Driving the Board Agenda: Tapping into 'Chapter 2' in HCM Software
Cameron Naylor , Megabuyte Principal Analyst, discusses the convergence of opportunities for UK tech companies in the Human Capital Management space and the one key question being answered by its most successful vendors: how can they leverage their data assets to solve multiple people-related challenges, rather than just one, shifting from tactical to strategic HCM?
Over the past year or two, Human Capital Management (HCM) software companies have seen softer financial performance, weaker valuations, and tougher competition. Yet, at the same time, technological possibilities have expanded significantly.
This has created a convergence of opportunities for companies to transform their strategies and product roadmaps, accelerating growth, regaining valuation premiums, and boosting competitiveness. The most successful vendors are all tackling one key question: how can they leverage their data assets to solve multiple people-related challenges, rather than just one, shifting from tactical to strategic HCM? Beyond the immediate impact on market size and sales efficiency, we believe this approach is a powerful driver of long-term shareholder value.
Tracing the sector’s expansion since pre-COVID
During the pandemic, Human Capital Management (HCM) was one of the fastest-growing segments within the software sector, and as a result, it has more than doubled in size since pre-COVID by several measures. UK-headquartered HCM software businesses (including UK subsidiaries of international firms) are now generating over ￡5bn in revenue and employ nearly 40,000 people collectively. This marks a rise from around 2.5% to almost 4% of the entire technology sector’s workforce.
It’s clear, from this top-down perspective, that the addressable market for HCM software has expanded at its fastest pace in the past five years. While growth has slowed compared to the pandemic period (we’ll explore the reasons for this shortly), we forecast that by 2030, HCM software companies could easily generate over ￡8bn in revenue and employ more than 65,000 people.
As a reminder, at Megabuyte, we see this revenue and employee base spread across four key segments of HCM:
Where does this content come from?
This market update was the scene-setter for Megabuyte's Human Capital Management CxO seminar held on 10th October. With thanks to our panelists Stephanie Coward IRIS Software Group , Ben Betts and Chris Ciauri Unily for their candid insights on how their companies are navigating key trends. The session was moderated by Megabuyte Founder & Chairman Ian Spence and sponsored by NatWest Business and LDC .
Since pre-COVID, several previously emerging categories have now become well-established. Take HR analytics, for example – once often limited to a BI dashboard requiring in-house data engineering expertise. Today, even mid-market organisations use specialised point solutions that combine unstructured data from various applications. Visier Inc. is the best-known vendor in this space, but there are also several rising UK players, such as Horsefly and HR DataHub , that HCM software companies should be familiarising themselves with, especially if HR analytics is adjacent to their technology stack and they have an active integration partner strategy.
Navigating short-term pressure on financial performance and valuations
In line with the broader technology sector, HCM software companies have seen weaker financial performance over the past year or two. While HCM software became a top priority in the boardroom during COVID, many critical implementations and migrations have now been completed. Macroeconomic factors are also at play: we are in a much weaker hiring cycle, with flat or declining headcounts across many industries, and hiring and L&D departments have faced significant budget cuts. As a result, when measured by the Rule of 40, the sector is at its weakest point in nearly four years, with a current score of 30, down from 39 at the end of 2022.
Valuations have similarly softened, with our HCM Software Index (tracking 30-40 publicly listed HCM software companies) aligning more closely with the Nasdaq. This indicates that a 20x EV/EBITDA multiple is now the new 30x, and the premium traditionally paid for HCM software – or SaaS more broadly – has shrunk compared to the wider tech sector.
However, weaker valuation dynamics have created a more favourable environment for M&A activity. We estimate there are over 1,200 UK-headquartered HCM software companies, nearly 200 of which are VC-backed. Of these, around two-thirds haven’t raised any funding in the last two years. While some acquirers might be deterred by their lack of profitability, this presents a significant opportunity to acquire innovative assets in the space.
Adapting to change: new strategies for HCM software companies
What have we learnt so far? Growth and valuations for HCM software companies have returned to normal levels, while the HCM software ecosystem has expanded and become better funded, making it more competitive. In response, many companies are refining their growth strategies, messaging, and product roadmaps to counter these trends. Specifically, they are thinking more strategically about becoming providers of embedded solutions that address multiple problems their customers face, rather than remaining administrative, tactical HCM tools solving just one issue.
A great example of this is UK-based Thomas , traditionally known for its digital psychometric assessments for recruitment. By leveraging its core psychometric data, Thomas is now helping customers address post-hire challenges, such as employee engagement, team conflict, and performance appraisals.
Acquisitions can also play a key role in this strategy. Beamery , originally founded as a candidate relationship management software provider, acquired a small internal mobility software business, Flux, in 2022. Flux uses skills inference to match internal employees to open positions. Together, they launched a Workforce Planning solution, offering managers insights into their team’s skill development, hiring needs (and associated costs), and whether it’s more efficient to recruit internally or upskill existing workers.
By adopting this approach, HCM software companies are benefiting in three key ways:
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a) Expanding their exposure to a broader range of use cases, which increases the potential user base and boosts retention through deeper engagement across the organisation;
b) Accessing additional departmental budgets, thereby widening their addressable market; and most importantly,
c) Evolving their technology strategies, particularly in relation to the next phase of cloud development, which we believe will have a lasting impact on their competitive positioning and business valuation.
Chapter 2 unveiled: driving success in HCM software
For context, the first phase of the cloud technology cycle focused on moving from on-premise to cloud-based applications, enabling the rise of SaaS business models. The second phase, or Chapter 2, is about building on this foundation by using next-generation technologies, including AI, to deliver competitive advantages. You can read more about what we mean by Chapter 2 of the cloud in Megabuyte’s AI Readiness Strategy Framework Report.
This report outlines ten key questions boards should consider to drive Chapter 2 technology strategies. The most crucial, particularly for HCM software companies looking to use proprietary data to solve multiple problems, is: What are your AI assets? Specifically, how can you use customer data, or your customers’ data, to broaden your solution offering, improve user experience, or unlock new revenue streams? This is exactly what companies like Thomas and Beamery are doing in real time.
Another important question is: What’s the Chapter 2 market opportunity? Where in end-users’ roles are there data and process-heavy tasks? Does the current industry structure or culture support drastic innovation? And what is the regulatory stance? So far, HCM software vendors have excelled at identifying these process-intensive tasks, using generative AI to automate job descriptions and conversational copilots to handle routine HR policy queries.
However, some vendors have shied away from more advanced technologies, like machine learning, to build predictive solutions—for example, predicting when an employee might leave the organisation. This has been attributed to a more cautious buyer profile among HR managers. So, is selling directly to HR and L&D directors limiting the adoption of next-generation technologies?
If so, this strengthens the case for HCM software companies to focus more on their key data assets and leverage these to address the wider range of challenges their customers face. If it’s not already evident, we believe this will be at the core of the next generation of HCM software companies.
Wondering how current sector trends could shape your next strategic move in HCM?
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