Research Note
Markets
25 September 2000

HR for the Midsize Enterprise: The North American Market J. Lehman

ASP offerings, Internet business services and BPO have combined to reshape the HR market for midsize enterprises in North America. These changes improve buyer options, but increase the complexity of investment decisions.

Core Topic

Business Applications: Human Resources Management Systems

Key Issue

How will HRM products and vendors support business requirements?

Strategic Planning Assumptions

By 2005, traditional in-house implementations will account for only 25 percent of new midsize enterprise HRMS investments (0.7 probability).

Through 2005, 50 percent of MSE HRMS service contracts will be canceled or renegotiated within 24 months of signing, as enterprises and vendors uncover the flaws inherent in contract experimentation with new models (0.7 probability).

New HRMS models give midsize enterprises (MSEs) new options, but complicate the selection process and change the competitive landscape for this market (see Note 1). The demand for increased value from HRMS investments and new opportunities gained through Internet technologies have vendors and enterprises shifting investment funding to alternative service models. Although many terms are used to describe these new models, Gartner uses four broad categories to characterize the vendors and issues in this market.

Note 1

MSE Defined

MSEs are defined as enterprises generating between $50 million and $800 million in annual revenue. Gartner uses a revenue definition for the HRMS market, rather than employee head count, because resource (IT and financial) availability is a greater driver in decision-making for technology adoption strategies than head count. However, these are just guidelines — it is not uncommon to find very small companies with large-enterprise revenue. Such enterprises typically invest in HRMS in ways that are more characteristic of MSEs. We also see large enterprises with MSE revenue that require large-enterprise systems to manage volumes

Source: Gartner Research

Traditional In-House Software: In-house systems (see Note 2) remain strong choices as part of an ERP system or when a high level of user control is required for customization, integration and flexibility. Large-enterprise market leaders (e.g., PeopleSoft, SAP and Oracle) must be evaluated based on enterprise readiness for the technical footprint and the application complexity of implementation and ongoing support. Lawson Software, J.D. Edwards and Great Plains Software are strong in targeted vertical markets, but, other than Lawson's Insight product, they are seldom seen in stand-alone HRMS. Ultimate Software Group and Best Software have the midmarket "mind share" for stand-alone HRMS products. Although these products continue to sell in this model, many vendors report that as much as 50 percent of their prospects are ASP deals. By 2005, traditional in-house implementations will account for only 25 percent of new MSE HRMS investments (0.7 probability).

Note 2

In-House Applications

The following vendors offer MSE HRMS products: PeopleSoft, J.D. Edwards, Infinium, Lawson Software, SAP, Ross, Ultimate, ADP, Genesys, Best, Cyborg, PDS, Oracle, Geac Computer and Ceridian.

Source: Gartner Research

Application Service Provider (ASP): ASPs should be considered when IT resources are limited or HR departments want a system that demands more support than the enterprise can manage. In this model, buyers typically license the HRMS software, then contract for the software vendor or a third party to manage application and technology. Business processing remains the user's responsibility. Users have full access to data, but pay a premium if they choose to customize. If integration demands are high, this model becomes less useful, unless the entire business application suite is supported. Almost all traditional HRMS vendors offer this model directly or through third parties (see Note 3).

Note 3

Vendors Offering ASP HRMS for MSEs

Virtually every vendor listed in Note 2 now offers its products in the ASP model. Most partner for the technical services. In addition, independent ASP providers that can support a range of applications also support this market, including Revere Group, USInternetworking, Corio and Interliant.

Source: Gartner Research

Internet Business Services (IBS): This model offers online subscription services focused on providing core functionality; integration points to Web-based services, such as payroll and benefit processing; and connections to the HR marketplace (see Note 4). Simpata, Employease, eBenefits and iBenefits target the low end of the midmarket, but this model scales well to provide services to the MSE that might otherwise be out-of-reach due to cost or complexity. This model is well-suited to MSEs that could outgrow an in-house system before realizing ROI or to enterprises looking for low upfront implementation costs.

Note 4

The HR Marketplace Defined

The HR e-marketplace comprises solutions, content and services — available for use or purchased through the Web — that support the HR consumer. Although this market trails e-procurement and e-learning in terms of the number of vendors and user adoption, it is growing at Internet speed.

Source: Gartner Research

Business Process Outsourcing (BPO): This model has generated considerable market interest from high-profile large-enterprise deals. BPO offloads the entire HR processing burden to a third party that can provide all levels of support, up to and including staff and call centers. The strength of this model comes from leveraging product expertise and HR best practices across a customer base to optimize the HR investment. This model is well-suited to MSEs looking for process improvement/processing efficiency and those focusing in-house investments on core business competencies. Vendors in this market (see Note 5) include traditional payroll processors, HR consultants extending current services and pure-play BPO vendors leveraging Internet technology.

Note 5

BPO HRMS Vendors

The following vendors offer BPO HRMS for MSEs: Synhrgy HR Technologies, EmployeeMatters, EmployeeService.com, ProBusiness, Automatic Data Processing (ADP), Spherion, PricewaterhouseCoopers, TriNet, Ceridian, Genesys, WorkScape and Fidelity Employer Services.

Source: Gartner Research

Acronym Key

ERP — Enterprise resource planning
HRMS — Human resource management system
ROI — Return on investment

Bottom Line: With the introduction of new products and vendors, the HR MSE market will continue to shift predominately toward service solutions. MSEs seeking HR capabilities should consider the impact of the selected model over time. Contract, pricing and licensing issues are immature in all but the traditional model. Enterprises should define the life of the intended commitment and ensure that the model can support the projected HRMS needs of the enterprise with a contract that does not create unrealistic risks. Such risks include short-term commitments without options for renewal at protected rates or long-term commitments that prevent adjustments as the models mature. Through 2005, 50 percent of MSE HRMS service contracts will be canceled or renegotiated within 24 months of signing, as enterprises and vendors uncover the flaws inherent in the contract experimentation of new models (0.7 probability).

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