HR Tech Is Not Built for Small Companies. Why Is That?

​In "Making HR Tech Easy," work tech expert Tim Sackett, SHRM-SCP, makes complex HR technology understandable for all HR professionals, because having a high competency in HR technology is critical to moving your HR career forward.

I work with a lot of HR technology startups. And I've noticed a commonality with many of them. The process of building HR technology kind of goes like this for the company's founder:

Step 1. I have a better idea of how to do something.

Step 2. Some HR leaders I spoke with agreed with my idea.

Step 3. I built this idea, and I have someone willing to test it out.

Step 4. This test company—usually your first client—helped me establish my product.

Step 5. I need to raise money to scale the company. The people with money want to know what my market is and how big the company can become.

Step 6. I've started to sell my product, and wow, is it hard to make money selling to small and medium-sized businesses (SMBs). Enterprises will be more profitable.

Step 7. I've turned my product and company into an enterprise-level software company.

Obviously, this is simplified. There are hundreds of steps in this process, but at a high level, this almost always plays out the same way.

Despite that, though, I tend to see most startups as amazing fits for SMB buyers—HR shops that have a handful of staff and usually under 500 employees. The technology can help these smaller staffs be more effective and provide features and benefits to their employees that they couldn't afford otherwise.

Most founders of HR technology startups usually set out with a desire to help SMBs. It's actually easier and more rewarding to build this technology. Building enterprise-level software for giant companies is a nightmare. But these giant companies have millions of dollars to spend annually. You would need hundreds or thousands of SMB clients to match one Fortune 100 client in most cases.

The reason most HR technology is not built for SMBs is simple economics. The top few thousand buyers of HR technology account for more than 1 million buyers underneath them. Also, it's very expensive to build products that big organizations need. You can't imagine the level of security and customization that large corporations demand from enterprise-level human capital management (HCM) providers; they have thousands of people working on building out very sophisticated workflows and processes.

The ironic part of SMB versus enterprise HCM technology is that as an SMB, you will probably have more feature-rich technology at your disposal than your enterprise counterparts. Enterprise HCM technology is built not to break—ever. If you have 1 million employees across multiple countries, your technology can't go down. If you have 100 employees in one location, your technology going down will be a headache but it won't stop your business.

This fact allows SMB HR technology providers to develop their products faster and try new things much quicker. So, there's a great chance the technology you use as an SMB HR professional has more advanced features than you'll see at the enterprise level.

Now, are there SMB HR technology companies out there that are really good? Of course! While most SMBs could never afford the full HCM suites like Workday, Oracle, SAP or UKG, there are still companies that focus on SMBs and continue to evolve their solutions for SMBs. On the HCM side, BambooHR might be the largest in terms of the overall client base. Others in the space include Rippling, Gusto and HiBob.

I also really like what the payroll providers have built around full-suite HCM offerings like Paycor, Paylocity, Paycom and Paychex. We tend to think of these companies as primarily payroll providers, but all of them have really built out their HR technology offerings and provide solid core HR solutions to go with very strong payroll solutions.

HR technology, for the most part, is not purposely built for SMBs, although there are some amazing providers out there. Like most things in life, money rules our decision-making, and in the technology industry, it's all about big clients willing to pay big margins for the software to run their businesses. While SMBs as a total buyer base can be huge, it's a lot of work to sell and service thousands of clients versus a few giant clients.

I love to see what SHRMLabs has been doing these past few years in working with HR technology startups who show a passion and desire to build technology with the SHRM membership in mind. Having organizations that are purposefully building technology for SMB HR shops will make a difference for millions of employees.

Tim Sackett, SHRM-SCP, is the CEO of HRUTech.com, the author of The Talent Fix (SHRM, 2018) and a popular speaker at HR conferences. You can read his daily newsletter at timsackett.com.