HR Tech and the rush to chase where the puck has been
Welcome to the HR Tech Thunderdome.
HR Tech suffers from that same over exposure and glut of poor quality that ended Burt Reynolds reign as ‘Americas Leading Man’. Once the toupee was lifted and the man behind the curtain was revealed, the swoon of female admirers and the idolatry of mustached men everywhere stopped.
The new entrants would like to decouple a ‘whole system’, make each niche component process their core competency and distinguish themselves by consumer friendly marketing, features and usability.
Sounds promising and the industry has become a bikini for the massive amount of VC rain.
Now comes the hard part, how to build a profitable company on a low margin, human capital intensive, complex sale when you don’t have the levers.
The ideals, those companies such as TriNet, Insperity, ADP, Monster and Manpower are profitable and have built complex mechanisms to acquire prospects and client velocity, to oversee underwriting, pricing and manage risk, maintain client credit control and invoice, the ‘secret sauce’ that was assembled through painful trial and error over generations of careers.
New entrants coming into the market are in a rush to prove themselves to benevolent funders and bring on business at any cost. They will not have the time to mature operational excellence.
It’s not a great benefit when a company doesn’t need profitability to fulfill its strategy, it can (and usually does) cause well intended recklessness. When shareholder value is measured in an unreliable and volatile currency, something wicked this way comes.
Another cautionary flag is that none of the new entrants have risk tolerance, nobody wants to hold on to the arbitrage overnight. They want it when it is favorable but have employed no system wide measures when it turns against them.
For example, company Z is essentially a sales and marketing firm for an insurance company. Company Z will give you a ‘free’ kick ass suite of services, a great interface and on boarding experience on the condition that they are the broker of record for your insurance, and as such, collect the residual income from the insurer…
Well, that’s dandy, until it isn’t.
When the large insurers do the cyclical clean up of the books, they employ all their contractual rights, they will give company Z staggering rate increases and say ‘you don’t like it, go elsewhere’. The entire ‘free’ schema of the value to the client now gets disrupted The company must pass on the rate increases to the clients – who in their vendor review will learn that they can go to a different insurer, outside of Z and get a substantial discount.
Of course Z has a rhetorical rebuttal, pilfered from inapplicable case studies and Google+ posts, which will sound operable, but ain’t. The problem when you make a mistake in pricing and lose (or have none) pricing discipline is when you make a mistake it’s exponential. Clients leave and therefore the forecast-ability of earnings and revenue becomes vaporous.
Client attrition is a fast working poison.
What is optimal strategy?
A. Be acquired (at a premium). This is not a likely outcome but if a company is built with meticulous precision it is doable.
Market leaders are not threatened by a lower cost alternative. They know that one of the levers they have is to lower prices and can neutralize the opponent’s biggest advantage. Further, they see no reason (usually) in buying at a frothy premium when just being patient will get them the same company or its undifferentiated competitor for pennies on the dollar, an acquihire.
The companies that do get purchased for a large premium are done so because the offer an internal process improvement. Big companies don’t need the next blockbuster, they need small basis point gains along their own factory lines.
B. Layer more products, reducing reliance on partners and churn to profitability.
Here the problem is, the more you introduce new products the more you look like the recognized ‘failsafe’ market leader, your fixed costs increase and the prospect decision maker will choose against career risk, by selecting the market leader, leaving holes in your revenues and bad forecasting.
C. Acquire failed competitors and complementary products/services on the cheap as those businesses move towards failure.
This is a very sound strategy. To succeed you must have pricing discipline, be the most expensive of the new entrants, hoard the cash and make opportunistic purchases earlier then you had planned. Buy the companies as they are falling, not after. As they are falling they still have clients and employee morale. After they have fallen all the vitals have deteriorated and it is very difficult, disruptive and asset draining to revive.
D. Asprire to a profitable lifestyle business. I think this is an underutilized strategy.
You will own a lot more of your company, can maintain client intimacy and can negotiate a sale, if you so desire, much more generously.
The accidental lifestyle business realizes it very late and after a lot of debt and equity has changed hands. Recapitalizing becomes emotionally draining and expensive to buy your way out of servitude. But, if you start with construction of a lifestyle business it permits the flexibility to alter course and trajectory.
HR Tech and the rush to chase where the puck has been