Payroll outsourcing as we know it no longer exists, thanks to bundled offerings and smaller deals. The result is a market that is ever changing.
Last year could be called the year of the mid-market or even the year of mid-market payroll, but it will definitely not be remembered as the year of payroll. What gives?
For the past few years, HRO Today has tracked and compiled a list of major payroll outsourcing contracts. What started as a listing of payroll-only deals quickly morphed into multi-process contracts that include components of payroll outsourcing. According to Advantec’s senior VP of sales, Steven Cohen, “The growing need for access to powerful HRIS, administrative support, and HR compliance services has forced payroll service providers to deliver solutions with more value to their clients.”
As the HR BPO market has matured, buyers of HRO services are more knowledgeable and demanding. At the end of the day, it is the customer who is driving the market, so it makes sense not to bite the hand that feeds you. This may the reason for the dearth of standalone payroll deals. Many larger providers were reticent when asked about these discrete deals, but we were still able to confirm a number of these discrete service contract.
This time last year, Lisa Rowan of IDC astutely wrote in the March issue of HRO Today the following: “Despite the maturity and robust nature of the market, many larger firms still pursue a strategy of managing payroll in-house, harking back to their mainframe days….The result is that the propensity to outsource payroll continues to be tied to organization size. The smaller the firm, the more likely it is to outsource. This situation is not a surprise because smaller organizations have fewer IT resources than those at the higher end of the market.”
According to Stan Lepeak, managing director of research at EquaTerra, small-sized payroll deals are easier to get off the ground because fewer complexities are involved. He added that although enterprise buyers have outsourced payroll services across multiple geographies (this is especially true in Europe), the deals have been on a country-by-country basis, creating a series of smaller-sized deals as opposed to one large deal with a single service provider.
At HRO Today we define the mid-market as organizations with more than 500 but fewer than 5,000 employees. Over the years, we have made many predictions about the mid-market—some realized and some not. But it is becoming apparent that as HRO moves down stream, the once ignored small fries are becoming the big guys, Lepeak explained.
“There is also a more competitive and robust supplier market targeting smaller deals and the mid-market than existed in the past. Smaller buyers are also in general doing more outsourcing, both in payroll as well as other HR process areas,” he said.
As you may have noticed, 2006 brought even fewer deals than in previous years. Every market experiences a slowdown. As things wind down in the states, payroll outsourcing is ramping up in the still nascent European HRO market. It is possible that we may never see the huge payroll deals of yesteryear. But as the market evolves, so will the deals.
So what can we expect to see in the coming years? At Advantec, trends are pointing towards a need for payroll processing in Canada. Cohen added, “We are also learning that our clients find value in being able to see gross-to-net payroll calculations prior to finalizing their payroll production.”
On the advisor side, Lepeak believes the focus will remain on smaller payroll deals; there will be more bundling with payroll suppliers offering bundled services. For larger, enterprise-level buyers there will be a shift to consolidate payroll outsourcing across multiple countries and geographies.
