Microsoft Formally Enters the HR Tech Space: And The Strategy Is Compelling

As many of you know, the HR Tech space got pretty hot and exciting this year.  Workday and ServiceNow each grew at over 30%, SAP acquired Qualtrics for $8 billion, ADP launched its NextGen HCM, and private equity players invested billions of dollars (Kronos, Ultimate Software, Infor, Saba, and others). 

Why all this investment? It’s simple: HR software is white-hot today, and in today’s talent constrained environment (US unemployment is at a 50 year low), companies are pouring money into tools to better recruit, develop, empower, and support their people.  The core HR software market alone is over $50 billion in size and when you add up all the tools for learning, recruiting, and other forms of employee management, the market is over $300 billion.

Over the last several years, one of the vendors I’ve been spending time with is Microsoft. As many of you may know, Microsoft is in the middle of one of the most impressive transformations in the history of tech and is now firing on all cylinders. Over the last two years Microsoft has acquired LinkedIn (which had acquired Glint), and its enterprise productivity tools are the most impressive and integrated in the company’s history.

Traditionally Microsoft has gone to market by industry. The wide range of products (productivity tools, cloud services, hardware and gaming, and business applications) are positioned and sold by industry and technology sales teams, and deeply marketed to IT buyers and developers. By doing this effectively, Microsoft has created enormously strong client relationships among IT and business buyers in companies of all sizes.

Today, products like Teams and Office 365 are revolutionizing the way we work (more than 13 million daily users of Teams already more than tripling each year). Yes, Google, Slack, Atlassian, and Cisco have created major markets for email, collaboration, calendaring, and various productivity solutions.. but added together, none have the scale and impact of Microsoft. And today MS Teams, the product I believe has the potential to change the way we work forever, has become an entire application ecosystem and is growing even faster than Microsoft expected.  (We built a Teams app for the Josh Bersin Academy and it’s widely used already.)

When I first started meeting with Microsoft it was hard to find a product leader who thought about the HR Tech market. Yes, the company got into the space by acquiring LinkedIn, but until the last six months there was no clear strategy to go after this buying segment, despite the fact that many of Microsoft’s tools are widely used by HR. Today companies use LinkedIn for recruiting and learning; they use Teams and Workplace Analytics for collaboration and people analytics; Sharepoint for employee portals, and of course Powerpoint and many other products for learning.

I spent quite a few meeting at Microsoft pointing out to them that “HR as a buying center” is a huge opportunity.

Well the shoe has now dropped, and the Microsoft execs are getting serious. Microsoft is formally getting into the core HR market.

What Is Microsoft Doing? Building an Enterprise HRMS.

This week the company made an announcement of a product called Dynamics 365 Human Resources. And despite the somewhat low profile blog published today, I believe this is a very big deal.

Essentially what Laurel Reitman, the general manager, has done, is pull together the tools and functionality already built-in Dynamics into a new core HRMS positioned for the enterprise.

microsoft dynamics hr

If you look at all this system does, it’s essentially the functional equivalent of what Ultimate, Workday, SuccessFactors, ADP, and Oracle are selling. And given it’s Microsoft roots and foundation, it will immediately integrate into the Microsoft directory, security infrastructure, Office 365 platform, and Teams.

To complement this, Microsoft is now formally positioning LinkedIn Talent Hub as its recruitment solution and LinkedIn Learning as its learning, skills development, and career solution. 

What Does This Mean To The Market?

This is a crowded market: can Microsoft make a dent?  Absolutely.

I’ve spent a lot of time with the Dynamics and LinkedIn teams, and this is well thought out decision. Many senior Microsoft execs are now involved, and I believe Microsoft has a big opportunity.

Let me explain my thinking.

1/ Microsoft is masterful at making complex things easy.

First, let me start with the basics. Microsoft’s core DNA is to create complex software applications that are easy to use. Witness Excel, which has more analytics horsepower than many complex systems, yet is easy to use by high school kids in 9th grade. 

Let me tell you a story. In the early 1990s I worked for Sybase, the pioneering developer of client/server databases. At that point in time, the only database technology you could buy was a mainframe-like server system, and applications had to build simple text-based user interfaces. By designing an entire client/server architecture, Sybase developed a database engine that was not only wicked fast, but enabled developers to build applications on the PC that accessed it in a dynamic and scalable way. Every Wall Street firm adopted it, and we were selling it to IT departments all over the world.

During the early days of the company, the founder Bob Epstein decided to license the technology to Microsoft, enabling them to build a “low-end SQL Server” that would help Sybase create an industry standard for client/server interfaces, stored procedures, and other innovations. It more or less worked – companies standardized on Sybase for Unix, and then bought Microsoft SQL Server for NT (which was very new). 

But oops, something terrible happened. Microsoft took the arcane, command-oriented interface to Sybase and totally redesigned it so it was amazingly easy to use. They built administration tools anyone could learn, a set of development tools that even Excel users could master, and an entire ecosystem of easy-to-use utilities on top. And they priced it a 1/10 the price of the Sybase SQL Server.

I remember our head of product management started joking:  “let’s see – our product is more complex, harder to use, harder to implement, and ten times the cost.  What is our marketing position now?” We were essentially disrupted by Microsoft’s relentless focus on ease of use, developer interfaces, ecosystem, and integration into other Microsoft products. Sybase had to totally rethink its entire product strategy, and became largely a mobile database company.

I think you could say the same thing about HRMS systems. While Ultimate and ADP are fairly easy systems to use, applications like Workday, SuccessFactors, and Oracle are dauntingly complex. Yes they are “best of breed” but the are in many ways just as vulnerable to Microsoft as we were at Sybase.  More on this below.

2/  Microsoft is relentless and tenacious in its business.

Second, Microsoft has the culture, experience, and deep pockets to stay the course. Let’s face it, the HRMS market is complicated. Companies that try to build these things (ie. SuccessFactors Employee Central) take many years to mature their products, and there are never-ending new features to add. Today, for example, capabilities for gig work, real-time pay, team-centric organization structures, agile goals, and social network-based recruiting were never even dreamed of ten years ago.

I believe Microsoft, through its new focus on core HR in the Dynamics business, can now patiently and relentlessly go after this market.

Prior to this decision the Dynamics business was trying to build everything (recruiting, compensation, field scheduling, payroll interfaces, and more). This of course stretched the development team thin, and they were having a hard time getting focus. 

Now, with LinkedIn taking formal ownership for the recruiting and career development market, LinkedIn Learning evolving into an enterprise learning platform (the company announced plans to build an LXP), the Dynamics team can focus on core HR. And as the chart above shows, they already have a big head start.

Look at the strategy below: this is a team that can focus on the core HR system. Even Workday and SuccessFactors have stretched themselves thin.

microsoft hrms


3/ Microsoft Dynamics HR can radically improve the employee experience, through microservices delivered as HR in the Flow of Work.

The third advantage Microsoft has is that they are able to build an architecture that really delivers on the employee experience. Here’s my thinking.

Workday, Oracle, SuccessFactors, and Ultimate were really designed as a “destination.” You login to the application, learn how to use it, and deal with it. When you’re done with your HR task, you logoff and go back to your regular job. 

In a world focused on the employee experience, companies are now doing backflips to make more integrated into your daily work life. Many are buying ServiceNow as a front end; companies build custom employee apps; and vendors are doing everything in their power not to lose your employees’ eyeballs. (Read about Workday’s People Experience which is a massive investment in this area.)

At the end of the day, however, you really don’t ever want to log into an HR system – you just want to get your work done as fast as you can. And when you need to update your goals, or schedule time off, or check your 401k, you just want to click on a bot or button, and go back to work.

While ADP Next-Gen HCM is a big step forward in this direction (it’s a totally micro-services based platform), Microsoft can do this faster than anyone. The Dynamics 365 HR system is all Microsoft based, so it has the interfaces and microservices architecture to be accessed from Teams, Outlook, or any other Microsoft platform. When I was talking with Laurel about this topic, she immediately got it and told me “just wait until you see what we’re going to do with Teams.” I can imagine.

Think about the way LinkedIn is being connected to Office 365 and other Microsoft apps. You can now share your contacts between LinkedIn and Outlook, you can share your Office schedule with recruiters for interviews, and soon you’ll be able to find LinkedIn Learning content directly from your email and other Microsoft apps. The new Microsoft technology called Project Cortex is now using AI to find relationships between all the documents in your company. Imagine how this could be leveraged for HR self-service and all other types of employee help applications.

Let’s wait and see: my guess is that Dynamics 365 HR will be available as a chatbot, through Microsoft cards and panels, and through conversations and direct suggestions in Teams.

4/  Microsoft can go after the market in many ways.

Finally, this product can enter the market in many ways. For small and mid-sized companies, Dynamics is already well established in retail, professional services, and many manufacturing industries. These customers are looking for an integrated “all-Microsoft” solution so they can be quick wins as the product matures.

For larger global enterprises, where Microsoft wants to focus, the 365 Dynamics HR server can be used to complement the existing HR systems. Consider, for example, the need for retailers to schedule people based on various shift changes, with all the complexities this entails. Companies could “turn on” the scheduling features in Microsoft Field Service, and use Dynamics 365 HR to track hours and pay. This may not replace the existing HRMS, but it could add value to the legacy system and immediately leverage the company’s investment in Teams. Another client could decide to use Teams for employee training and development and could use Dynamics 365 HR to add features for compliance management, reporting, and training administration.

In other words, this, like SQL Server, is the camel’s nose under the tent. Microsoft customers will see new features and capabilities they want to use in their enterprise products, and they will just buy Dynamics HR to enable these features to scale.

ADP’s Next-Gen HCM is positioned the same way. If you need to manage teams, set team goals, or build an application ecosystem that works around teams, you could implement ADP’s solution on top of your existing HR infrastructure, and slowly migrate to a new architecture. I believe Microsoft is likely to see the same thing take place.

Bottom Line: This Is A Sound and Compelling Strategy

While Microsoft has not aggressively marketed or sold this product yet, I think the strategy has a lot of potential. Ecosystem partners (payroll, learning, recruiting tools, and others) will flock to Microsoft’s solution (just as they have been for Teams) and integrators and resellers will pick this up. As the features become well understood, companies will ask themselves “does this capability belong in our HRMS or should we put it into the Microsoft application network?” If the Microsoft system is easy to use (and well integrated), a lot may pick the Microsoft approach.

Yes, there’s a big question about “where all the employee data goes.” But in reality, most companies have many employee systems of record already, so it’s quite common to see some employee data in one system and some employee data elsewhere. Because Dynamics 365 HR is part of the Microsoft family, I believe integrating its source of data with others will be much easier than people think.

This is not a brand new product: Dynamics 365 has been around for a few years, so the functionality is well along. Let’s wait and see how ambitiously Microsoft markets this new solution, I think the strategy has a lot of legs.