vendors charge per employee, their revenue will drop with reduced employees served. The fact remains though, it is much more challenging in practice to essentially turn off users. Employee data is still very relevant and useful after the employee is not longer employed requiring the account to remain active. Conceivably, talent management applications becomes even more important in a downturn because companies need to really understand the financial impact of personnel decisions and further understand the high-performers they would like to retain. Lastly, while RIFs in a downcycle are a reality, I don’t anticipate the mass layoffs witnessed in 2000/2001.
Keep in mind, these are only one man’s opinion. Just as I write this, I am reading a post stating, “SaaS Companies Vulnerable in a Recession“. Additionally, Phil Fersht writes a great piece about how an economic downturn could be the kickstart that BPO and HRO needs. It should be noted though, many vendors that were thriving in 2000 found themselves fighting for existence less than 12 months later. We all remember Resumix, Icarian and many others, right.
Technorati Tags: talent management, recession, Stepstone
9 Comments Add your own
1. Thomas Otter | December 13th, 2007 at 11:53 am
Jason,
On your first point, my experience points to the the opposite. When costs tighten, department level discretionary buying is hit hard, systems consolidation becomes “hot” and buying decisions centralise back with the CIO and the procurement police.
This strengthens the hand of the ERP vendors at the expense of the niche play.
Also with SaaS, most of the cash flows externally. With in house ERP, a larger part of the cost is internal. External cashflow gets squeezed first.
2. Jason Averbook | December 13th, 2007 at 7:31 pm
Jason
Agree with your points below. The most important thing that organizations can do when making the business case for strategic HCM solutions (talent management) is not call them HR systems, but business systems.
In every downturn, HR and HR systems get cut quickly; with a focus on business and the impact that these tools can have on helping the organization out of the downturn, a different lens other than “another nice tool for HR” needs to be put on the picture.
3. Lexy Martin | December 14th, 2007 at 11:26 am
Looking back over 10 years of data from our workforce technologies survey, during the 2000-2001 downturn (www.cedarcrestone.com/whitepapers), the “develop” category of strategic systems grew strongly, while recruiting solutions had somewhat stagnant growth. Some companies clearly saw the need to develop the existing talent rather than acquire new. We’re starting to see some indication of this thinking again. We’re also seeing a move to hosting…companies want to minimize IT costs and outsource their application management to competent providers. If I were queen at an organization, I’d immediately deploy performance management, some form of business intelligence, and workforce planning…I want to know who my top performers are, who needs development, and what talent I may still need to meet business plans during the next few years.
4. Jason Corsello | December 14th, 2007 at 2:37 pm
Lexy- Great comments. Thanks for your insight and advice!
Jason
5. Josh Bersin | January 3rd, 2008 at 6:18 pm
We’ve been thinking a lot about this scenario also Jason, and I also agree that any real economic slowdown is likely to hurt HR software vendors quickly.
While we are all very well educated about the value and importance of these systems, we have to realize that HCM or talent management software investments are almost always “optional.” The organization will usually function just fine “as-is” — and when money is tight, the CFO immediatly looks for places to (A) cut capital spending, and (B) implement initiatives which cut costs.
Right now the huge growth in HCM software is largely driven by tight labor markets - organizations want to more tightly manage talent to reduce the drain on ghe leadership pipeline, improve succession planning, and improve hiring to cover the retiring baby boomers.
Once that all stops, I can see a scenario where HCM spending slows to a trickle for a while. Organizations will still buy “bread and butter” systems like LMS systems (which are often cost-justified to reduce the cost of training), or perhaps compensation planning systems which may reduce waste or inefficient spending, but I am afraid to say that I believe a real recession would take our wonderful HR software market and give it a set of “lead overshoes.”
There will always be a market for these systems to support fast-growing companies and organizations going through tremendous talent shifts, but I actually think the HCM market is currently driven heavily by business growth and the aging workforce. These trends are not going away, but I do believe a recession (if we do have one) will slow the market - and force more consolidation, as you well stated above.
6. Jason Corsello | January 3rd, 2008 at 6:53 pm
Great comments Josh. Thanks!
7. Joyce Maroney | January 15th, 2008 at 2:02 pm
To your last point, I believe the sensitivity to recession of a particular HCM solution is probably linked to the part of the employee lifecycle that solution addresses. At Kronos, because we can validate that investments in our core workforce management technology can be tied directly to ROI through hard dollar expense management, that business has grown steadily for 30 years throughout economic cycles. As a veteran of the talent management business, however, (BrassRing) - I’d agree that recruiting software is less recession proof. When the hiring activity declines, the business case for automating that functionality is put at risk. Net - especially in a recession, companies only invest in HCM solutions to the extent those solutions can be demonstrated to drive hard dollar business results.
8. Al Campa | February 21st, 2008 at 11:55 am
While to some, investing in talent management solutions during a down economy may seem incongruous, it actually can mean the difference between simply surviving a downturn and using an economic slowdown to create competitive advantage. The research we’ve done at Taleo indicates that even in a slowing economy, social, financial, and political factors will continue to drive the development of new jobs. In addition, employers need even more efficient ways to tap into current employees who can help the business expand into new industries or launch a search for candidates that bring new skill sets to the workforce. Figures also show that even in a down economy, million of “Gross” new jobs continue to be created. According to the Bureau of Labor Statistics, during the last recession (between 2001 and 2002), 63 million Gross jobs were created. During the dotcom boom years of 1999 to 2000, 68 million Gross jobs were created. This 5 million gap represents only a 7 percent decline and suggests that companies do still hire in a recession. Additionally, even in tough times, over a fifth of a company’s workforce will still walk out the door of their own volition in pursuit of better opportunities. Voluntary turnover was 23 percent across all businesses in North America in 2007. In 2001 and 2002, it went down but only to 22 percent. Successful organizations know that superior business performance is driven by superior talent. Talent management is a critical business function in any economic climate and the acquisition and retention of top talent should always be on the radar screen of executive management.
9. Jason Corsello | February 21st, 2008 at 12:36 pm
Thanks Al. Well said!
Jason
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