HR technologies have recently become more popular in Russia: interesting start-ups have been popping up, and HR vendors (like HeadHunter or IBS) have been investing significant funds in the development of the Russian market. But there has still been very little real implementation: courses in HR automation have already been taken, HR tech projects on KPI have been completed, but what to do remains unclear.
According to CB Insights, HR technologies have been one of the most active segments in terms of venture capital growth in recent years. Both the number of investment rounds and the number of exits have continued to grow steadily: for 2016, more than 400 transactions were registered in the segment worldwide, and the total volume of funding for HR tech companies exceeded USD 2 billion (nearly a tenfold increase from 2012).
Venture capital investors have been paying attention to this segment for a reason. HR tech is a large and fairly volatile market that features a variety of niches and business models. In addition, it is a market that does not need to be created from scratch: it has historically had large budgets. The recruitment market alone is worth more than USD 500 billion, which today is going into the pockets of traditional businesses, such as recruiting agencies, recruitment companies, etc. And, according to all the principles of the idea that 'software is eating the world', it is being smoothly transformed with the help of technology.
The global HR technology industry, according to various estimates, is worth USD 8-16 billion—if you start from the revenues of vendors in the market. And this is only the B2B piece of the pie, where there are giants like Taleo (taken over by Oracle for USD 1.9 billion) SuccessFactors (taken over by SAP for USD 3.7 billion), Cornerstone OnDemand (with market capitalisation of more than USD 2.1 billion). Don't forget that HR tech is still a colossal B2C market, where there are candidates who are willing to pay for professional orientation and to improve their skills, as well as professionals who are ready to invest in their own potential, etc.
A detailed map of the HR tech market can be found in CB Insights' research. Among the most impressive transactions of recent times, we can mention SmartRecruiters' recruitment automation platform, which brought in more than USD 50 million from Insight Venture Partners, Salesforce Ventures and other investors, and, as another example, Everwise, the developer of a cloud-based LMS (learning management system) that received more than USD 25 million from Sequoia Capital. On the same map is Zenefits, the most controversial start-up in the industry, with capitalisation of more than USD 4 billion, which has recently been experiencing serious problems with US laws, as well as Entelo, the market leader in social recruiting, which brought in more that USD 20 million (Forbes: one of its earliest investors was Talent Equity Ventures, a fund with Russian roots, which the author of this article represents).
The Russian market has traditionally been four or five years behind the West in the development of HR tech; however, there are pioneering companies that are on par with leading American and European corporations, and that sometimes even surpass them. These are usually large Russian companies with a bright leader on their HR staff, a technocrat who believes that the future of HR is in technology. Such people (they can be found, in my opinion, companies such as MTS, Mail.ru, Rostelecom, Alfa-Bank and Beeline) become visionaries and the inspiration for projects related to the automation of HR processes.
At the same time, companies that are seriously thinking about the development of HR technologies in Russia face a large number of barriers.
First, there are legal difficulties. Many of the laws adopted in Russia over the past few years severely restrict the development of HR technologies. First of all, we are talking about laws related to the processing and storage of personal data.
The vast majority of today's HR tech solutions are cloud-based and have data processing and storage centres in the United States and Europe (that is where most of their customers are located). With the adoption of a law on personal information, the following requirement was introduced: personal information about Russian citizens may not be stored outside the territory of the Russian Federation (there has been a lot of discussion of this issue on LinkedIn). This gives Western vendors a choice: to bet on Russia and invest serious funds in creating local infrastructure or to forget about the Russian market for the time being. Unfortunately, most of them choose the latter. SAP SuccessFactors is perhaps the only Western HCM vendor (offering solutions for the automation of human capital management) that has made significant investments in the Russian market and local infrastructure. The others are not yet rushing to move in.
Second, Russian companies have a limited choice of vendors. This problem largely follows from the previous one. Despite the diversity of vendors in the global HR tech market, Russian HR specialists often have to pick their poison. When companies are seriously thinking about automating their HR processes, after going through a lengthy and painful market analysis, they reach the conclusion that they have only three options.
They can choose based on principle and introduce obsolete Russian products that have been around for at least a decade. Over 80 per cent of large and medium-sized Russian companies have taken and will continue to take this path. The advantage of this approach is the low cost of such solutions (depending on the number of users, but the cost usually does not exceed RUB 100,000, plus the cost of updates). The main disadvantages are outdated user interfaces and a limited set of features: such solutions are adapted to traditional HR processes, and do not allow the automation of processes based on the latest trends in the field of recruiting, performance management, etc.
The second path involves experiments with Russian HR tech start-ups, which have been increasing rapidly in number of late. Not a week passes without the appearance of a new HR tech solution. What we are seeing for now are rather variations on traditional products (e.g., cloud-based ATS systems, evaluation platforms, etc.), but there are already more interesting products available, such as chatbots, marketplaces, etc. This option has a number of advantages: it is possible to find inexpensive and, in my opinion, rather nice solutions from the point of view of the user interface; in addition, beginning startups are ready to make significant adaptations to their product for large customers. The main risks are associated with the very high level of mortality among such companies. The main thing here is not spend too much time playing around: very often, large companies squeeze startups on costs and updates, making it commercially unprofitable for the vendor to serve the customer and meet all its wishes and desires and provide the amount of user support needed.
And there is a third option: the introduction of expensive platform solutions (in fact, there's only SuccessFactors, since other vendors are in no hurry to enter the Russian market). While the cost of implementation depends on the size of the company, it almost always amounts to hundreds of thousands of dollars. The disadvantages of this approach are obvious: it takes a long time, it's expensive and it does not always lead to positive results. This was the option chosen by Sberbank and Rostelecom, but it's still difficult to judge the results: it will be possible to see the impact in the long term, and the recoupment period for such solutions may exceed five years.
Unfortunately, this situation definitely doesn't benefit the Russian HR tech market: it significantly limits competition between vendors and options for customers.
Third, Russia has unique HR processes. This is, unlike the previous two, rather an internal barrier. Many Western vendors working in Russia have noted that Russian clients require a higher degree of adaptation of solutions than their Western counterparts, and that they try to make IT solutions fit the existing HR processes in their company. This is complicated by the very low degree of unification of processes in Russian business as a whole. In mature markets, business processes in companies are usually built on common standards and principles, while in Russian business, it is universally accepted that they have to invent their own wheel, including in the area of HR. HR committees, the labour pool, certifications—the average large company, over its history, acquires a huge number of HR processes, some of which are often a legacy of the Soviet system of management, while others are 'invented' and introduced by the owner.
Along with all this, it should also be noted that there has been a significant increase in the popularity of HR technologies in Russia of late. This is largely due to the activity of Russian HR vendors (like HeadHunter and IBS), which have invested significant funds in the development of the Russian market. As a result, one of the most common situations with Russian companies today is that courses in HR automation have already been taken, HR tech projects on KPI have been completed, but what to do remains unclear.
Author: Taras Polishchuk
Director of the RPO programme at IBS
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