U.S SMB HCM Market: Durable Growth is Overlooked

THE COWEN INSIGHT

Both the payroll landscape, which remains fragmented, and the massive opportunity for spending beyond payroll are underappreciated growth drivers for the US SMB HCM market. A durable growth outlook estimated annual MSD TAM expansion, & HSD+ industry revenue growth, along with our expectation for new public market entrants over the medium term yield an attractive HCM segment that investors should take notice of.

INVESTING IN THE US SMB HCM MARKET

A fragmented payroll landscape and the massive opportunity for spending beyond payroll are underappreciated growth drivers for the US SMB HCM market resulting in a more attractive than perceived investable universe. We believe leading established, and emerging HCM vendors will continue to drive attractive investment returns over the medium term due to a large market opportunity, the strategic relevance of HCM offerings amongst SMBs, and a fragmented landscape.

KEY INVESTOR CONTROVERSIES

• Payroll Market Fragmentation: The US SMB payroll market remains fragmented despite the considerable market share of the largest vendors. However, outside of the top-5 largest vendors, no vendor has greater than a 1% market share. Beyond the five largest payroll vendors, there also exists a sizable greenfield opportunity for payroll vendors from SMBs utilizing paper and Excel spreadsheets to process payroll, estimated to be as high as ~1.8MM businesses.

• HCM Opportunity Beyond Payroll: The increasing strategic relevance of HCM amongst SMBs is resulting in higher than perceived actual & potential spending on HCM offerings. The increasing strategic relevance of HCM is driven by the challenges of attracting & retaining talent, the desire to digitize & automate processes, distributed workforces, and potential cost. The higher than perceived actual & potential spending on HCM offerings includes increasing adoption of HCM software for processes that were previously handled by Excel, pen & paper, or with no formal process in place, as well as growing demand for HR services to replace or supplement internal HR resources.

WHAT IS UNIQUE TO OUR REPORT

This report is unique in that it provides a comprehensive overview of the US SMB HCM market, including the vendor ecosystem, market scale & opportunity. It also covers market share, key public & private vendors, competitive environment, revenue models & economics, key trends, themes, behaviors, predictions, macro considerations & more. It includes our proprietary market share analysis, TAM analysis, industry revenue growth projections, and identification of key private vendors to monitor. Further, it includes contributions from two Cowen analysts that cover the HCM market.

WHAT TO WATCH

Industry revenues are expected to increase annually at a high single-digit rate or better, with leading vendors growing revenues at multiples of this rate due to the factors expanding the TAM cited above plus increasing adoption of existing available HCM offerings.

Key items to watch that may confirm our thesis include vendor disclosures of client growth, revenue per client growth, revenue per client employee growth, maximum potential PEPM increases from new offerings, as well as industry M&A announcements.