2019 was another banner year for the worldwide HR technology market, which grew 12% to $16.5 billion thanks to the dual driving forces of “cloud replacement and digital adoption,” according to Gartner (full report available to Gartner clients).
2020 was gearing up to be more of the same. Then in March, the novel coronavirus/COVID-19 pandemic upended everything, forcing businesses to adjust, disrupt, and—in many cases—just try to survive.
It’s an interesting time to look at HR software trends, to say the least, but it’s also an important one. How has the pandemic affected HR software purchases, if at all? Who’s looking for HR software, and why? That’s what we’re here to find out.
At Software Advice, our software advisors talk to thousands of HR software buyers every year to connect them with the right software for their needs. Analyzing a random sample of these interactions gives us insight into the thoughts and motivations behind these purchases.
If you’re buying HR tech for your business, we encourage you to use these findings to help inform your software purchase.
(For a detailed methodology of this report, click here.)
Have HR software purchases been affected by the pandemic?
Before we dive into analyzing our random sample of HR buyer interactions, let’s address the elephant in the room: How has COVID-19 impacted HR software purchases?
It’s no secret that COVID-19 has turned everything upside-down for businesses in 2020, including technology rollouts. According to our April survey of small-business leaders, 80% of small businesses say that COVID-19 has had at least some impact on their software purchases and implementation plans.
An April survey of HR professionals by Raven Intel adds that a majority of HR software plans, specifically, have been “paused, had a scope change, or been canceled altogether” due to COVID-19.
At Software Advice, we’re seeing a similar trend. Compared to Q2 (April-June) of 2019, we talked to 28% fewer businesses about purchasing HR software during Q2 of 2020. For a software industry that’s experienced double-digit growth for a decade, that’s significant.
We believe the pandemic is driving a drop in HR software interest, but how? We have a few theories.
For one thing, small businesses with 250 employees or fewer—who make up a majority of HR software purchases—have had to deal with a painful dip in their cash flow because of the virus. According to that same survey we ran in April, 73% anticipate their company’s annual revenue will decrease this year due to the COVID-19 pandemic. With less money coming in, small businesses don’t have the same budget to spend on HR software like they have in the past.
Another theory is that businesses have had to repurpose their software budget for other needs. What are businesses investing in instead? Looking at the software categories that have seen significant jumps in traffic on Software Advice due to the pandemic* gives us some insight:
- Telemedicine software has become vital for medical practices to limit virus exposure for their patients and staff (+1,212% visitors MoM).
- Virtual classroom software is being rapidly adopted as schools and other educational institutions pivot to distance learning (+708% visitors MoM).
- Have you been in a lot of video calls lately? Online meeting software purchases have taken off as remote workers collaborate from home (+471% visitors MoM).
*Percentages shown are for the period of March 9-April 8 compared to February 3-March 2 in 2020.
Retailers have also had to undergo massive change, with one-in-four telling us they’ve launched an online ecommerce store to keep their business going due to the pandemic. With so much disruption taking place, it wouldn’t be surprising if many businesses are putting their HR software plans on hold.
We won’t know anything definitively until we see some market numbers sometime next year, but this is definitely a trend HR leaders need to keep an eye on.
Buyers are split on standalone systems vs. integrated suites
Let’s look at our random sample of HR buyer interactions now.
When making an HR software purchase, businesses have an important choice to make: Do I bundle all of my needs into one integrated software suite or piecemeal a solution together using multiple standalone systems from different vendors?
In this choice, the vote is nearly evenly split: 51% of HR software buyers we talked to in the first half of 2020 wanted a standalone system (or systems) for their needs, while 49% wanted one integrated suite.
This divide reflects what’s happening in the HR software vendor landscape itself. On one side, HR suite vendors have been busy merging and acquiring one another to try and become a comprehensive one-stop HR shop for their customers (in February alone, Kronos and Ultimate Software merged and Cornerstone acquired Saba). On the other side, specialized standalone vendors have been popping up to fill niche functionality gaps left by the suite vendors (look no further than the emergence of employee engagement tools).
The existence of both options out there in large supply doesn’t totally explain the near-perfect split in preference, though, so let’s dive deeper into these results. Breaking the numbers down by business size reveals where integration preferences start leaning one way or the other.
Very small companies slightly prefer standalone solutions, small-to-midsize businesses (SMBs) slightly prefer suites, then large companies slightly prefer standalone again. What’s going on?
Using our HR Needs Cycle—which looks at the HR systems businesses invest in as they grow—we can draw some conclusions:
- With nothing in place for HR and little budget to leverage, start-ups and very small businesses are more likely to invest in one tool to address their biggest need (usually payroll, which accounted for 62% of purchases from businesses with 1-24 employees).
- As these businesses grow, along with their HR needs and software budget, it becomes much more preferable to invest in an integrated suite to consolidate HR software functions. The one exception: applicant tracking systems (ATS). SMBs are keen to keep their ATS separate to support recruiting efforts.
- Once businesses have matured, and they’ve exhausted the functionality from their preferred HR suite vendor, their only option is to add-on with niche standalone offerings.
As businesses try to figure out the timeline for building out their HR software stack, this information can be incredibly beneficial.
Small businesses represent a growing majority of HR software purchases
When we ran this report five years ago, small businesses with 100 employees or fewer only accounted for 39% of the HR software buyers we talked to. Today, that number is 57%.
The increased availability of affordable HR systems (including free ones), the strong pre-pandemic growth of the economy, and the pressure on small businesses to digitize in the face of massive disruption are just some of the reasons behind this significant small-business swell in HR software interest.
Knowing small businesses are behind a majority of HR software purchases informs some of our other findings. For example, when we asked buyers what methods they were currently using to handle their HR needs, 43% said they were using manual methods such as pen-and-paper, whiteboards, or spreadsheets.
More than a third (34%) said they were using one or multiple HR systems, while 21% said they were using standalone payroll software, indicating many buyers have familiarity with HR software and are looking to replace a system they have rather than purchase one for the first time.
Doable with a tiny workforce, manual methods quickly become burdensome and time-consuming to maintain as businesses grow. They also lead to errors, which can be costly. After just two mistakes on their paycheck, 49% of U.S. workers say they’ll look for a new job.
Since it’s mostly small businesses relying on manual methods, it’s not surprising then that the most common HR software purchases center around core HR needs. The most common applications requested by the HR software buyers we talked to were payroll (42%), personnel tracking (40%), and time and attendance (29%).
Payroll and time and attendance, in particular, have seen significant jumps in interest from five years ago when just 16% and 19% of buyers requested these applications, respectively. A core HR suite with personnel tracking, payroll, and time and attendance is becoming a popular purchase for growing businesses looking to consolidate and automate these needs.
Other noteworthy HR software trends in 2020
We hope the insights covered here help HR software buyers and vendors alike. Looking through the sheer amount of data we have on our HR software buyer interactions, we could cover a lot more.
In the interest of time, though, here are our quick thoughts on some other interesting HR software trends:
- Though no single industry dominated HR software purchases, the healthcare (11%) and nonprofit (10%) sectors came up the most. Dealing with unique talent challenges and government regulations, it makes sense why these industries would be keen to invest in HR software.
- Owners (19%) were the most common job role we talked to about HR software, even more so than HR professionals like HR directors (12%), HR managers (12%), or HR generalists (6%). Lacking an HR team of their own, small-business owners should become familiar with some of the HR roles, responsibilities, and terminology before making a purchase decision.
- The desire to automate or streamline was the most common pain point cited for purchasing HR software (29%). Other common pain points related to current methods: they lacked desired features (18%), they were too time-consuming or labor-intensive to use (15%), or they didn’t support the company’s growth (15%).
- Budgets for HR software were (expectedly) all over the place. What wasn’t expected was that timelines for HR software purchases were also similarly scattered. Businesses were nearly just as likely to plan to make an immediate purchase (17%) as they were to plan to make one six to 12 months from when we talked to them (19%).
Buyer Report Methodology
For a detailed methodology of this report, click here.
The Software Advice COVID-19 Digital Transformation Survey was conducted in April 2020. We surveyed 503 small-business “leaders,” defined as full-time employees at the vice president, president, C-suite, or owner/founder level at U.S.-based businesses with 2-250 employees. We worded the questions to ensure that each respondent fully understood the meaning and the topic at hand.