The HR Tech Market heading into 2023 looks very different from the optimism that surrounded the sector at the beginning of 2022. This is primarily due to a significant deterioration in the general macroeconomic environment, with inflation at decades-high levels and interest rates having been raised significantly in response to the inflation fears. Coupled with quantitative tightening by central banks, this has resulted in a so-called funding winter with start-up valuations down across the board and venture capital that has become much more selective.

HR Tech boomed in late 2020/2021 as CEOs began to realise that robust HR practices and overall employee well-being were integral to company's bottom lines. Employee mental health, employee engagement, and employee retention became key metrics which HR professionals were measured against.

Some trends that started during the Covid pandemic will persist as the world transitions into a post-Covid state in 2023. For example, hybrid working is here to stay and HR Tech start-ups that can help companies manage their workforce more effectively will continue to do well.

However, in a vastly different recessionary economy today, companies are more concerned with cost-cutting, retrenchment and cash burn. As a result, HR Tech as an industry will face more problems in 2023.

HR Tech companies that focus on improving inefficiencies in existing HR systems and processes and can present a clear cost-benefit analysis to potential customers will continue to see success in 2023.

On the other hand, HR Tech startups that focus on the ‘softer’ side of HR such as employee benefits, organisational network analysis and the like will find the sales process in 2023 more challenging as they will have to go the extra mile in convincing potential customers to part with their hard-earned cash on projects which don’t have an immediate impact on the bottom line.

As an example, if an HR Tech startup’s focus is on allowing companies to hire larger quantities of workers, how would that work in a recessionary environment where companies are laying off hundreds of workers?

But despite these challenges, there are still some potential areas of success for HR Tech startups.

First of all, traditional banks tend to perform well in high-interest rate environments due to the positive impact on net interest margins as long as they keep a tight rein on their non-performing loans. Other recession-proof industries such as FMCG companies may also be potential targets for HR Tech startups.

Secondly, while hiring may have slowed down, it hasn’t stopped completely.

As such, HR Tech startups that make the hiring process cheaper and more efficient could still find success. As an example, a year ago there may have been only 5 applicants for a position. Today there may be 20 applicants for the same position. This increases the burden on existing HR managers so a tool that allows them to filter the list of candidates more effectively is likely to be a winning tool.

Similarly, HR Tech startups should think about focusing on geographies that will be potentially less impacted by the global slowdown. For example, India seems to have weathered the storm very effectively thus far, as borne out by strong financial results by the top companies year-to-date.

Most importantly, this depressed macroeconomic environment will not last forever and we will see an eventual reversal once inflation peaks and interest rates start coming down. Companies will then be hiring en-masse and talent shortages will once again become the order of the day.

HR Tech startups should focus on solutions that allow customers to scale up or scale down accordingly and they may have to adjust their pricing accordingly. The primary objective should be customer acquisition at this point and then attempting for a greater share of wallets once the economy as a whole improves.

2022 brought us chaos, but also the opportunity to review, renew, and advance. Read the end-2022 issue of People Matters Digital Magazine for a look back, and some key takeaways to bring forward.