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Understanding the hidden influence of the HR vendor community

Peter Cappelli, Wharton
Peter Cappelli
Peter Cappelli is HRE’s Talent Management columnist and a fellow of the National Academy of Human Resources. He is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School of the University of Pennsylvania in Philadelphia. He can be emailed at [email protected]

My colleague Shoshana Schwartz and I recently tried to map the scope and scale of the industry of vendors that supports human resources in “The rise of the human capital industry and its implications for research,” published in Human Resource Management.

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(To give a little perspective before you guess the dollar revenue per year, note that there are 29 magazines in English in addition to HR Executive that try to keep track of it—and that doesn’t count specialized publications in subfields such as recruiting.)

You might think first about consulting; historically, it was the core of HR support, but that is now the smallest subsector of the HR industry, at about $31 billion in revenue per year. The biggest are the firms doing “talent acquisition” in one form or another: $751 billion. If you total up the revenue of all of the vendors, you get a figure of $1.99 trillion per year, most of it in the U.S.—bigger than the Gross National Product of all but nine countries.

If that sounds impossible, think about this: The GNP of the major industrial countries combined is about $62 trillion, and labor is the single biggest expenditure in GNP.

Why does this matter? The main reason is that we have not paid enough attention to the role that vendors, per se, play in managing employees. One aspect of this is their ability to set the agenda. By some estimates, these companies spend about 10% of their revenue on marketing, which would be almost $200 billion.

That marketing is arguably the dominant force in shaping what we think the issues are in HR and how we should address them.

Modern HR vendor opportunities and challenges

Vendors now provide something that in the past was never available: close to real-time survey information about what employers and employees are doing. On the other hand, they also make predictions that are spectacularly wrong. Consider all the reports just a few years ago predicting that by 2023, truck drivers would be replaced by robots; we haven’t seen a single one.

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Or think about the institutionalization of “generational differences” and problems associated with them in HR discussions, which the National Academy of Sciences has completely debunked as non-existent. The reason there are so many of these wild predictions is that you don’t generate any business by saying “nothing to worry about.”

The conceptual basis for HR thinking has shifted as a result, too. I/O and personnel psychology are fading in the face of data science. This spring, there were just 17 positions open for those psychologists on the Indeed database and just under 4,000 for data scientists in the field of “human resources,” as software has come to dominate HR practices. (Note to aspiring students: If you are studying statistics, call yourself a data scientist … )

There are also overlooked operational challenges when it comes to how clients deal with vendors. For example, it is common to think that outsourcing decisions are just about doing something cheaper than we could do it ourselves, but do we give enough thought to how the management of vendors and the relationships with them affect that value? In other words, what “costs” are in that calculation? The $250 billion spent on “managed service providers” who run our IT systems is a prime example of something so fundamental to our operations that we never would have thought about turning it over to someone else in the past. Making sure that it adapts to our operations rather than us to it is a huge task.

Something we learned from vendor surveys is that “vendor management”—a new and very big function—is pretty siloed and divorced from dealing with vendors once they are there. One of those surveys reported that 25% of managers did not know who had the responsibility for managing non-employee labor provided by vendors.

Here’s a different but well-known problem: We pick the best vendor for each task and then discover that they don’t integrate well. This is the main factor holding back data analytics in HR: We can’t get the different databases integrated. Applicant data is with our applicant tracking software, employee performance measures are captured by performance management software and so forth.

See also: What’s trending in HR tech? Improving EX, plus gen AI in skills intelligence

Related is the issue of alignment—having our practices fit together when each one is being provided by a different vendor. We can try to specify that in a contract, but as each vendor innovates, the others have to adjust, too. Who gives and how much is hard to specify in advance.

When we outsource entire functions, we typically lose our own capability to assess how things are going in it. We have to ask the vendors to assess themselves. One of the unintended consequences of all this outsourcing is that the role of consulting has shrunk with the growth of outsourcing because most organizations no longer have the capability to execute anything new with their own resources.

They need a vendor not just to tell them what to do but to do it for them. Especially for those who remember the major HR consulting firms a few decades ago, it is surprising to see that the leading firms by revenue in HR consulting are Accenture, Deloitte and EY—giant companies with roots in accounting that now mainly deliver IT-related solutions.

Our organizations are living these challenges every day, but they have gotten surprisingly little attention. There is an opportunity for vendor management firms to spend more of their marketing budgets explaining how to navigate these challenges better.