The last six months have seen an influx of new entrants to the ATS arena. These include two ad agencies, an assessment vendor, and a background checking services provider. Many more are in development. An existing ATS provider also recently announced that its product is available for licensing as a private label offering. While each of these new offerings claims to provide unique components that differentiate it from the rest, there’s been little, if any, innovation. Admittedly, tighter integration with each of the new providers’ core services has some value ó but the benefits are incremental at best, cosmetic at worst. The main value to the customer is lower cost based on package pricing and, hopefully, more stable integrations. Presumably, the new products have been built to be fully compatible with the providers’ core services. But then again, the ERP vendors may have proved the value of this to be a myth. The situation in the ATS industry is reminiscent of H.G. Well’s 1932 novel, The Shape of Things to Come. This is a story about a long war that drags out over many decades. Eventually most people do not even know who started it or why. Nothing is being manufactured at all anymore and society has broken down into primitive localized communities. This more or less reflects the state of the ATS industry today: a lot of companies fighting for the same piece of turf. It’s hard to remember what started all this. The original rationale for creating an ATS has long been lost, and nothing new is really being made. Much of the functionality that has been developed in recent years has done little to improve recruiting; in fact, some has actually made things worse. Despite much technological prowess, vendors exist as localized communities following a primitive approach to delivering systems. But the future is quite clear. Most industries follow a predictable pattern:
- The industry is started by a few entrepreneurs who discover an untapped market.
- These entrepreneurs have some early successes.
- A flood of competitors emerges.
- Many failures occur as a result of shrinking margins or no profits.
- A small handful of dominant players emerge and establish themselves.
The ATS industry is nearing the end of stage 3. With over a hundred competitors vying to establish themselves ó and with little to differentiate themselves from one another ó a shakeout is inevitable. To better understand the situation, consider the industry as being divided among four quadrants. On the horizontal axis is a continuum with specialized products on the left and generic products on the right. The vertical axis has basic products at the bottom and advanced products at the top. So the four quadrants are:
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- Specialized/Basic (bottom-left)
- Generic/Basic (bottom-right)
- Generic/Advanced (top-right)
- Specialized/Advanced (top-left)
Quadrant 1: Specialized/Basic This quadrant represents niche products. These products focus on a specific need, such as hourly staffing, or target their offerings to a specialized field in recruiting, such as staffing/executive search. This area is a sparsely populated today. A few vendors have chosen to offer highly specialized products, focused on a particular industry or employment segment. Others are trying to enter the space, but early indications are that the approach taken by many is to change the packaging and not the content. Instead of developing products that are designed for a particular segment, some are taking their existing products and offering them up as dedicated solutions with a few tweaks and new positioning. The temptation to do so is obvious: the costs are lower and the vendors’ own past experience shows that buyers are not the most sophisticated bunch when it comes to technology. The promise of gold in the hills will soon create a replay of the situation in Quadrant 2 below. Of course, there is the possibility that a few vendors will dominate this space by getting in early with well-designed dedicated solutions. Quadrant 2: Generic/Basic This quadrant represents commodity products. The vast majority of ATS vendors belong here, though many position themselves as being in a different quadrant. Quadrant 2 is, however, the worst place to be. Buyers of commodity products place no premium on customizations, leading-edge functionality, best-practices consulting, superior service, or any of the other things that some vendors like to push. Price is the only real consideration. Successful commodity providers in other industries offer products either to serve the lowest common denominator or to meet a very broad set of needs. They hope that offering a range of low margin products makes up for having one or a few high margin ones. The sheer number of providers in any commodity market also means that customers have to be given the option to shop a la carte. They cannot be forced into buying services and add-ons they don’t value. Survival requires selling in quantity, since margins are miniscule and the competition is brutal ó and there is a laser-like focus on costs. Other strategies are also unlikely to succeed, as many spectacular failures have demonstrated. Some may recall an ATS company named after a character from Greek mythology. It was well funded, had some great product ideas, and pioneered a concept of providing tiers of service at different price levels. Clients got what they were willing to pay for. Unfortunately, this company chose to pursue clients at every level with the same vigor and aligned itself with a now defunct consulting firm for handling implementations. The strategy was the equivalent of selling Big Macs served on fine china. Those who wanted the sandwich had no interest in paying for the china, and those that valued the china were put off by the meal. The failure of this strategy proved that it really is impossible to be all things to all people. Quadrant 3: Generic/Advanced This quadrant represents enterprise products. Many vendors like to position themselves as being in this quadrant because it allows them to claim that their products are strategic. The image being projected is that products in this space are suited for advanced recruiting needs. Products that support multiple languages, globalization, and other high-end functionality belong here. Of course, being strategic has nothing to do with technology and everything to do with how it’s used. But it sounds good and is an excellent excuse… er… rationale for hosting an executive briefing to sell more products. Given current trends, Quadrant 3 will soon be dominated by the ERP vendors. This is inevitable, given that these vendors have a dominant presence in larger organizations and are continuing to improve their products. The argument advanced by current leaders in the ATS space ó that they have better products since they’re dedicated to the space ó is increasingly seen as being just so much hot air. All of this “dedication” has not produced a meaningfully better product. It rings hollow since many, having presumably seen the writing on the wall, decided to diversify their product offerings. The other reason why the current industry leaders have had some success in the past is their claimed ability to customize their products to their clients’ needs. This too, however, is increasingly not an advantage. Customizations cost money and are usually very poorly supported. There’s clear recognition of this among larger organizations. At a user conference of a major ERP vendor earlier this year, the CEO specified that the company’s goal was to get 90% of its client base to shift to plain-vanilla implementations within three years. Several clients were trotted out who spoke about the virtues of changing business processes to match the software, rather than the other way around. While this may seem exactly backwards of how things should be, it at least was an acknowledgement that customizations are a bad idea, no matter how desirable. With that kind of a shift in thinking, a customizable ATS will likely cease to be anything that buyers value. For the current industry leaders in this Quadrant 3 to survive, it will require they either switch to providing genuinely specialized products or develop other lines of revenue to support their ATS applications. Of course, the latter strategy does not mean that the ATS line will be profitable, since there will be continuous downward pressure on prices from both the ERP vendors and mid-market providers ó the former because they can leverage the development resources and support infrastructure of their enterprise applications, and the latter because they have much lower infrastructure costs to begin with. This isn’t exactly a profound revelation. In an earlier article of mine (Building a Better ATS, Part 4) I had mentioned Porter’s Competitive Strategy model, which shows that success in any industry can only result from a strategy of differentiation or cost leadership. Of course, it’s possible to offer an ATS product as a loss leader, so long as there are other products and services that can be sold around it. Some vendors are already gearing up to do this, by building up everything from assessments to recruitment outsourcing services. There are a few established providers that offer a full complement of products and services around an ATS. This model is easier to develop if the complementary products and services are already well established than it is to start with an ATS and try and add services that complement it. Properly done (and there are a few that do it well) the ATS serves as a hub for talent management. Done poorly, the customer ends up with a Rube Goldberg solution involving a hodge-podge of products. Quadrant 4: Specialized/Advanced This quadrant is empty today. There are no products that are genuinely advanced and meet specific needs. That makes this quadrant unexplored territory: ripe with opportunity and fraught with pitfalls. Entering this requires vision and some courage ó both of which are about as common in this industry as weapons of mass destruction are in Iraq. But this is also the space where companies can break out of the mediocrity of a hundred look-alike products. There are many specialized recruiting needs that require advanced solutions ó staffing for nurses or physicians is a great example. There are also no truly global solutions, and there may never be one. Successful staffing in other countries requires much more than just being able to support the local languages and recognize the zip code equivalents. Another example would be a product that supports large college recruiting efforts. In conclusion, a migration out of Quadrant 2 has to happen. Staying there guarantees a slow death for the majority of vendors. Quadrant 3 is off-limits to most, given the dominance of ERP vendors. That leaves Quadrants 1 and 4. Entering either one is difficult, but there are a few well-researched and well-designed products that are on their way. The danger is that these might be followed by a slew of others claiming to be “just right” for any and every particular need.