![THINK ACT
Reach for the cloud
6
ABOVE AVERAGE GROWTH RATE TO BE
EXPECTED
German HCM software market 2014-20 [EUR bn]
A MAJOR GROWTH DRIVER IS CLOUD BASED
HR SOFTWARE
German HCM software market by deployment type,
2014-20 [EUR bn]
SEVEN SEGMENTS MAKE UP THE HR MARKET
German HCM software market by product segment,
2015 [%]
DEMAND FOR NEW SOFTWARE IS ESPECIALLY
STRONG IN THE GERMAN "MITTELSTAND"
German HCM software market by customer segment,
2014-20 [EUR bn]
A
C
B
D
2014
2014
1.2
1.2
0.3
0.3
0.6
0.9 1.0
1.1
2015
2015
1.3
1.3
2020
2020
24%
Employee data
administration
23%
Workforce
management
17%
Recruiting
13%
Learning &
development
11%
Performance &
talent management
4%
Employee collaboration
& engagement
9%
Payroll, compensation
& benefits
1.7
1.7
CAGR
+5%
+11%
+86%
Source: Roland BergerHCM = Human Capital Management
Administrative segments Strategic segments
Cloud On-premise
2014
1.2
0.4
0.4
0.7
0.8
0.9
1.0
2015
1.3
2020
1.7
+16%
+55%
SME Large](https://image.slidesharecdn.com/tabhrsoftwaremarketfinal-160709152116/85/German-HR-Software-Market-2016-6-320.jpg)
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German HR Software Market 2016
- 1. A comprehensive guide to reinventing companies Mastering the Transformation Journey 2015 THINK ACT March2016 The HR software market looks to 2020 Reach for the cloud BEYOND MAINSTREAM
- 2. THE BIG 3 2 THINK ACT Reach for the cloud 100 interviews conducted with decision makers and experts from HR software vendors. page 3 EURO 1.7 BN is the expected volume of the German HR software market by 2020. page 4 86% till 2020 is the predicted growth of the strongest driver in the market: the transition to cloud based solutions. page 6 4MAJOR TRENDSARE SHAPINGTHE MARKET P.4
- 3. THINK ACT Reach for the cloud 3 What is going on in the world of HR software? Do you understand the market situation well enoughto makethe right software purchases? Roland Berger conducted over 100 interviews with de- cision makers and experts from HR software vendors and customers focusing on the four key features of the HR software market: Market size and growth, compet- itive environment, customer behavior and market trends. Add in a raft of primary and additional second- ary research and the result is a comprehensive, quanti- tative market model. This report will enable vendors to sharpen their view of the market and adjust their business model ac- cordingly, for instance by increasing their focus on smaller customers and specific verticals. In case you are a customer, this report will dramatically improve your understanding of the current market situation and thus enable you to make the right purchase deci- sions for your HR software. 3 "Cloud will come no matter what, the question is only how long it will take the majority of com- panies to adopt it" GLOBAL TRANSPORTATION PLAYER, VP GLOBAL HR TRANSFORMATION
- 4. 4 THINK ACT Reach for the cloud Seven product segments make up a German HR software market worth EUR 1.3 bn today. FOUR MAJOR TRENDS SHAPING THE MARKET The market described above is shaped by four major trends. Increasing HR software budgets provide future potential for investments and innovation. The switch from on-premise to cloud based solutions is evidently taking off and substantially driving growth in this area. Simultaneously, this raises concerns about data securi- ty & privacy, which must be taken into consideration – especially in German companies with strong works council co-determination rights. These concerns are intensified by German companies having an emotional preference for cloud based data to be hosted in Germa- ny, even though the entire European Union could be considered from a regulatory perspective. For HR software customers, this implies the need to consciously assess the state of their HR software landscape. New technologies and offerings in a com- petitive market environment may provide less costly solutions to existing or as-yet unsolved problems. For HR software vendors, it becomes crucial to respond strategically and sustain their competitive advantag- es, e.g. via M&A activities. All things considered, both sides need to actively prepare to reach for the cloud. The German HR software market reached EUR 1.3 bn in 2015 and will hit EUR 1.7 bn by 2020. Although growth is being achieved in all seven product seg- ments, it is stronger in the strategic HR segments (re- cruiting, performance & talent management, learning & development and employee collaboration & engage- ment) than in the administrative HR segments (em- ployee data administration, compensation & benefits, workforce management). Accompanying strong growth from small and medium-sized enterprises (SMEs), cloud based solutions make a significant contribution to relative growth, despite being inhibited by various factors including data security and privacy aspects. The competitive environment has proven to be rather consolidated in the administrative HR segments, while the strategic HR segments remain at a fairly low con- solidation level. For the latter in particular, this is driv- en by many micro players developing their niches be- sides large players with global reach such as the industry primus SAP/SuccessFactors. To access dis- persed markets such as the SME segment, system inte- grators provide an alternative indirect route to market. Regardless of the segment, customers are focused on product quality (in this case a mix of usability, flexibil- ity and integration) and consider price only after their quality requirements have been fulfilled.
- 5. THINK ACT Reach for the cloud 5 The German HR software market reached a volume of about EUR 1.3 bn in 2015 and is expected to grow an- nually by approximately 5% to total some EUR 1.7 bn by 2020. A The market can be broken down into three admin- istrative HR product segments, employee data admin- istration (EDA), compensation & benefits (including payroll), and workforce management (WFM). Further- more, there are four strategic HR product segments, namely recruiting, performance & talent management, learning & development, and employee collaboration & engagement. B The administrative HR segments have a tendency to show lower growth than the strategic segments while currently still accounting for a larger share of the market. The slower growth is primarily attributable to customers being reluctant to switch HR software ven- dors, thus creating product life cycles of 7-10 years. This immobility is driven by the high customization level that is required to handle the present complexity, the interdependencies with other systems, the high sensitivity of processed data and the importance for the going concern of the company. IMPORTANT GROWTH DRIVERS The most common growth drivers mentioned by our interviewees include the gradual but ever more certain transition to cloud based software, the strong growth among small and medium-sized enterprises (SMEs), as well as several industry verticals experiencing elevated growth rates, including retail. The strongest growth driver in the market is the transition from on-premise (licensed) software to cloud based solutions (or Software as a Service – SaaS). With an expected per annum growth rate of approxi- mately 13% in 2014-2020, the segment will be worth around EUR 600 m in 2020. In contrast, the on-premise segment is expected to grow only at about 2% annually in the same time frame, reaching a total volume of some EUR 1.1 bn. C Market sizing and growth: Administrative HR segments are larger in size but lower in growth than strategic HR segments.
- 6. THINK ACT Reach for the cloud 6 ABOVE AVERAGE GROWTH RATE TO BE EXPECTED German HCM software market 2014-20 [EUR bn] A MAJOR GROWTH DRIVER IS CLOUD BASED HR SOFTWARE German HCM software market by deployment type, 2014-20 [EUR bn] SEVEN SEGMENTS MAKE UP THE HR MARKET German HCM software market by product segment, 2015 [%] DEMAND FOR NEW SOFTWARE IS ESPECIALLY STRONG IN THE GERMAN "MITTELSTAND" German HCM software market by customer segment, 2014-20 [EUR bn] A C B D 2014 2014 1.2 1.2 0.3 0.3 0.6 0.9 1.0 1.1 2015 2015 1.3 1.3 2020 2020 24% Employee data administration 23% Workforce management 17% Recruiting 13% Learning & development 11% Performance & talent management 4% Employee collaboration & engagement 9% Payroll, compensation & benefits 1.7 1.7 CAGR +5% +11% +86% Source: Roland BergerHCM = Human Capital Management Administrative segments Strategic segments Cloud On-premise 2014 1.2 0.4 0.4 0.7 0.8 0.9 1.0 2015 1.3 2020 1.7 +16% +55% SME Large
- 7. THINK ACT Reach for the cloud 7 DEEP DIVE ON PAYROLL To illustrate the effects of the growth drivers discussed above and how they manifest themselves individually in each market segment, we looked more closely at the payroll segment. The payroll segment in question excludes the busi- ness process outsourcing (BPO) share of the market, and is expected to grow by about 4% per annum in 2014-2020 to reach a volume of around EUR 148 m in 2020. The cloud influence described above holds true for payroll, its cloud based software share being fairly small (approximately 7% in 2015) but growing more strongly than the on-premise segment (approximately 7% vs. 4% per annum in 2014-2020). The above-men- tioned factors limiting cloud adoption can be applied to payroll as well. Complexity plays an especially im- portant role in payroll: Dozens of updates on federal legislation concerning payroll calculations, a variety of collective and union agreements and many different employee groups contribute to system complexity. This complexity can only be met with a high level of customization, one aspect still better catered for by on-premise solutions and hence substantially limiting the influence of cloud based solutions' growth. In terms of customer size, the SME segment is ex- pected to grow by about 5% per annum in 2014-2020 (vs. the LE segment with approximately 3% annual growth in the same time frame). Growth can be real- ized by penetration gains from pen & paper as well as payroll outsourcing customers. SMEs seem to prefer best-of-breed solutions providing tailored systems with a higher standardization level, in keeping with the cloud advantages mentioned previously. The increas- ing scale of cloud adoption also drives a shift toward a larger share of the market realized with service and maintenance contracts. Currently significantly smaller, the share of cloud based solutions is driven first by the unclear legislative situation regarding data security and privacy, and sec- ond by the large market share occupied by administra- tive HR software, which has an inherently lower cloud adoption rate. Lower upfront investment in IT infrastructure and more innovative technology that enables products in- cluding self-service and mobile features are furthering the growth of the cloud segment. The rather standard- ized cloud solutions, customizable only via parametri- zation, represent a good fit for SME companies with lower complexity and less need for customization. However, there are also inhibiting factors, such as the abolition of the "safe harbor" agreement. While this may change the way in which cloud based solutions are realized, it does not jeopardize the momentum of the trend. A strong source of growth is the German SME cus- tomer segment, the fabled "Mittelstand", encompass- ing companies with fewer than 1,000 employees. This segment is expected to grow at about 9% per annum in the period 2014-2020, reaching a volume of approxi- mately EUR 710 m in 2020. This stands in contrast to the large enterprise segment (LE), expected to grow by some 3% yearly to around EUR 990 m in 2020. Even though the majority of employees in Germany work in the SME segment, its HR software market is smaller due to the lower penetration level overall and less suitable products in some areas (historic domi- nance of complex and highly customized on-premise solutions). SMEs are growing faster now because they can leverage shorter and simpler decision processes as well as less complex company structures. They have a lower need for (global) IT harmonization and can thus un- dertake smaller projects in distinct parts of their HR software landscape. Enabled by the cloud trend, they tend to do so by choosing best-of-breed providers that ensure a balanced range of standardized and cloud based software, which simultaneously provides indus- try and company size specific functionality. D Industry verticals exhibit growth rates ranging be- tween about 4-6% annually in the period 2014-2020. In manufacturing, for example, the trend toward greater specialization and Industry 4.0 creates the need for industry specific solutions to cover unique requirements.
- 8. THINK ACT Reach for the cloud 8 The competitive environment in the administrative HR segments is perceived as being highly consolidated with a few established players and a variety of very small micro players. Digitization took a hold in these administrative HR segments first, resulting in greater maturity than stra- tegic HR segments, with industry leaders able to claim dominant market positions. The textbook example, SAP, has a strong presence in the LE segment and pro- vides an all-in-one solution. It services the highest complexity levels on a global basis and is highly cus- tomizable. Despite the resulting good fit to companies' individual requirements, customization simultaneous- ly creates a lock-in effect: Any switch of providers would render substantial previous spending wasted. The competitive environment does, however, have to be analyzed on a segment by segment basis, since few players excel in all areas. The payroll segment, for example, has one of the highest anticipated consoli- dation rates; as much as 65-90% of the market is ca- tered for by the top 10 players. The early establish- ment of the market, particularly long product replacement cycles, high complexity driven by the lo- cal variations in the nature of the subject, and fre- quent updates favor the establishment of large play- ers. Simultaneously, this environment opens up niches in industry vertical sub-segments, which can be covered by small micro players providing schedul- ing solutions in the workforce management segment for hospitals as part of the healthcare sector. E The perspective on strategic HR segments turns out to be inverted – consolidation seems to be rather low. Here, medium-sized and small players compete in the market with a strong technology focus, offering prod- ucts with self-service and mobile features. The shorter product life cycle in combination with lower upfront investments, shorter contractual obligations, more standardized interfaces and data models reduces risk and allows for less expensive provider switches. Cus- tomers of all sizes have to deal with the consequences of demographic change and the lack of qualified labor, which serve to put more pressure on related HR soft- ware segments such as talent & performance manage- ment and recruiting. E Regardless of whether the subject in question is the administrative or the strategic segment, system inte- grators are essential market participants in the com- petitive arena. They provide an indirect alternative to the conventional direct sales channel. For HR software providers, they can thus offer an attractive way to reach the customer, which is a very interesting proposition especially in a small and fragmented customer seg- ment. From a customer perspective, system integrators provide a neutral counterpart offering specialized ex- pertise and able to help navigate through the market. Competitive environ- ment: Market shaped by a fewlarge players and a varietyofmicro players.
- 9. THINK ACT Reach for the cloud 9 EMPLOYEE DATA ADMINISTRATION RECRUITING SAP Oracle PeopleSoft Workday Sage SAP/SuccessFactors Persis IBM Umantis Lumesse PERFORMANCE & TALENT MANAGEMENT LEARNING & DEVELOPMENT EMPLOYEE COLLABORATION & ENGAGEMENT SAP/SuccessFactors Lumesse Umantis Talentsoft Cornerstone SAP/SuccessFactors Persis Sage Umantis NetDimensions IBM Jive Microsoft SAP Salesforce Top players Top players Consolidation level Consolidation level Allegion SAP ATOSS Kaba Isgus SAP P&I Datev Sage ADP PAYROLL WORKFORCE MANAGEMENT Source: Roland Berger assessment based on more than 100 interviews with decision makers and experts from HR software vendors and customers between November and December 2015 – enriched with a raft of primary and additional secondary research and background information. E TOP MARKET PLAYERS AND CONSOLIDATION PER SEGMENT Administrative HR segment Strategic HR segment
- 10. THINK ACT Reach for the cloud 10 The ease of initial implementation presents a final hy- giene factor ("How long will implementation take, what manpower is needed on my side and what will it cost me?"). F Apart from these key purchasing criteria, it is com- mon to establish customer loyalty via a trust based re- lationship. For customers to decide in favor of a HR software vendor, especially in the administrative seg- ment, a trust based relationship is essential. Its inten- sity increases over the long product lifetime and conse- quently presents itself as an advantage if a vendor switch should be on the cards. Such switches usually take place in specific situa- tions, e.g. when a company has outgrown their existing systems in terms of employee numbers, when the busi- ness model has changed and introduced new require- ments or when the old and new systems are no longer in harmony with one another. The decision process customers run through is normally driven by HR, which defines its specific needs together with IT. Depending on the software segment concerned, adjacent functions may be included, e.g. the finance function in the case of payroll. As soon as a tender comes into question, the procurement office can be brought into play. The works council and data protection officer need to be involved throughout the process as well. Final decisions are usually made by an executive committee. Customers in the HR software market behave in a way that appears to be consistent across all industries. This can ultimately be condensed into key purchasing crite- ria that guide customers' buying decisions. First, customers determine what constitutes prod- uct quality for them, what level is required to serve their purpose, before seeking out vendors able to meet these requirements. For most customers, prod- uct quality is a mix of usability ("Can my employees use it efficiently and with little or no training?"), flex- ibility ("Can it cover the level of complexity we need?") and integration ("Can we integrate it seamlessly via interfaces?"). As soon as the product quality criterion is ful- filled, customers proceed to the next one in line, namely service & maintenance quality ("Can I easily get in touch and how well and how fast do they re- solve issues?"). Assuming the first two criteria are sufficiently well met, the price factor comes into play. Despite being ranked third, price is of the utmost importance and plays a pivotal role in strategic HR segments where many vendors compete against one another. Converse- ly, price becomes obsolete as a criterion as soon as companies are "locked in" by highly customized on-premise systems that simply cannot be switched, a phenomenon that occurs more often in the adminis- trative HR segment. Customer behavior: Product quality, service quality, price and ease ofimplementation.
- 11. THINK ACT Reach for the cloud 11 F KEY PURCHASING CRITERIA THAT GUIDE CUSTOMERS' BUYING DECISIONS. In the German HR software market KEY PURCHASING CRITERIA Usability for operative end users Flexibility via customization and covered complexity Integration possibilities and connectivity/ interfaces Service & maintenance quality Price attractiveness to customers Ease of implementation (e.g. time, investment) PRODUCTQUALITY PERCEIVED CUSTOMER IMPORTANCE Low Low Low Low Low Low High High High High High High
- 12. THINK ACT Reach for the cloud 12 Throughout our interview series, HR software custom- ers and vendors indicated a variety of underlying driv- ers in the market. We condensed four major trends that were consistently of relevance, and which seem to have an extraordinary influence on the market envi- ronment. HR SOFTWARE BUDGETS The overall software budgets of German companies are expected to increase going forward, driven by trends such as digitization. Correspondingly, German HR software budgets are expected to remain stable or in- crease. Major motivators seem to be the aging software landscape as well as investments in the talent pipeline. HR software budgets are primarily funded by HR, though infrastructure relevant budgets from IT and corporate level may also come into play. For the HR software market this substantiates the expected growth. Customers of HR software will have to ask themselves where to invest the resources at their disposal, e.g. in renewing old systems or extending the scope of current applications. Vendors of HR software will need to minimize customers' reservations about making the investment, e.g. by providing a track record of successful implementations with seamless and fast implementation. CLOUD ADOPTION Generally, usage of cloud computing is increasing im- mensely across verticals and customer segments in Germany, even though the overall level still remains below that of pioneers such as the UK and the US. The same holds true for the HR software market: Cloud adoption is increasing strongly, albeit with limited ab- solute effect as yet due to the small basis upon which the trend is building. As mentioned above, growth is driven by the vari- ous advantages of cloud based solutions: Lower up- front investments, lower switching costs, higher stan- dardization with improved connectivity via interfaces/ Market trends: Increasing HR software budgets are invested in cloud solutions in the face of data security concerns.
- 13. THINK ACT Reach for the cloud 13 DATA HOSTING One aspect closely related to data protection con- cerns the data hosting location. In light of the general data security situation, which is fraught with distrust and legal uncertainty, German companies have a strong, rather emotional tendency to prefer data host- ing in Germany. This is the case even though from a regulatory perspective, data hosting in any country of the European Union would be feasible. Certainly in the wake of the abolition of the "safe harbor" agreement, data hosting outside of the Euro- pean Union is perceived as highly undesirable and does not represent an option for most German com- panies. Regulation of data handling via standard EU contractual clauses or processor binding corporate rules cannot bridge this security gap and is generally perceived as insufficient. "Data trustee" models, following the Microsoft and Deutsche Telekom example, may become a new trend: Here, companies originating from outside of Germany use a Germany based data hosting provider and voluntarily renounce all access to their own data. This prevents any third party access that could possi- bly be enforced by the foreign company's national government. From the customer perspective, EU hosting loca- tions other than Germany should also be considered. From a vendor perspective, hosting in Germany will always be perceived as an advantage against competi- tors with non-German hosting. standardized data models, and new technological fea- tures. Simultaneously, factors like the sensitive nature of HR data combined with data security and privacy issues and the limited customization via parametriza- tion inhibit the trend's effect. For HR software customers, this implies the need for sound decision making between on-premise and cloud based solutions in all relevant segments. For vendors of HR software, this, in turn, creates the ne- cessity to provide cloud based HR software solutions, with or without on-premise solutions – the latter op- tion seems feasible in the strategic HR segment, while a dual offering may suit the administrative segment better. DATA PROTECTION Data protection is a highly topical issue for HR in Ger- many and needs to be addressed appropriately when discussing HR software. Beyond HR itself, the German situation is unique owing to two institutions installed by the BDSG ("Bundesdatenschutzgesetz" or Federal Data Protection Act) and BetrVG ("Betriebsverfassungs- gesetz" or Works Constitution Act): 1. Works council: Employee representation with the mandate to compensate for the uneven distribution of power between employer and employee. Every German company with more than five employees can have a works council and it is likely to have co-determination rights regarding the introduction or change of any HR software solutions. 2. Data protection officer: An internal or external offi- cer whose purpose is to ensure adherence to the BDSG and other data protection legislation. The officer has to control and work toward the successful implementa- tion of the BDSG and other related legislation; howev- er, the data protection officer has information and par- ticipation rights only. What this implies for HR software customers is the need for timely involvement of the relevant parties; as far as the works council is concerned, it involves clearly identifying motives and goals to help establish com- promises. HR software vendors can help here, for in- stance by ensuring full software functionality even without certain critical features, providing informa- tion tailored to the works council's demands, etc.
- 14. THINK ACT Reach for the cloud 14 If you are a customer you might want to review your existing HR software landscape, looking for new solu- tions that add value and bring cost savings potential. New features and capabilities, which were thus far out of reach or financially unattractive will provide your buyers with software solutions that will help you become more effective and cost efficient. Cloud based solutions are becoming more and more attractive for SMEs due to lower complexity and higher value from standardized products. Cloud solutions provide cus- tomers with the added flexibility that comes from a standardized process and data model. This enables you to switch providers more easily, thereby putting you as customers in a stronger buying position. The cloud is out there. Reach for it. If you are a HR software vendor, you might want to focus on developing a unique value proposition by concentrating on certain customer segments and spe- cific verticals. The growing market will increase competition among vendors who will try to differentiate on quality and technological levels. This will trigger innovation and may bring new software forward, solving as-yet unaddressed problems or improving existing solu- tions. Established HR software vendors will be chal- lenged by new entrants with new cloud based innova- tive solutions. Defining clear response strategies to ensure a sustainable market position will be key. The priority has to be on ensuring a sustainable competi- tive advantage that creates a unique customer value proposition. Vendors can either grow organically or pursue M&A activities targeting one of the evolving small players. Cloud providers will need to address data protec- tion issues including the hosting location of cloud based data. This involves aspects such as the early and well prepared involvement of works councils, as well as sustainable data hosting solutions, possibly using the new "data trustee" model. Conclusion and recommendation: Customers and vendors need to prepare to develop into the cloud.
- 15. ABOUT US 15THINK ACT Reach for the cloud FURTHER READING Links&Likes ORDER AND DOWNLOAD www.rolandberger.com STAY TUNED www.twitter.com/ RolandBerger LINKS AND LIKES www.facebook.com/Roland BergerStrategyConsultants A detailed insight into current thinking at Roland Berger is available via our new microsite at new.rolandberger.com THINK:ACT CONTENT IT outsourcing involves more than IT IT outsourcing often feels like a lottery where you are always drawing the wrong number. While it should be a guaranteed win, more often than not you turn out to be the loser. That is why many managers who outsource IT operations feel deceived. Often they are right. Worse still, to a large extent they only have themselves to blame. But there is a better way to make sure that firms can get what they want. THINK:ACT SPECIAL: CLOUD ECONOMY The path to new business models Social networks are simply the most obvious manifestation of a trend in which ever-larger parts of our personal lives are shifting online. Business networking is also gradually making the transition to virtual reality. This transformation has a huge amount of business potential. We call it the cloud economy: an environment in which companies can use new technology to harvest huge quantities of online user data and integrate it into their business models. Roland Berger, founded in 1967, is the only leading global consultancy of German heritage and European origin. With 2,400 employees working from 36 countries, we have successful operations in all major international markets. Our 50 offices are located in the key global business hubs. The consultancy is an independent partnership owned exclusively by 220 Partners.
- 16. This publication has been prepared for general guidance only. The reader should not act according to any information provided in this publication without receiving specific professional advice. Roland Berger GmbH shall not be liable for any damages resulting from any use of the information contained in the publication. © 2016 ROLAND BERGER GMBH. ALL RIGHTS RESERVED. TA_16_007 WE WELCOME YOUR QUESTIONS, COMMENTS AND SUGGESTIONS Publisher ROLAND BERGER GMBH Sederanger 1 80538 Munich Germany +49 89 9230-0 www.rolandberger.com Editor DR. KATHERINE NÖLLING [email protected] JÖRG SEUFERT Partner Munich +49 89 9230-8666 [email protected] LARS SUHREN Consultant Hamburg +49 40 37631-4306 [email protected]