HR Technology Market Disrupted: Employee Experience Is Now The Core
For decades companies have embraced HR technology by starting at the “core.” This “core” was always considered the payroll system, HRMS (employee system of record), and foundational infrastructure, often called HCM.
Companies select these Core Systems first, spend millions to tens of millions of dollars to implement them, and then they “lay other tools on top.” These core systems of record are considered to be architectural: they form the basic, fundamental architecture for the hundreds of billions of dollars spent on employee applications, systems, and tools.
Well, I would like to argue that this has now changed. While core HCM systems are necessary to run a company, they are no longer the center of gravity they once were. The layers on top, which I describe as the Employee Experience and Talent Intelligence Systems, are even more important.
Bear with me as I try to explain.
If you go back to the 1970s and 1980s world of tech, the biggest innovation in IT was the invention of ERP. ERP, or Enterprise Resource Planning, was an effort by pioneers like SAP and others to integrate financials, manufacturing, supply chain, and other back-office systems into one, end-to-end solution.
The idea of ERP, which is now well understood, is that companies need an integrated set of financial and operational systems to manage products, suppliers, vendors, financials, and results. These systems, which are now widely sold by Oracle, Workday, SAP, and hundreds of other vendors, became the “financial and operational backbone” of our companies.
And this all worked. In those days, when most businesses sold products and services in an industrial model, we needed to know how many widgets were involved in each assembly, how much each one cost, and what supplier provided it. So every major corporation, from oil companies to auto manufacturers, embraced ERP.
Later, software vendors tried to apply this model to HR. Pioneers like PeopleSoft realized that the ERPs were simply not handling HR and employees well, so they created a market for HCM.
Initially, HCM was all about payroll, employee record keeping, and job architecture. So we implemented these things and modeled our companies around the hierarchy. But despite the best effort of ERP vendors, the HCM system wasn’t enough. Why? Because the original ERP model was not designed for people.
A bolt or assembly has a fixed cost and while it may depreciate, its value doesn’t change over time. People, by contrast, are constantly growing and changing, so we needed a system that could manage skills, career paths, succession plans, and all sorts of mushy, non-linear investments in people. A person is not like a widget and a job is not a product: we can’t just put a “cost” on them, so the ERP model for HCM did not work well.
So what has happened? Vendors and buyers started to layer all sorts of value add tools on top. Learning management systems, applicant tracking systems, assessment systems, and now skills inference and employee engagement tools. None of these really had a “home” in the ERP, so they each became independent systems of record.
Where did that leave HCM, the core system of record?
HCM Was Built On An Industrial Model
Well, the solution stack has changed. The HCM system, since it tends to treat employees and jobs as objects, is built on job families (ie. Finance, IT, sales), hierarchical job levels, and tens of thousands of job titles, job descriptions, and job competency models. The concept of a “project team,” a “part-time worker,” or even a “contingent job” did not quite fit.
And it gets even more complicated. When you move into a new country, undergo new regulatory rules, or acquire a company, you end up with another system. So today, as we proliferate these systems, companies have business rules and job architectures all over their company.
Ideally, we’d like to have a single “system of record,” but in reality, the data is in multiple places. Few companies have a good view of their contingent or gig workforce. (Workday recently acquired VNDLY to help customers address this challenge.) Most companies have lots of job descriptions and job titles that are no longer used. And almost every company has too many job levels, lots of cross-domain teams and projects that aren’t in the system, and unending challenges figuring out things like skills, progression, career mobility, and other “non-linear things.” Each of these new objects sits in another system, making the real “core” a network of applications.
By the way, these “non-linear” assets are the most important of all. While it would be nice to know how many people we have (which itself is not always easy to find out), it’s far more valuable to know what skills we have, how much expertise we own, and how our people are moving, progressing, and performing at work. None of this “squishy stuff” was designed into ERP so we have to either buy other tools or find a system that is addressing this with their architecture.
Of course, Workday, SAP and Oracle are working on this: they each have skills clouds, career tools, journey platforms, and emerging inferencing engines. Workday has more than 1100 customers using its skills cloud and acquired Peakon in 2021 as part of the company’s EX strategy. SuccessFactors HXM is built on a new people model and is now embracing a new People Model that includes mood, learning styles, and other personal growth characteristics. And Oracle HCM Cloud is built on skills at its core.
Now I regularly meet with Workday, Oracle, SAP, and many HCM providers and I am in no way minimizing the importance of what they do. Their systems play a vital and essential role in business, and every company needs an HCM to operate. But most of the value-add over the coming years is taking place at the top of the stack.
Some Client Examples
Let me give you some examples.
The first company I want to mention is DHL, which has more than 700,000 employees in hundreds of companies. They, like most global companies, have an enormous patchwork of back-end systems for local company payroll and benefits. But what the company needs most is a modern employee experience platform for drivers, operators, distribution agents, and professionals. They are building this on a platform called Staffbase, which is a modern EX communications platform. Other vendors in this space include ServiceNow, Applaud, Microsoft Viva, and a new breed of “deskless worker” ex platforms like Workjam, Yoobic, and others.
Now that they have this EX layer defined, they’re moving down the stack from the top, looking at employee survey platforms, journey management, and other EX tools to build from the top down. None of this work impacts the core HCM system.
The second company I want to mention is a large global electrical systems manufacturer, who does business in more than 30 countries. They have more than 15 different HCM systems around the world, many based on Oracle. They each process local payroll, local regulatory compliance, and handle local staffing needs. The CHRO is looking for a better data analytics solution, an integrated EX platform, and a series of new applications for internal mobility, skills development, and career planning. Their original thought was to replace all these back-end systems with a whole new platform.
After exploring their needs in detail, we all came to the conclusion that they really don’t need an ERP replacement, they need a global data warehouse, a global skills and mobility system, and then a standard set of EX tools for employee access, portals, and support. While at some point they will want to upgrade the core HCM systems, their real needs wouldn’t be served by that approach and they can save lots of money focusing at the top of the stack.
The third example is a big SuccessFactors customer in Asia. This company, which operates in raw materials and distribution, also has a mixture of on-premise and cloud systems and lots of local payroll in different countries. They also asked us whether they should consider a massive vendor change or possibly upgrade to all new features of SuccessFactors. The final decision, which has been recommended by us and their systems integrator consultant, is not to replace anything, but rather to upgrade the SAP technologies over time and focus their new investments in EX.
And let me add one more. When we were at Deloitte we did a lot of work with Delta Airlines. They, like most airlines, have a massive investment in legacy systems. When Delta needed to redesign its entire customer and employee experience, they didn’t replace these systems. They built one of the world’s most innovative apps, connecting to legacy systems on the back end. This is the lesson for all of us: if the user is not happy, it doesn’t matter how elegant the back-end system may be.
Employee Experience and Talent Intelligence Is The New Core
I don’t need to tell you how fast the EX platform market is growing. In only one year Microsoft Viva has attracted more than 1,000 paying customers and vendors like ServiceNow, Applaud, and Workjam are growing like crazy. Every company is standardizing messaging on Teams, Zoom, Webex, or Slack, and most new employee solutions have to plug into these systems. Workday Everywhere, for example, is Workday’s program to deeply integrate with these tools.
One client, Colgate, told me their new HR Tech strategy is based on a vendors’ ability to integrate with Google Workspace, which is their primary employee toolset. It doesn’t matter to them what the back-end looks like – it only matters how well it integrates into the employee’s platform.
In the Talent Intelligence area, the market is similarly white-hot. Vendors like Eightfold, Gloat, Beamery, Fuel50, Hitch, and technologies like Skyhive and Techwolf are being snatched up as new core systems for skills, careers, and AI-powered growth. And the learning experience vendors (Degreed, EdCast, Viva Learning, and others) are becoming essential to every company.
By the way, the stock market understands this. Look at the relative price charts for the three major ERPs (Workday, Oracle, SAP) vs. ServiceNow (a leader in EX). These are all sophisticated technology companies each run by excellent management teams. They’re just in different markets.
One More Piece of Evidence: Our HCM Research
Let me conclude with one more piece of research. In our HCM Excellence studies, which detail HCM implementations across all the major ERP providers, we found one particular finding. The companies that had the most success with large HR Tech projects focused on employees first, technology second. They clearly defined their employee and management needs, their new talent practices and cultural goals, and the data they wanted to capture. Then they sat down and built the stack from the bottom up or top-down.
We also found that these companies looked at new HR Tech as part of a business transformation, not as an IT or technology project. They focused on their new business models, their new operating models, and their new HR and talent practices first, then looked at the technology as an enabler of these goals.
What Does This Mean To HR and IT?
The bottom line is simply this: the center of gravity has shifted.
HCM and ERP systems remain essential to running your company, but the new center of gravity has shifted. My research shows that HCM/ERP systems tend to last 8-12 years, and then often the vendor’s architecture or business has been disrupted. If your problem is a lack of consistent data or poor career experience for employees, in most cases you’re better off fixing the implementation you have and focusing your dollars on the upper layers.