HR Tech Companies Laying People Off: Was It Overdue?

Over the last two weeks I”ve talked with more than a dozen HR Tech companies that decided to lay off a large percentage of their workforce, and a new article in the WSJ lists dozens of Silicon Valley tech companies letting thousands of people go.

To me, this is another dimension of The Big Reset, a meaningful and important reset of our economy, work, business climate, and society.

This Was Coming

Earlier this year, before the virus crisis began, I told an HR Tech reporter that I expected many of the 4,000+ HR Tech companies to “go away.” And now we’re beginning to see this shakeout occur. Why? The demand for all these HR Tech tools was becoming saturated.

Here’s the history. Over the last eleven years, Venture Capital and PE firms have thrown money into this market (estimates of over $10Billion, if you include all the M&A). Almost every entrepreneur became an angel investor, and nearly every major VC firm has a partner focused on HR Tech. 

And this made a lot of sense. When the economy grows for a long period, many new businesses are formed. New restaurants, distributors, retailers, and service companies emerge, and they all need software for recruiting, hiring, payroll, human resources, and talent management. So these HR Tech startup vendors were serving this enormous new market of fast-growing new businesses, and they expected it to go on forever. I was always amazed that among the hundreds of vendors I talk with each year, each seemed to be growing.

Then there’s the market for enterprise HR Tech software. The HR Tech market is like a barbell – a huge number of small businesses (more than a million companies with less than 100 employees) and several thousand global organizations with 10,000 employees or more. Vendors tend to specialize in one market, and the enterprise market was already slowing.

Why? Global companies are finishing a ten-year replacement of legacy in-house HR systems with cloud HCM systems, which has cost companies billions of dollars and created heavy recurring costs. These projects have been expensive, they’ve sucked up enormous resources from HR and IT, and they’ve started to starve the market for smaller vendors.

Consider how complex the landscape has become. Driven by VC-funded innovation, the average large organization has 11 HR systems of record, 7 different recruitment platforms, 11 or more learning platforms, and lots of other systems for employee experience, benefits, wellbeing, and more. During times of economic growth, it may make sense to buy all this stuff. But once the economy takes a dive, companies just start asking themselves “how do we rationalize this big mess?”

Prior to COVID-19, the big theme was reskilling, talent mobility, AI-based tools for employee experience, and advanced recruiting and analytics tools. While none of these problems have gone away, they’re all being refocused on the problem of “how do I respond to the health, safety, and mobility problems we have right now,” and “how do I more quickly redeploy people to new roles when things change so quickly?” So spending on these systems will slow.

The other symptom of slowing were the conversations I’ve been having with HR leaders. For more than two years they’ve been asking me “who are the hot vendors in this space” and “what are technologies I”m missing?” Today the comments are “can you tell all these vendors to stop calling me?” and “who’s the leader because we don’t have time to look at all these startups.”

We’ve reached the end of this HR Tech hype cycle, so vendors just have to accept that things will be different from here.

The Big Question. Do Companies Need All These Tools?

Well, it really depends. What I’ve found over the years is that buyers fall into three categories: Innovators who like to “jump in early” and experiment with lots of new tech; Followers who like to wait for innovators and the copy them; and Laggards who pretty much wait until their current systems fall apart, and then grudgingly upgrade to whatever is current.

Companies in the first category are now on pause: companies in the second category are on hold; and companies in the third category are just doing something else.

Listen, I”m a huge fan of innovation: I am one of the biggest HR Tech fans in the world. I am constantly amazed at the ingenuity and innovation coming from startups. But when your entire company is threatened to go out of business and you’re laying off a third of your workforce, do you really need an AI tool that gives people nudges how to be better leaders or an organizational networking tool that helps you identify low levels of diversity. Not really.

Many of these systems are “nice to haves” and in this particular economic cycle they’re going on the back burner (or side burner). As the saying goes, right now people want band-aids, not vitamins.

That said, there are some new urgent problems to solve. As I described in my earlier article, companies now want systems to facilitate remote work (hence the explosion in Microsoft Teams and free downloads from Qualtrics and many others), they want tools that help them quickly educate and transform their workforce, and they want systems to help quickly identify and move people to new jobs (fueling interest in platforms like Gloat, Fuel50, Eightfold.ai, and Accenture’s new Talent Exchange). But will they buy a new leadership program or learning platform? Probably not: at the moment they’re trying to use what they have (or plug tools into Microsoft Teams).

And then there’s the slowdown in recruiting. While there are 20 million people on Unemployment, close to 7 million jobs are still open. Vendors that have great remote recruitment tools are on fire (Filtered.ai is a good one, for example). So many of these niches are alive and well.

So to me, this is not a “long winter” in HR Tech, it’s just a year-long pause, one where companies can solve the urgent problems they have, rationalize what they’ve already purchased, and wait for the market to shake out.

For Vendors: Remember Business Is About Profit

Most VC and PE partners have business degrees (or MBAs). But for those of you who don’t, let me remind you of something my accounting professor taught me in the early 1980s.

Companies that lose money over the long run have no market value at all.

In other words, the only reason anyone would invest in a company that’s losing money is that they believe (or gamble) that at some point it will make a profit. Of course there’s the scenario that “this company will be acquired,” which has been the bigger thesis over the last decade.

In fact many investors put money into founders, often on the assumption that “these guys can build something others will want to buy at a premium.” I’m fine with this approach, but it’s a risky way to invest and in many cases it doesn’t go that well.

Amazon.com, which was panned for a while, lost money for years, and then turned a profit. Ditto Google, Facebook, and most other highly valued tech companies. And during this economic cycle hundreds of tech companies were sold to these leaders, giving early investors a good return. But now we’re seeing “down rounds” (investment rounds at valuations below the prior round), and reality is setting in. Nobody talks about Webvan, Pets.com, and others who blew up in the last economic cycle, but the risk is always there.

I won’t mention any vendor names, but there are dozens of HR Tech firms that lose money and need investors to stay afloat. If you’re one of these companies, I suggest you focus on profitability for a while. I know VCs understand this, most of them have advised their companies to “get profitable fast.”

Reposition Yourself: It’s Good For You

Can you reposition yourself within this crisis? The answer is absolutely yes! As I discussed in an earlier article, now is the time to think seriously about the value of what you sell. Maybe you created a product for a growth economy: take your ingenuity and rethink how it can be used for restructuring, cost-reduction, and efficiency.

A great example of this is Eightfold.ai. This is a company that built an amazing AI-based system for recruiting, and was growing well during the last few years. Today the team has pivoted their approach, and they’re now selling the system as a tool for rapid, data-driven workforce transformation. I think they’re going to see some big deals ahead.

Another example is Limeade. This is a company that initially focused on wellbeing, a market that felt needed during the economic growth. Now their entire focus is on Care – caring for individuals, managers, and teams, which is perhaps the #1 issue companies face.

I’ve gone through this myself, by the way. When I was building our research company years ago (Bersin & Associates) I spent hours every month thinking “how can I make what we do even more ‘indispensible’ to the HR professionals we serve?” In the upcycles we did research on recruiting and talent management, and in the downcycles (2008 for example) we studied restructuring and “how to do less with less.”

I call it a never-ending process of “crawling up the value curve,” and it may involve doing more consulting, changing your price, revamping your positioning, or even changing who you sell to.

And this is what business is all about. Solving real problems.

I remember reading years ago (I believe it was Peter Drucker) that “the only purpose of a business is to create a customer.” In other words, if people aren’t buying what you’re selling, then you’re either selling the wrong thing, talking to the wrong people, or just not clearly explaining what it is.

I Could Be All Wrong, But Warren Buffet Is With Me

I have to admit I’m a bit old-fashioned about these things. I never really believed in VC-backed businesses for myself (we avoided taking investment in the businesses I’ve run), because I was a part of several VC-based companies that became what Warren Buffet calls “firecrackers” – companies that fly up high, fizzle out, and crash back to earth. I always believed that good companies provide essential business services, they take good care of their customers, and they develop a “moat” (competitive advantage) through service, technology, and a great brand.

Right now, for example, Warren Buffet is buying airlines – because he knows people will eventually fly again. And if you have enough money this makes perfect sense. Of course some of the airlines today may disappear, but the fundamental business proposition is clear: people need to get from place to place, and it’s very hard to build and run an airline. 

If you’re a vendor, apply that simple idea to your company. Is your product or service “essential” in some way, and if so can you find a way to reposition it when buyers are in crisis or short on cash? If so you’re going to be fine. Just think about cash flow and profit, and you’ll be surprised how much stuff you can cut.

What Should HR Tech Firms Do: Hang In There

Let me go back to something I wrote about a few weeks ago. HR Tech, like the airline industry, is not going away. Every business in the world needs to hire, pay, manage, and develop its people – and they do this during good times and bad. 

Vendors, take a sober look at your product, price, and marketing – and make sure what you’re selling is “essential.” In case you aren’t sure, just look at the priorities for HR and employees we just published last week.

You may need to let some people go, and it may not be the best time to start a new product. But if you’re an entrepreneur or seasoned leader, this is when you earn your keep. The tech firms that survive this period will be the leading firms in the future.

I encourage you to roll up your sleeves and just push ahead. We need your good ideas, and as always I’m here to help.

Background Reading from the COVID-19 HR Pulse: