Maybe you’re looking for the latest generative AI tool to save time when summarizing the results of engagement surveys. Perhaps you’re seeking a cutting-edge sourcing tool to help identify and assess job candidates faster than your competition. Or perhaps you’d like to pilot new features in augmented reality technology to train your customer service staff.
Regardless of your taste in emerging technologies, you’ll likely have to look beyond your incumbent HR technology vendors to satisfy your needs. Most innovation in the market continues to come from startups, and analysts say you might miss out on important opportunities to improve HR’s performance or productivity if you don’t consider adding emerging vendors to your tech stack.
More Feature-Rich, Advanced Options
Experts say HR functions in smaller businesses aren’t the only ones that can benefit from the products created by HR tech startups. Larger enterprises also can reap dividends from the more feature-rich platforms, greater willingness to modify products to meet customer needs and deep knowledge of cutting-edge technologies that many startup vendors bring to the table.
“If you’re looking for innovation in HR technology providers, that innovation happens much faster and there are far more options with startups than with large, established vendors,” said George LaRocque, founder and principal analyst of WorkTech, an HR research and advisory firm in New York City.
The last three years have seen a wave of new HR technology providers enter the market, with these companies attracting billions in venture capital funding as they introduce products designed to support trends including hybrid work, recruiting amid talent shortages, globalization, workforce reskilling, employee well-being, and diversity, equity and inclusion initiatives.
LaRocque added that these providers often are more responsive and flexible than established vendors when it comes to accommodating requests such as adding new features or tweaking designs of original platforms to meet the unique needs of clients.
“You often have more leverage and ability to impact the product road map of startup vendors than you do with incumbent vendors,” he said, referring to the “big fish in a small pond” phenomenon. “Your ability to have a bigger voice, whether it’s on a customer advisory board or just one-on-one with the founders, is something you can get when partnering with startups that you may not with established vendors who typically are dealing with many more customers.”
Mitigating Risk with Startups
Increased innovation can come with increased risk when working with technology startups that are leveraged with venture capital funding, often aren’t yet profitable and have limited track records. LaRocque advises viewing your HR tech stack like an investment portfolio and taking conservative positions with mission-critical technologies while experimenting in areas where the risk of failure has more benign consequences.
That might mean avoiding startups in mission-critical areas such as payroll and benefits and seeking opportunities with emerging providers who offer unique point solutions that supplement or replace systems that are part of larger human capital management suites.
“None of the all-in-one technology suites does everything well and you’ll always be in a position where you’re filling gaps, so it’s around the edges of those platforms where you should consider working with startups to access capabilities you need that are unique to your organization,” LaRocque said. “That’s where you can have a higher threshold for risk.”
Late-stage startups specializing in areas such as candidate sourcing, compensation benchmarking tools or analytics software can be good options, he said.
“With analytics or survey tool providers, for example, if you’re comfortable with their data security and privacy practices, the risks to you of their failing is relatively low,” LaRocque said. “While it would be inconvenient, you’d still have your data and could shift to another provider. It wouldn’t threaten your business or even your HR career, like a payroll platform provider not performing or going out of business [would].”
However, HR leaders shouldn’t completely rule out partnering with startups in benefits, payroll or similar areas, LaRocque said. “Some may be profitable and on their way to an initial public offering, for example,” he said. “Every startup you consider isn’t risky, but you do need to give them extra scrutiny.”
That evaluation should start by closely vetting the backgrounds of company founders and conducting financial due diligence far beyond verifying funding levels and the quality of investment partners. “You want to approach it just like an investor,” LaRocque said. “Are they first-time founders? Have they had a successful exit or [initial public offering] before? Do they come from the HR discipline? Do they really know their audience?”
LaRocque said this is an area where it can make sense to tap the expertise of your finance department, and if you’re a smaller HR function with limited internal resources, to consider enlisting the services of an outside financial adviser.
“You’ll also want to ask the founders, depending on what they’ll share and what’s covered by [a nondisclosure agreement], for things like their revenue run rate,” he said. “You want to determine what their burn rate is, or how much money they’re spending on a monthly basis. … Will they need to go out to raise money again, and how much?”
Special Considerations for Partnering with Startups
Some experts believe the unique characteristics of startups also require that HR leaders in larger enterprises adjust their strategies and mindsets when partnering with them.
Thomas Otter, general partner with Acadian Ventures, a venture capital firm based in Madison, Conn., that invests in early-stage HR tech companies, said many larger organizations make the mistake of dealing with startups like they do incumbent vendors.
In a presentation to the virtual HR Technology Conference and Exposition this past spring, Otter said larger enterprises should make the following adjustments when doing business with HR tech startups:
Leave long lists of feature requirements behind. Otter said that using the same lengthy request for proposal (RFP) documents and requirement demands you might with established vendors is the wrong approach with startups.
“Defining requirements is a horrible way of working with startups,” he said. “A startup is trying to solve your problems in a novel way, and what they want first and foremost is to understand the key problems you’re trying to solve. They want to spend time talking with you to figure those out, to understand what’s not working and find opportunities to do something different. If you start the process with a long list of requirements, you essentially close off that discovery process.”
Temper the desire for extensive rewrites of vendor contracts. Large or midsize organizations should be content to use standard contract terms and conditions with startups and avoid rewriting contracts in ways that can run up legal costs, Otter said.
“Today, most software-as-a-service contracts are very standardized and easy to understand, which wasn’t the case 10 years ago,” he said. “Most startups come to the party with those industry-standard contracts around issues like renewal terms, system uptime, data access and the like. Spending hours of an attorney’s time rewriting standard contracts so they’re even more favorable to you might seem appealing, but those legal costs can add up for startups. If the startup is paying for attorneys, it might mean they can’t pay for things like hiring engineers.”
Rethink how you use pilot projects. Otter said HR leaders in larger enterprises tend to use pilot projects with startups to test the viability of the vendors’ platforms without putting much of their own skin in the game.
“You shouldn’t launch a pilot project with a startup without having some kind of contract,” he said. “What I prefer larger companies do is sign a contract for the startup’s product dependent on the successful delivery of a pilot project. Using open-ended pilot projects without any commitment to signing a contract at a certain date puts startups in a difficult spot. They pour time and resources into the pilot but don’t know if they’ll eventually have a contract and can’t predict any future bookings.”
Be open in your communication. Startups aren’t always familiar with how processes and politics work at large enterprise companies. “If you know it might take you six months to get procurement signed on to a contract with a vendor, then tell the startup provider that,” Otter said. “You need to communicate continually and guide them through your processes.”
Dave Zielinski is principal of Skiwood Communications, a business writing and editing company in Minneapolis.