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Coronavirus may deliver an HR tech market shakeout

The HR tech market, which has some 3,000 VC-funded firms, may see big impacts from the new coronavirus. That will depend on how long the crisis lasts and if it triggers a downturn.

On Oracle Corp.'s most recent earnings call, CEO Safra Catz described the new coronavirus as business as usual for the 42-year-old tech vendor, with "some modifications."

The modifications include video conferencing and postponing employee travel. But it's not yet clear how the coronavirus will affect customers and suppliers, she told financial analysts. Oracle is a well-established HCM vendor.

Catz added that any coronavirus-related economic impacts will be different from past downturns.

Oracle's subscription revenues now account for 71% of its business. Because of this contracted revenue, Catz said the company expects minimal virus-related impact this quarter. She contrasted that to 2001, when the dot-com bubble imploded. At that time, license revenue "was a very large percentage of our business" and it dropped significantly, she said.  

Overall, Oracle's revenue increased 2% to $9.8 billion for the quarter and beat expectations.

But the HR technology market is vast and many are funded by venture capital. Analysts see the potential for rough times ahead for this market, if customers rethink their spending plans. 

Last week, IDC forecasted "a significant slowdown" in IT spending for hardware, software and services. Its most pessimistic scenario put global IT spending growth at 1% for 2020. That's compared to its original forecast of more than 4% growth.

The HR technology market may see a retreat of buyers because of the coronavirus. This may prompt vendor consolidations and closings of weaker firms.

HR startups in the very early stages that don't have a lot of revenue are "going to have a really tough time," said George LaRocque, an independent analyst at HRWins, which tracks VC investments.

"There'll be a lot of IP [intellectual property] that gets acquired for pennies on the dollar by larger startups acquiring smaller startups," he said.

Last year, HR VC investments, globally, were $5.33 billion, an increase of about 33% from the prior year, LaRocque said.

The leading VC investment area is in job boards or firms specializing in particular verticals. Last year's VC spending growth was due to some big deals, LaRocque said. A $300 million investment in RigUp Inc., an Austin-based firm focused on connecting a workforce with energy sector firms, was one example, he said.

Customer budgets in holding pattern

"I think every vendor's pipeline is going to go into a holding pattern while [customer] budgets get reevaluated," LaRocque said.

HR budgets have already been flat to shrinking, according to Gartner. It raised warnings about an economic slowdown last fall, well before the coronavirus pandemic.

I think every vendor's pipeline is going to go into a holding pattern while [customer] budgets get reevaluated.
George LaRocquePrincipal analyst, HRWins

Josh Bersin, an independent HR analyst, believes HR vendors in startup mode -- or those with less than $2 million in revenue -- "are going to find the next year or two more difficult, unless they have a very unique offering, amazing brand recognition or strategic partnerships."

Buyers of HR technology are overwhelmed by too many vendors, Bersin said. He has been tracking around 4,000 HR tech vendors. "At least 3,000 of them are less than 10 years old, and they are all VC-funded," he said.

"There could be a big shakeout," Bersin said.

The HR tech market may see "massive consolidation ahead as larger players pick up smaller players at lower valuation in the next two to three months,'' said R "Ray" Wang, founder and principal analyst at Constellation Research.

The recruiting segment of the market will still be important if the coronavirus crisis ends in the next several months, Wang said.

What happens remains to be seen, but the pace of change has been remarkable so far, LaRocque said.

"The most astonishing thing is how quickly everything is changing," LaRocque said. "If you think about where we are at this moment today, it's very different than where we were two weeks ago."

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