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igh-tech companies aren't the only ones feeling the effects of the dot-com fallout. Many employers have seen the HR software vendors they carefully selected suddenly change names, change ownership or simply go out of business.
Consider, for example, i-Search.com. The once up-and-coming hiring management system went down and out in January 2001. Dot-com woes also beset one of its competitors, SkillSet.com. That company closed its doors briefly in May 2001, then re-emerged after being acquired by e-Labor.com.
"If there's a particular aftershock of i-Search, its that it woke up everybody [in HR] that it could happen to them," observes Bill Craib, director of training and one of the founders of AIRS, an Internet recruiting and training company based in Wilder, Vt.
Indeed, the possibility of your software vendor being acquired or shuttered is not a remote one. (For a list of notable mergers and acquisitions in the HR software field, see
You Can't Tell 'em Without a Scorecard)
"All this activity puts HR software customers in a bind: Do you move ahead with software acquisition plans and take the chance that the company you select may go out of business or be acquired by another vendor? Or, do you take a pass for now, and face the heat from those in your organizations clamoring for an upgrade to your HR software capabilities? Employers are still moving toward leading-edge technology while being concerned about the stability of the companies providing the technology," says Pat Keller, director of HR information services at Sprint Communications in Kansas City, Mo.
"Understanding the marketplace can help. Though few foresaw the extent of the HR software industry shakeout, most now can identify clear reasons why it happened. How long can a business exist without making money?" asks Sid Simon, director of product management for BenefitAmerica of Mountain View, Calif.
"Despite the current downturn, most analysts characterize what's going on in the HR software industry as a correction, not a crash. This is a shakeout where companies that either did not have a good business model or did not have time to get to a profit position soon enough are finding that access to capital dried up," explains David Lindheimer, program director of application delivery strategies for META Group Inc., based in Tampa, Fla.
As a result, some suggest that the established giants in the HR software industry are in the best position to survive. "Nothing is going to happen to PeopleSoft," says analyst Bob Stambaugh, founder and president of Kapaa Associates in Kekaha, Hawaii. Nothing dramatic is suddenly going to happen to any of the big vendors. They have clients, an installed base and maintenance revenue. If anything is going to change, you'll be able to see it well in advance.
"Among newer companies, say analysts, the smart money is on those that have a track record. The companies that are going to make it are the ones that started three, four or five years ago," says Rick Fletcher, president of HRchitect, based in Cambridge, Mass. Those that were shaken out didn't have a chance to get their traction yet. Those that were started before 1997 or 1998 have stability.
But if you talk to some of those newer companies, you'll find that they are hardly ready to roll over. Consider, for instance, Icarian of Sunnyvale, Calif., a frequent subject of takeover rumors. "There is a cycle that companies go through, especially entrepreneurial companies," says Ed Koepfle, Icarian's new CEO. "A company," he says, "has to bring in operating guys to complement the entrepreneur. We were at that point." "However," he quickly adds, "rumors of our death are greatly exaggerated. We were able to raise money in probably the most down time in the last decade with both inside and new investors."
Icarian says its base of venture capital funding is a valuable asset. Others say their companies are strong because they are self-funded. "Knowing we have been profitable every year, without taking part in venture funding, says it all," says Shafiq Lokhandwala, president of privately held NuView Inc. of Wilmington, Mass., which owns MyHRIS, an Internet-based HRIS product.
Impact on Customers
Regardless of funding, many analysts predict that high-tech companies will remain attractive candidates for mergers and acquisitions for years to come. And when a company goes through such a transition, it can have a significant impact on its customers that is, you.
Consider the case of Seeker Software. Just three years ago, Seeker was the darling of the HR technology industry. Acquired by Concur Technologies in 2000, the package was renamed Concur HR and, say many of its users, languished. Says Tom Ott, a former acquisitions sales consultant with Concur, "The focus of development was to integrate it with the expenses product, Concur Expense. Seeker didn't broaden a lot, functionality-wise."
Eventually, MBH Technologies of Teaneck, N.J., acquired the product, and renamed it Link2HR. Says MBH President Peter McCree, "I'm real excited about this stuff. I got 10 times as much as I thought I had. Link2HR users are pleased the software has a supportive parent company." "If MBH had gotten the product when Seeker sold it, I think the product would today have a far and away lead [in the Internet HR marketplace]," says Steven Moritz, senior manager of HR information technology at Dell Computer Corp. in Round Rock, Texas.
The Seeker experience shows the impact an acquisition can have on existing HR software. In short, while a merger probably doesn't spell the end of your HR product ("It's reasonable to assume that the acquirer will continue to serve the same markets as before," says Lindheimer), it can portend a new direction for the software.
To predict the effect a merger will have on the package you have purchased, you should try to determine why it occurred. "Typically," says Lindheimer, "a company buys another to gain control of at least one of the following:"
"It's a bad sign," says Lindheimer, "if a company was acquired primarily for the first two reasons on this list."
Tough Times in ESS, Recruiting
One of the things that has become clear in the ongoing HR software shakeout is that some sectors are more vulnerable than others.
Also vulnerable: companies specializing in recruiting software solutions. "Nearly all companies in the e-recruiting sector have experienced layoffs, according to a number of sources. That's because they were hit with a triple whammy," says Sami Jajeh, vice president of marketing at AtWork Technologies, a provider of web-native benefits administration software, based in Atlanta.
First, the economy slowed capital spending. Second, with companies laying people off, they didn't need recruiting as before. Third, there were so many vendors focused on different things that a shakeout was almost inevitable.
"Still, some companies in the recruiting sector insist they are strong. An HR software purchaser should look for an e-recruiting company with a large client base in a variety of industries, excellent client support and service, strong return-on-investment metrics, a well-rounded financial history, and satisfied customers," says Hank Stringer, president of Hire.com, based in Austin, Texas.
Some observers also fear that companies specializing in web-delivered services are in danger, given the downturn in the Internet economy. However, these companies also insist they are poised to survive the shakeout.
HireRight Inc., of Irvine, Calif., offers pre-employment screening applications delivered over the Internet. The company says it has benefited from the web while sidestepping its risks. "We exploit web technology for increased efficiency, reach and profitability," says HireRight's president, Eric Boden. "However, our core business offering does not depend on the web to legitimize its value."
"Employease of Atlanta is staffed by veterans of PeopleSoft and has more than 1,000 customers. Employease isn't relying on banner ad sales, free-pricing models or other gimmicks to get customers to use its service," says Michael Seckler, co-founder and vice president of marketing and business development for Employease. It is building a real business for the long term.
Simpata, one of Employease's closest competitors, says its Internet-based functionality is a strength, not a weakness. "I think a fundamental reason we are different from many other Internet startups is that, from day one, we've provided a service of high value to our customers, who are willing to pay for it every month," says Chuck Moxley, vice president of marketing.
AtWork's Jajeh says besides its underlying technology, his company has another valuable asset--its partnerships. "I think that AtWork is safer [than some Internet companies], partly because of the company we keep," says Jajeh. Among those partners is ADP.
Indeed, far from being a weakness, successful integration of Internet technologies is key to an HR software company's survival. "For a business to decide to ignore the Internet is like saying its not going to use the telephone," says Craib. Stambaugh agrees: If you find any that are playing this game who say they are not Net-based or at least have plans to be Net-based, they aren't players at all.
Ask Tough Questions
How do you make sure that the vendor you selected for your HR software solutions will be around for the long haul? Do your due diligence upfront, says Karen Osofsky, co-founder and chief marketing officer of Tiburon Group, a consulting firm based in Chicago specializing in Internet recruiting.
Use best practice in selection, Lindheimer advises. Look for strong companies with products that match your needs and have references. Don't fall for bells and whistles. Make sure there's a clear value proposition from the vendor. Factor viability high on the importance scale.
Stambaugh stresses the importance of checking references. Have any vendor provide the names and numbers of five satisfied customers, he recommends.
In an article posted on the Electronic Recruiting Exchange web site (www.erexchange.com), John Logan, director of business operations for Peopleclick, an HR strategy and technology services firm based in Raleigh, N.C., suggests a series of hard questions to ensure viability. One is, Has your company been involved in any reorganization, acquisition or merger within the past three years? Another, which companies may prefer not to answer: Are you a profitable business entity? If not, when do you expect to be profitable?
Bottom line: In the current high-tech economy, figuring out the long-term stability of a vendor requires good instincts and a lot of research. One thing is certain: There is no simple bright line test for determining which companies will succeed and which wont.
For example, on one hand, proven companies seem to be a good bet. Look for organizations that have consistently earned a highly respected reputation for quality, for service, for continued innovation and leadership, says Jim Spoor, CEO of Spectrum Human Resource Systems, based in Denver. There is no substitute for years of experience and for having learned the hard lessons and proven their viability.
But, on the other hand, new Internet companies also have something special to offer. In general, its not reasonable to assume that a company in the software marketplace longer is any better able to understand the Internet [than a newer firm], says Craib. In fact, he notes, a new company that produces web-native software may have a fuller understanding of the Internet and its capabilities than software firms that have been around for years and years.
End in Sight?
Its enough to keep an HR software specialist awake at night. It may seem like a safe bet to hold off purchasing any software solution until the marketplace settles down. Yet, that strategy is also fraught with risk--the new economic reality means your company becomes more efficient and innovative. That's hard to do if you have outgrown your HRIS package and put off getting another one until the high-tech industry has stabilized.
Indeed, that may never happen. But, the good news, according to many analysts, is that there is an end in sight to the shakeout that has racked the HR software industry for the past year or so. Those that are left by the fourth quarter are probably in it for the long haul, says Craib, and should be judged on their merits.
What matters in this environment of rapid technological innovation and heightened merger and acquisition activity is making sure your data is safe. No matter which vendor you work with, no matter how established your relationship with that vendor is, keep in mind Osofsky's advice: Put into your contract that on a monthly or bi-monthly basis, all of your data gets downloaded on CD-ROM.
These days, you just cant be too careful.
Jim Meade, Ph.D., is a regular software reviewer for HR Magazine and an HR consultant specializing in software selection. He is currently preparing The 2001 Guide to HR Software.
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