Where is the Market for HR Software?

One of the things we regularly do as an analyst firm is estimate the size and growth rate of various corporate software markets.  Without giving away our proprietary methodology, I’d like to point out something which should make software providers think twice about their business strategy.

In the United States, only 38% of all employees work for companies with more than 1,000 employees, and only 22% work for companies with more than 10,000 employees.  So if you focus your software sales and product strategy toward the biggest companies, you are likely to find a saturated market quickly.  In fact, there are only 912 companies with more than 10,000 employees headquartered in the United States.

The “mid-market” is actually shaped like a dumbell.  In other words, there are a very large number (nearly 6 million) of tiny companies in the US (startups, small businesses), but far fewer companies of a medium size (companies from 500-2,500 employees only make up 8% of total US employment).  My guess is that the reason for this is that it is very hard for a business to grow above a few hundred employees, and those that manage to doso are solid enough to either grow much bigger or become acquired.

What this data essentially means is that HR software companies that target the large, global enterprise buyers are going to run into a lot of competition as their market matures.  For example, the market for performance and talent management software has already become very competitive, with more than 22 software providers including Oracle and SAP.  When this occurs it becomes a “replacement” market, which slowly favors the largest most established vendors.

On the other hand, if you can find a way to tap into the small business market, you are likely to find a goldmine.  Look at ADP and Paychex, for example.  These companies dominate the market for small business payroll and both are very large, profitable, and growing.  ADP’s revenues are nearly $9 Billion and Paychex’s is over $2 Billion.  Both are highly profitable and continue to grow rapidly.

In addition, the HR software solution providers must realize that the real needs of small businesses (those with more than 10-20 employees) are not much different than the needs of large companies.  Functionally, they still need payroll, performance management, learning, succession, and compensation management systems.  While they need a very simple, easy to use interface, one will find that once you start to fill their needs their requirements are very similar to big companies.  Halogen Software and Kronos are two of the best  examples of companies that understand this.  Their products are widely used by small and mid-sized companies and both have grown successfully and profitably in this huge market.

In the coming months we are going to introduce two major research reports on enterprise software markets, one discussing the marketplace for corporate social networking software (a very exciting and rapidly changing space) and the other focused on the exploding market for performance and talent management software.   In each report we will point out the current market size, growth rate, and potential penetration in each segment. 

Finally, one more important thing to consider.  Two seperate but also large markets for HR software are the federal and the state and local government markets.  In the US both are very big:  the Federal Government employs over 2.2 million employees and state and local governments employ more than 23 million employees.  As you consider your growth strategy, think about when and how you will target these segments as well – both of which need precisely the same software as profit-making businesses.

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  • Jan

    is the report for performance and talent management completed?

  • I work with a company that offers EmployWise (www.employwise.com) an integrated employee life-cycle management HR software in the SaaS model.

    What you have said applies equally to several other markets especially emerging ones with a high level of entrepreneurship.

    A key reason why uptake of HR software in the SMB segment (20 – 1,000 employees) is still slow is perhaps the “software implementation” model need that is skewed for the bigger organisation. Most HR software today requires expensive implementation services and support which makes it too expensive for SMBs. Also if a large number of SMBs were to adopt these software, there imply won’t be enough implemntation experts available to meet the numbers.

    The answer therefore lies in new generation HR software that SMBs can deploy and use as simply as they can use a browser and use email.

  • That was a great article. I can see why it’s one of the more popular posts. Some of those statistics opened my eyes to the difficulties of HR software to fit and target larger companies. Finding quality talent that is specific to jobs applies to all sizes of business. I have to agree that user interfaces need to simple for small and big companies alike. Maybe in the past, the branding or even the implementation of these softwares in larger companies hasn’t been marketed correctly. Just a thought

    What qualities of HR software used to find qualified candidates for jobs would you suggest?

    I look forward to those two research reports about social networking software and talent management software, thanks again for the post.

  • You mentioned 2 major research reports on enterprise software. Has this report benn published?

    • joshbersin

      Hi Lyle, we have published this report already, it’s called Talent Management Suites, and its on our website…

  • Hi… that was a very neat article…. explaining the scope for HR software in SMB segment. I work wit a company who specialize in (SME)HR domain and have decades of experience in serving the HR fraternity RoosterHR (WWW.RoosterHR.com. We have two simple web based applications – one(R-Lite) specially made for recruitment process and the other(HCMone) for the entire HR process. These are centralized, feature rich, simple, structured workflow based applications in SaaS model. Thses were designed specially keeping in mind the SMB’s and startup’s. We have decided to launch our products in US market next month and we’re doing a small research on the market size of US recruitment and HR software market. Really good to see the high numbers and positive trend in these markets.

    Would like to have a summary of the report to see its relevance with our research. If it correlates we might probably endup in buying it.

    Anyway thanks for this wonderful article

  • JCO

    Thank you for an interesting and insightful article. I know a number of US and European HR software companies interested in penetrating the Africa market. Do you have any information or statistics about the potential in sub-Saharan Africa?