Human Capital Management brings together the technologies and services used to recruit, administer, support and develop a workforce. Spanning talent acquisition, core HR and talent management, the HCM market contains a wide range of specialist providers serving different organisational needs.
Published in 2021, this whitepaper explores the structure of the HCM market, the factors driving its development and the consolidation opportunities emerging across its fragmented landscape.
The HCM market can be divided into three closely connected areas:
The global HCM market was forecast to grow from $17.6 billion in 2019 to $24.3 billion by 2025, representing a compound annual growth rate of approximately 6.7%.
Organisations have access to a considerable range of specialist HR software. While this creates choice, it also means that businesses may need to use several separate providers to meet their workforce requirements.
This fragmentation creates opportunities for HCM companies that can combine complementary capabilities and offer customers a more complete solution.
HCM software was once focused primarily on larger enterprises. The emergence of flexible, modular SaaS platforms has made these technologies more practical and economical for smaller organisations.
Monthly pricing, configurable modules and multi-tenanted technology have reduced the need for substantial upfront licensing commitments. Scalable infrastructure and streamlined onboarding can also allow corporate solutions to be launched within minutes or hours.
The adoption of big data, cloud-based technology and artificial intelligence was supporting the development of more person-centred HCM solutions.
Cloud technology also gave employees, contractors and freelancers more immediate access to information such as payroll records, while helping employers respond to the growth of virtual working and flexible hours.
Changes to regulation increased the importance of managing workforce information accurately and securely. Requirements associated with IR35, GDPR and Key Information Documents placed further responsibilities on employers and workforce service providers.
The growth of contracting and self-employment also increased demand for umbrella companies and software capable of handling the related compliance requirements.
Elsewhere, cloud-based learning management systems helped organisations administer and document mandatory training, including health and safety compliance.
The Covid-19 pandemic brought employee mental health and wellbeing further up the corporate agenda. This supported investment in solutions addressing mental, physical, financial and social wellbeing.
Employers were also using technology to attract, motivate and retain people within increasingly flexible and distributed workforces. Relevant solutions included employee feedback platforms, communication tools, reward and recognition services, learning systems and virtual fitness programmes.
Environmental, social and governance considerations were becoming another area of corporate focus. Employee turnover, workplace culture and environmental credentials could influence how a company was perceived by its workforce, stakeholders, investors and potential acquirers.
The HCM market contained numerous fast-growing specialist businesses, some of which were approaching the limits of their available capital or personnel resources.
This created an environment in which larger competitors and private-equity-backed management teams could use buy-and-build strategies to create broader platforms. Consolidation was taking place both within individual HCM niches and across different parts of the market.
Several commercial factors supported this approach:
The availability of investment capital, continued market growth and the number of specialist providers also strengthened the opportunity for consolidation.
Flexible benefits, salary-sacrifice services and voluntary benefits represented potential additions to wider HCM platforms.
Reward and recognition technology could help employers align employee behaviour with organisational values while supporting more immediate and personalised recognition.
Providers addressing mental, physical, financial and social wellbeing offered capabilities that could complement broader employee engagement and benefits platforms.
Virtual fitness classes and gym programmes were also becoming part of the tools used by employers to support workforce health inside and outside the home.
Feedback, survey and communication platforms gave leadership teams a faster way to understand employee sentiment and gather responses to new initiatives.
These capabilities were becoming increasingly connected with more traditional leadership and organisational consultancy services.
Mobile workforce management technology allowed employers and customers to access real-time information relating to site visits, timesheets, payroll, mileage and workplace observations.
Established payroll platforms could expand by acquiring outsourced payroll bureaux and introducing additional services to their customer bases.
Potential complementary services included accountancy, financial planning, salary sacrifice, compliance-related e-learning, and reward and recognition.
The whitepaper identified a limited number of UK HCM businesses with sufficient scale and quality to attract investment as either standalone platforms or bolt-on acquisitions.
Competition for these businesses had the potential to increase valuation multiples as institutional investors pursued a relatively small pool of opportunities. Cross-border transactions were also becoming more important, with international businesses and private equity investors acquiring HCM capabilities in the UK and overseas.
Competition was not expected to come solely from established HCM providers. Businesses operating in areas such as wealth management, insurance and accountancy could also view HCM services as a way to acquire new customers and protect existing relationships.
The strongest platforms would need more than an extensive product portfolio. Technology, service quality, management capability, user experience and the ability to execute an effective growth strategy would all influence which businesses emerged as market leaders.
For owners of specialist HCM businesses, the fragmented market presented several potential strategic routes. A company could continue developing within its existing niche, broaden its capabilities organically or become part of a larger platform through investment or acquisition.
Businesses likely to attract interest included those with differentiated technology, strong management teams, scalable delivery models and capabilities that could fill a gap within a broader HCM proposition.
Understanding where a company fits within the HCM landscape—and how its services could complement those of a potential investor or acquirer—was therefore becoming increasingly important.
HCM encompasses talent acquisition, core HR administration and talent management. Its functions include recruitment, onboarding, payroll, workforce management, employee benefits, wellbeing, learning, engagement and performance management.
The market contains many specialist providers designed to meet particular workforce requirements. Relatively few businesses offer capabilities across every HCM sub-sector.
Acquisitions can add new technology, extend a platform’s service offering, increase customer expenditure and create cross-selling opportunities. They can also help providers become more comprehensive, one-stop solutions.
Areas highlighted included employee benefits, reward and recognition, wellbeing, workforce management, payroll, learning management, employee feedback and communication tools.
Cross-border transactions give platform businesses access to additional technology, capabilities, customers and geographical markets.
Relevant qualities include scalable technology, strong management, an effective user interface, differentiated capabilities and the potential to complement or extend an existing HCM platform.
