HRtech and the trajectory of the puck

As a kid I papered my bedroom with posters sloppily posted to white walls. Bruce Lee was my favorite and he was (and remains) aspirational in physical ability and a practical synthesis of an actionable philosophy.

“Obey the principles without being bound by them.” – Bruce Lee

Pre rant notes:

1. The below is my selfish discourse on Professional Services. This category includes Payroll, Recruiting, Staffing, Workforce Management and the like.

2. There are two basic systems for building an opportunity to create shareholder value and an event. the first is measured on the top line Get mass. The second is Get profitable. These are more than just sequential processes although well managed companies will seasonally cycle and repeat thru each many times particuarly as it adds ancillary services, gains capacity and operating leverage.

3. For a new entrant in a mature market, creating and sustaining an advantage requires precise understanding of the current system, its gaps and a theory that will allow it to create the distance from competitors needed to maintain outsized shareholder returns.

HRtech and the trajectory of the puck.

Here then is an incomplete glimpse of the market and my imprecise calculations that, in its unformed whole comprise my theory. Rather than present as a doctrine, I offer it here in a bulleted format.

Where is the puck right now?

The established (profitable incumbent) market leaders possess:

• A comprehensive suite of employer/employee services
• Well capitalized and/or public
• Efficient mechanisms for extracting value from prospects/clients and selling ancillary services
• Experienced management
• Levers to sustain profitability and squeeze competitors
• Mature underwriting, credit control and risk tolerance
• Disciplined client selection and pricing
• Sales brute force comprised of tenured reps

And the market leader strategy:

• Not threatened by new entrants with low priced solutions
• Let the newco soak up low margin, ‘low hanging fruit’ clients – anticipating that these clients that grow will require a robust ‘all in’ provider
• Push deep into vertical markets of ‘non clients’
• Achieve basis point improvements along the assembly line
• Increase back end capacity utilization
• Use acquihires and acquisitions to improve aesthetics, compress product cycle times, increase prospect/client velocity.
• Reduce staffing ratios and the amount of human intervention required in manpower intensive processes

New entrants and their collective strategy:

• Reframing competition from reliability to cost
• Continuous cycles of minimum viable product innovation
• Reliance on integrating with other companies and co-invention risk
• Dependent on a poorly installed ‘coalition’ of ecosystem partners
• Rivalry intensifies, hyper competition in the low end market, competing away the value they create
• Little operating leverage
• Increased volatility in health insurance pricing will challenge favorable arbitrage in rebranded Kaiser, Aetna, United group healthcare networks

“cheap to achieve escape velocity. Very expensive to maintain an orbit” – me

Where is the puck going?

1. Special purpose PEO’s: That scale from only one service to a total solution and serve only the ‘host’ company’s clients and pushing the hosts own local finance+ apps down into the market. The legacy providers were built as ‘all in’ solutions. It is ingrained in their culture, their pricing and sales strategy and they can’t be both super premium and super convenient, those ‘twains will never meet.
2. Decoupled Employer/Employee relationship: This is a trend we have seen in Europe. The dynamics outide of the US are unique and driven by onerous legislation that preserves and enforces an implied ‘lifetime’ contract between the Employer and Employee. In the US the catalyst will be Health Care+ tax code and retirement changes.

a. Employees migrate to State exchanges. This is an important trend and infers sweeping changes and volatility as ‘ObamaCare’ progresses in the marketplace from the highest utilizers to the lowest and will cut the tether from employer to employee. Many Employers insurance pools will contain abundant ‘adverse selection’ as the good risk gets taken by the exchanges.

b. More employees will migrate from the ‘traditional’ W2 to become 1099/mercenaries.

c. Going into the new presidential cycle and our next national rhetoritician, I expect we will see sweeping changes in tax collection and an easing of company retirement benefits to an outside market.

3.Push fast and deep into the phone: Legacy systems (Applicant Tracking, Learning Management, etc.,) were designed for a different worker profile and were constructed as compliance tools. Next generation is built from scratch to use messaging, teach, mentor, train, payroll, benefits enrollment and attendance, etc.

4. Defragmentation of the market. New entrants are reframing competition from quality to price and most will not build the operating leverage to become profitable. As these companies wither, capacity will get taken out of the market and a restoration of profitability for those companies that have built a rainy day fund and/or that have enough top line to lever.

• The opening is the only place the holds the potential for true creativity and doing something entirely new
• Maintain threats and pressure, it will lead to better negotiations and improve the quality of material
• Opportunistic, paced, synergistic acquisitions to tolerate near-term uncertainty in the environment and avoid ‘death by indigestion’
• Build a syndicate of complementary VC + PE and family offices to fund and gain advantage over other, less flexible, buyers
• Aggressively push to a size premium