Equity Research

HR Software Market to Benefit From the Evolving Work Environment

A Look Into Key Trends

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To say the HR software funding market has been white hot would be an understatement. More private funding was raised by HR tech companies during 2021 than in the previous five years combined. In our view, the increased interest in the space has been fueled by the pandemic, which arguably changed the way in which people work more over a 2-year period than in the previous 10 years. Although some of these changes may revert, two years (and counting) is a long enough time to develop strong habits and preferences that can be hard to break. And these material changes in the way we work drive a need for rethinking traditional HCM software, which investors are betting will result in a significant HR software investment cycle with new categories being created.

In our report titled “HR Software Market to Benefit From the Evolving Work Environment: A Look Into Key Trends,” we highlight seven themes in HR software and provide our conclusions as to the implications to our public HR software coverage. These themes and conclusions are based on our discussions with private and public HR software companies and participants in the industry. We also profile 29 private software companies that are exposed to these themes, most of which have raised significant funding over the past couple of years.

The key themes we identified are: 1) HR has become more strategic versus administrative, 2) in HR, there is an increased focus on efficiency, better data, automation, and artificial intelligence, 3) remote and global workforces are creating a new set of challenges, 4) the labor market is driving a need for better retention, development, and hiring processes, 5) the contingent workforce is becoming more important, 6) HR departments are increasingly focused on and tasked with diversity, equity, and inclusion initiatives, and 7) employee mental health is becoming a focus for HR.

What does this mean for our public-company HR software coverage? First, we believe the HR software market is much larger than current estimates indicate and is expanding quickly. This is partly because many new areas of HR software are drawing upon non-HR-software budgets such as money allocated to temp agencies, placement services, job advertising, and background checking services. Further, with HR becoming more strategic and taking on more roles, and modern HR software better able to provide a tangible ROI, we believe HR software budgets will increase accordingly. Second, we expect a period of consolidation over the next several years, with large HR tech companies buying start-ups to address emerging opportunities and some of the better funded private companies also making purchases. Third, although the investment wave driven by moving HR software from on-premises to the cloud is past its peak, we expect the new normal work environment, labor challenges, the expanding role of chief human resources officers (CHROs), and ESG initiatives to drive another significant wave of growth. Bottom line, we believe the HR software space should see significant tailwinds and growth over the next five-plus years, and we believe investors should have exposure to this segment.

For a copy of the “HR Software Market to Benefit From the Evolving Work Environment: A Look Into Key Trends” report mentioned in this article or information on any of the companies in Matt Pfau’s research coverage list, please contact your William Blair salesperson.

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