Sophisticated buyers seek both when outsourcing payroll.
By Linda Merritt
Payroll is such a well-accepted mainstay of HR outsourcing that it’s nice to see its steady growth year after year, according to the 2013 NelsonHall Targeting Payroll BPO market analysis.
Over time, payroll outsourcing has grown, evolved, and increased in strategic importance. What has not changed is that buyers are looking for savings by outsourcing payroll. The good news is that payroll outsourcing delivers: first-time clients can save from 15 percent to 40-plus percent, depending on the degree of complexity and variables, such as the number of locations, with everything from a single location to more than 100 countries.
Cost saving remains the number one reason to outsource payroll, and several nuances have been added:
• Clients want a more variable cost structure and less fixed costs;
• Savings now often include not having to refresh client technology (cost avoidance);
• Cost reductions can derive from simplifying payroll after a series of M&As or restructurings; and
• Payroll losses from ineligiblity and overpayments can be reduced.
Cost remains the number one client requirement for payroll outsourcing, but there is a new aspect, and it is the same one NelsonHall is seeing in other HRO areas; balancing cost with value. Value for price is especially understood by second- and third-generation buyers who indicate their willingness to change vendors to get it.
Given the focus on cost reduction, pricing pressure should be no surprise. This is a market with many mature and capable suppliers, which in itself adds competitive pricing pressure and the need for differentiation to focus on value as well as cost.
As an indicator of payroll service provider capabilities to compete, I earlier mentioned the steady year-over-year revenue growth. That growth has been achieved at the same time as the average price per-payslip has fallen significantly during the last three years.
Payroll BPO is what we follow most at NelsonHall, and it is a growing part of the overall payroll market. Even as software-as-a-service (SaaS) payroll products become more ubiquitous (two-thirds of vendors already offer a SaaS option), many clients will still want support for the whole process. Which can be seen in the changing pattern of client requirements, as some needs have increased in importance:
• Standardization and centralization of processes and technology.
Instead of defending the need for customization, now buyers are demanding standardization to increase efficiency and to reduce the cost of maintaining disparate systems.
• Compliance/risk management. Ever more complex and changing regulations and work rules need the time and attention of fulltime experts. For example, in Europe the complexity of regulations combined with employee populations spread over multiple countries adds to the challenges of compliance.
• Better employee experience. Users want access that is easier and simpler, including self-service anytime-anywhere access. The vendors that deliver the most useful mobile payroll applications the fastest with the greatest security will create valuable market differentiation, while others play catch-up.
• Payroll subject-matter expertise. Clients expect improved quality of payroll with augmented accuracy which can lower overpayment and off-cycle payroll runs.
For multinational companies (MNCs), multi-country payroll remains a sought-after capability, as they want one vendor, one contract, and one payroll platform. Also wanted is visibility to aggregated costs and data reporting, in addition to the flexibility and scalability to add or change geographies.
Vendors have responded to the blended needs of MNC clients for cost savings and global coverage by:
• Increasing nearshore and offshore service centres to offer different cost points;
• M&A or partnering for increased geographic coverage (60 percent of vendors use partners);
• Offering multiple technology platforms from SaaS to enterprise resource platforms (ERPs).
The focus on improved payroll processes and systems is driven by more than the requirement to pay employees timely and accurately. It is also driven by the need to manage the total cost of labour with real-time access to data and analytics for decision-making that leads to improved business performance. Payroll is increasingly seen as a valuable management strategy tool, and clients will be looking to payroll BPO providers to help them access and develop workforce analytics expertise.
Helping clients tap the “big data” that they have in their payroll and employee databases requires both an integrated technology platform to access data and the subject- matter expertise to turn data into useful information. Providers that can connect both technology and analytics expertise will have an opportunity for a more sustainable form of market differentiation.
For providers with multiple products and service, payroll is a great anchor of adding on a chain of other services. The top add-ons are HR administration, benefits administration, recruiting, and talent management applications.