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Over the next three to five years, significant changes will reshape the Employer of Record (EOR) market. As competition increases, many EOR providers will merge while others go public to attract new investment.

Despite the increased competition among current EOR services, new competitors will not enter the market. However, look for prominent software companies acquiring leading EOR services to counteract its influence in the HR tech arena.

Here are my predictions for the EOR market and how businesses can survive and thrive.

Evolution of the EOR Market

One word will sum up the next few years for the EOR market - consolidation.

The leading 10 EOR firms will merge into six or seven dominant providers. Some leading EOR companies are operating at a loss, hinting at potential mergers or acquisitions.

Companies focusing primarily on technology, especially startups offering competitive prices, may need help to stay financially afloat. Large software companies could acquire EOR companies to add to their portfolios.

While the market leaders consolidate their positions, new players will unlikely enter the EOR space. Due to factors such as high entry barriers, technological infrastructure, and market saturation.

While it's not impossible for new players to enter the EOR space, it is decidedly more difficult. Those considering entry would need a clear value proposition or innovative approach to differentiate themselves from established competitors.

Challenges and Trends in the EOR Industry

Pitfalls of Focusing on Price

Organizations that focus solely on price over quality of service are likely to need help. They may lose their footing when faced with increased competition from companies offering superior service at realistic prices. Tech-enabled service delivery is necessary, even if the cost is slightly higher.

Dangers of Diversification

EOR services that attempt to diversify can lose sight of their core principles and may find themselves on shaky ground. When businesses spread their resources, trying to tap into various sectors (e.g., contract payroll, HR, etc.), their primary services often suffer compared to more specialized providers.

Instead, creating an ecosystem building upon core EOR capabilities with integrations to other domains, such as HR, makes for a superior offering.

Integration Challenges with Human-Centric and Tech Solutions

Another trend is EOR organizations trying to combine human-centric services, such as traditional HR, with high-tech solutions. However, integrating the two is not seamless.

Some larger EOR companies have faced legal challenges due to a lack of preparedness. This not only damages their brand reputation but impedes their ability to adapt to market trends.

Market Comparisons: Lessons from Other Sectors

The scenario I see for the EOR market mirrors trends experienced in different industries over the years. Below are a few examples of those sectors:

Dot-Com Bubble and Internet Startups

Similarities:Rapid expansion, large investments, and then the bubble burst when many companies couldn't turn a profit or sustain their business models.

Examples:While Amazon and eBay survived and prospered, many like Pets.com, Kozmo, and Webvan failed

Ride-Sharing Industry

Similarities:Heavy investments in startups, aggressive expansion, price wars, and then consolidation. A focus on price often overshadowed the service quality.

Examples:Uber and Lyft emerged as dominant players. However, many regional players either got acquired or went out of business. For example, Grab acquired Uber's Southeast Asia operations.

Streaming Services

Similarities:A plethora of services emerged, each trying to diversify its content offerings. Those who couldn't keep up with quality or breadth of content struggled.

Examples:Netflix remained a major player. Disney acquired 21st Century Fox. Meanwhile, smaller platforms like Quibi failed to gain traction and eventually shut down.

Recommendations for EOR Providers

These are my leading recommendations for EOR companies as we look ahead to the next five to ten years.

Focus on Quality Over Price

In an ever-evolving market, competing solely on price can be a race to the bottom. A focus on quality ensures customer loyalty, repeat business, and referrals.

Apple has consistently prioritized quality over cost in the software industry. Even though Apple products are typically more expensive than their competitors, they have a loyal customer base because of their commitment to quality.

Companies in the EOR sector should invest in advanced technologies to streamline operations, hire knowledgeable staff for accurate and efficient processing, and prioritize customer support to address any issues or concerns.

Be Compliant with Regulations

Non-compliance can lead to penalties, lawsuits, and a damaged reputation.

Due to non-compliance and unethical practices, companies like Wells Fargo faced massive penalties and public backlash.

Given the complexities of employee records and data sensitivity, EOR companies must adhere to data protection regulations, labor laws, and other related legislation. Those considering an IPO should ensure robust compliance systems to withstand public and regulatory scrutiny.

Compartmentalized Services

Instead of being a jack of all trades, companies should specialize in certain services and excel in them. By compartmentalizing, businesses can deliver superior value in specific areas and partner with complementary services.

Salesforce, primarily a CRM company, divided its services into marketing, sales, service, and commerce clouds. For other complementary services, it often integrates or partners with third-party providers.

An EOR firm might specialize in employee documentation while partnering with a payroll company for payment solutions, ensuring both services are top-notch.

Build an Ecosystem Around Core EOR Capabilities

Building an ecosystem means creating an interconnected set of services where each component adds value to the core offering. This can increase customer retention and offer multiple revenue streams.

Amazon started as an online bookstore but built an ecosystem that now includes Amazon Prime, AWS, Alexa, and more. Each service feeds into the other, creating a vast interconnected network that adds value to the core business.

EOR companies can create an ecosystem by integrating HR solutions, payroll services, training modules, and more around their primary offering. The result is a comprehensive suite of services that leverages the strengths of each component.

Final Thoughts

The evolving landscape of the EOR market demands adaptability, foresight, and a focus on core strengths. By emphasizing quality, ensuring compliance, compartmentalizing services, and building an ecosystem around core capabilities, EOR companies can overcome the challenges ahead and position themselves as industry leaders.