Why this outsourcing silo continued to grow straight through the recession.
By Gary Bragar
While HRO services such as learning, recruitment, and multi-process HRO contracted in 2009, why did payroll continue to grow, albeit modestly? Like recruitment and learning, which are volume driven, so is payroll, predominately priced per payslip. Unemployment kept growing in 2009, so wouldn’t that mean there were fewer employees to pay, thus contracting payroll?
The answer is that, even during the recession, payroll remained resilient, and payroll outsourcing contracts continued to grow for several reasons: New payroll outsourcing contracts were won, including multi-country payroll; existing payroll processing and service bureau contracts moved up the value chain to full BPO; vendors provided additional payroll services to increase sales and negate any reductions in number of client employees paid; and vendors offered an increased number of Software-as-a-Service (SaaS) HR services, including talent management and employee and manager self-service, alongside payroll, particularly in mid-market-size companies.
As payroll outsourcing is a $12.4-billon market today, expected to grow to $15.2-billion by 2014, let’s look at the drivers of why buyers are turning to payroll outsourcing and the benefits they can obtain.
1. Need to reduce and control the cost of payroll services. Driven by the recession, an increased number of buyers (previously reluctant to outsource) were driven by the need to reduce costs. On average, vendors have been able to provide cost savings of 25 percent to buyers over current spend, consistent with what buyers are generally looking for. Clients are also looking to control costs and pay on a variable basis, as many companies globally have reduced headcount and now want to reduce high internal fixed costs, especially with less staff to pay.
2. Client HR wants to become more of a strategic partner. This has been long discussed, but now that HR staffs have been reduced to the bone, HR managers want to get out of doing transactional work to save time and be able to focus on the more strategic parts of the business.
3. Increasing requirement for multi-national payroll. Clients are looking for a global platform managed by a single vendor and have aggregated data, integrated with other HR, finance and accounting systems platforms and consolidated reporting. Multinationals are becoming more aggressive in looking to streamline operations and put more countries in-scope. For example, in December 2009, NorthgateArinso was awarded a contract to provide payroll services to AstraZeneca’s 65,000 employees across 100 countries. Multi-country payroll might be for as few as two countries, ranging to as high as 50, but the typical requirement ranges between six and 12 countries.
4. Better technology. Buyers no longer have the capital to make investments themselves and keep up to date with software and pay for technology upgrades.
5. Compliance/risk management. Payroll is becoming more complex and increasingly difficult to keep up to date and be compliant with constant changes in tax laws, regulations, and labor agreements.
6. Improved payroll with best practices and depth of provider capability. Buyers want better quality of data and service; with a commercial outsourcing relationship, vendors will have stringent service levels for accuracy, timeliness, system availability, and customer satisfaction.
7. Process improvement. Buyers know they need to standardize and streamline. Centralization versus decentralization leads to consistency, efficiency, and agility.
8. Lack of resources. The recession has caused companies to cut jobs, including payroll positions, and expertise has been lost. Providers have the ability to scale resources up or down, so buyers no longer need to worry about hiring or downsizing again.
9. Reduced risk. This includes smaller companies outsourcing over concern of not having enough resources to manage payroll because of downsizing and the ability to ensure proper backup of data.
When looking at client drivers by mid-market national corporations and multinationals, cost remains the top driver, but there are differences.
Dissatisfaction with internal payroll is at the bottom for mid-market and near-bottom for large market. Thus, buyers are saying they can do it themselves, but can they do it as efficiently and effectively, all while saving and complying with local tax laws? And did we mention while providing multi-country payroll with consolidated reporting in multiple languages and currencies?
