TD Cowen 2024 Human Capital Management Survey

Overview:

• This year's survey compiled Human Capital Management (HCM) trends from over 3,000 organizations.
• We see signs of a deceleration in HCM growth entering into 2025.
• Spending growth is driven by demand for solutions to increasing functionality and efficiencies.
• The survey forecasts consistent growth in HR tech spend led by mid to large organizations.

The TD Cowen Insight

TD Cowen's 2024 Human Capital Management (HCM) Survey relays the spending trends, vendor switching intentions and vendor positioning of over 3,000 companies and organizations. We found consistent Human Resources (HR) tech spending growth indications, yet lower planned and potential payroll solution switching depicts a nuanced demand environment.

Stable HR Tech Spend Outlook

Our survey reflects a healthier spend backdrop than the consensus view, and that may present attractive rotation opportunities as macro fears wane. We anticipate a gradual deceleration in HCM growth through 1H25, adjusted for the impact of moderating labor growth, due to lower payroll solution switching indicated by our survey. HCM coverage has primarily underperformed other tech sectors for the last 18 months due to market views of a potential recession, moderating labor growth, HCM demand being affected by macro uncertainty and investors' concerns on payroll market saturation.

Our survey's more stable HR tech spend outlook, coupled with lower year-on-year planned or potential payroll solution switching, affirms the consensus view that macro is affecting demand for payroll. However, it also depicts a nuanced demand environment with spending growth also being driven by the adoption of additional functionality, solutions that increase efficiencies and pricing increases. Near-term concerns are unlikely to fade much for the balance of 2024. The fact that cost was not cited as the top factor for payroll switching should also ease concerns on market saturation and a lack of product differentiation resulting in pricing compression.

Full Spectrum Survey on HCM Spending Trends

Our survey provides an updated view on HCM solution spending trends, vendor switching intentions, vendor positioning, buyer behaviors and more. The data is primarily focused on payroll and Human Resource Management System (HRMS ) offerings. We partnered with a leading industry advisor and consultant to survey 3,318 organizations globally. The survey covers the full spectrum of HR buyers as it includes participants across industries and employer size segments. Survey findings provide takeaways for both pure-play HCM software and services vendors and for Enterprise Resource Planning (ERP) vendors.

Consistent Growth in HR Tech Spend

Our 2024 survey reflects consistent growth in HR tech spend over the next 12 months led by enterprise and mid-market organizations. The survey found that 41% of all organizations cited increasing HR tech spend over the next 12 months versus just 7% of organizations decreasing spend. The net increasing spend mix (% increasing less % decreasing) of 35% nearly matches the net 37% relayed from the same respondents for the prior 12-month period. Despite a slight decrease in mix of net increasing spend indications, average HR tech spend growth is projected to uptick to 3.3% from 3.2% for the prior 12-month period. We note this percentage is not weighted by employer size segment, which likely modestly understates overall market growth.

Spending indications are most favorable for organizations with 5,000+ employees (45% net increasing), followed by 500-4,999 organizations (41%) and weakest for 1-499 organizations (28%). The average HR tech spending growth for the next 12 months mirrors this ranking with enterprise projected at 5.1%, mid-market at 4.0%, and SMB 2.5%.

Overall, resilient HCM spend intentions in our survey increases our confidence in modeled near-term growth projections across coverage. The global HCM software a services Total Addressable Market (TAM) is conservatively estimated above US$150 billion. The 3% growth in HCM tech spend implied in our survey over the next 12 months is modestly below the global market growth rate estimates previously cited as being in the mid-single digits by leading vendors. However, several of the HCM vendors under our coverage are growing in excess of that growth rate demonstrating ongoing share shifts and relative exposures. We do not see that dynamic changing over the medium term.

What to Watch

The upcoming 3Q earnings period is the next milestone that may confirm our thesis. Updates across coverage will detail progress on the key fall selling season. From this result, we can gauge how demand levels and potential switching for payroll vendor offerings compare versus indications relayed by survey participants. Further, monthly employment data releases for signs of stabilization in private employment growth.