Buyers who once outsourced payroll only are embracing a cornucopia of services from their providers. Attracted by lower prices and more robust technology, small and mid-sized employers broaden their engagements.
When small and mid-sized companies experience rapid growth, it’s a mixed blessing. Just ask David Hughes, the vice president of HR at Access Insurance, a small Atlanta-based insurance business.
A carrier that services customers in California, Florida, Texas, Georgia, Alabama, and Pennsylvania, the company was ranked No. 10 among Inc.’s 500 fastest-growing privately held businesses. Since 2004, the company has expanded its workforce 30 percent to 300, and Access Insurance continues to grow its operations, adding two or three states to its client base each year. The growth is welcomed, Hughes said, but accompanying HR headaches are not. To relieve those pains, Access Insurance outsources a cornucopia of HR services to its payroll provider, Roseland, NJ-based ADP.
“What led to the decision for us was we were a small HR department needing to grow along with our fast-growing company,” said Hughes, who pointed out that his company’s engagement with ADP has changed over the years from payroll-only to HR services and more.
That growing companies such as Access Insurance need a lot of back-office support as they expand is hardly news; but how they leverage the resources of providers—vendors they regarded in the past as no more than a payroll bureau—is evolving in a new direction. No longer satisfied with simple payroll, many small and mid-sized buyers are discovering that the HRO market has changed in recent years, enabling employers to shift an ever-growing scope of services to vendors while relying on them for process improvements, compliance handling, and other domain knowledge.
Why are employers engaging their payroll providers on myriad fronts? What has led these companies—especially small and mid-sized businesses—to consider end-to-end HRO? And will this trend continue in light of uncertain economic times?
According to industry observers, outsourcing just payroll is giving way to buyers seeking more value from HRO engagements. More than ever, they realize that the market has made many services—benefits administration, time and attendance, employment verification, and employee and manager self-service—easier and more affordable to procure and use. For scores of mid-market employers, this broadening of choices has made their lives better, especially as HR is asked to do more with less. While payroll was once their primary responsibility, HR professionals are now asked to get more involved in strategic services such as recruitment, human capital planning, and business growth. So for many of these professionals, outsourcing is the most effective method for addressing these needs.
At the same time, providers are rolling out a new wealth of offerings. Touting robust technology, affordable solutions, and value-added consultative services, they are dovetailing additional product components to their traditional payroll business to prompt buyers to rethink how they can more strategically use outsourcing to their advantage. By continually investing in technological tools, they are raising the bar in automation and allowing clients to selectively engage just the services they want. Offered à la carte or all-in-one, these solutions provide employers flexibility in their outsourcing approach. Furthermore, buyers can add service components as they become more comfortable in their initial engagements, building out as needed.
“We are seeing a shift from product-centric to a solution-centric offering. They (employers) are looking to be more strategic, integrated, and much more efficient in non-strategic areas,” said Rich Watson, vice president of marketing and business development for ADP.
Watson noted that many of ADP’S clients have broadened their outsourcing initiatives in recent years, transitioning from a purely payroll buy to include HR, benefits, taxes, and more. He explained that two clear market trends are driving buyers to search out comprehensive solutions. Because of the impending wave of Baby Boomer retirements, employers are paying more attention to talent management issues and are looking for both consultative and administrative help. And with executive management expecting HR to take on more duties and support work, many of those clients are looking externally to ease the workload.
According to an ADP study of more than 1,200 small and medium-sized companies, many employers view technology as the panacea to their stretched HR departments. In fact, 80 percent of respondents said they would like to see more automation of HR-related tasks. Considering that the majority of respondents said their HR staff spent their time on administrative tasks (see Fig. 1, p. 21), it’s no surprise that HR leaders are looking to automate as much of those chores as possible.
By outsourcing administrative duties related to payroll, benefits, and IT, HR professionals said they are able to spend more time on strategic services. In fact, their first choice would be to focus on employee development, including employee training, management/leadership training, and career path development, according to the study.
“To me, ADP or someone like them really are much more experts in the minutiae. Taxes, 401(k)—we want to touch that as little as possible. They are the experts,” said Hughes, who pointed out that Access Insurance began its engagement with ADP through a web-based self-service platform that has since expanded to include taxes, 401(k) administration, Worker’s Comp insurance brokering, and others. “For us to do it ourselves, it would take a lot more time.”
Hughes added that since broadening the relationship beyond payroll, Access Insurance has been able to maintain a bare-bones HR staff of himself and a recruiter, even though his company has added a significant number of employees. By outsourcing more services, he said he is able to free himself from “old school” HR duties to focus on work with greater business value.
“Business case-wise, there is clear proof of the cost-effectiveness and the value. I know our managers spend much less time doing HR overhead functions than if we did it ourselves. I’m much more freed up to pay attention to things that matter—working on organizational development and thinking much more about the future” state of the HR department, Hughes added.
Focus on Human Capital
Indeed, providers say many buyers today are more concerned with human capital issues than in the past. Even in recessionary times, succession planning doesn’t go away, and employers’ desire for more robust services, greater access to data, and a consolidation in the number of vendors remains high.
But beyond broader administrative support, payroll providers are being asked to help clients better comply with a spectrum of employment regulations. As Jodi Hayes-Roth, vice president of HRO services and relationship management at payroll giant Ceridian, pointed out, employers want assurances that vendors will be responsible for fulfilling compliance mandates even though clients are ultimately responsible. She pointed out that it’s all part of an effort to consolidate services.
“They want more of an integrator. They want more services—one throat to choke,” she said. “It’s kind of an evolution.”
Hayes-Roth said while these end-to-end deals have been common in the enterprise market, mid-market buyers—the ones who have embraced outsourced payroll but little else—have in the past shied away from such comprehensive outsourcing deals because of the costs associated with end-to-end services. But as technology brings down price points, these services are now within reach for a larger group of employers.
For instance, the bundling of services such as time and attendance along with payroll services and benefits administration is a natural fit. Because data into these areas are interlaced, engaging a single vendor to administer these services results in the greatest savings for the employer. To be sure, providers say they see many clients steadily stretching the scope of their engagements. Some do so because they find out that their existing payroll provider is capable of additional services; others are simply driven by lack of internal resources.
According to Tim Padva, president of payroll services provider CheckPoint HR in Edison, NJ, about 65 percent of his clients use more than one application offered through its web-based HRMS platform; about 25 percent use all of the offerings, which include payroll, HRIS, recruiting, training, benefits, and others. He noted that while only a minority of clients is engaged in full, end-to-end services, the trend among others is to add functionality as they grow accustomed to a broader offering.
To help them become accustomed, providers such as CheckPoint HR offer free training. While the service is also meant to help vendors generate additional revenues, employers benefit from discovering new ways of automating their HR processes, enabling them to deliver, for instance, robust self-service, to minimize headcount, and to improve overall efficiency in small HR departments. And because these mid-sized companies lack extensive HR resources, providers are taking on the role of consultants as well, which further accelerates their relationship from payroll bureau to full-service HRO.
In an age of self-service—consumers have become used to the concept as a result of their experiences using web-based retail sites such as Amazon.com or Expedia.com—implementing new functionality on a web-based payroll platform has become a non-event for users. Totally transparent, new HR services tacked onto an existing payroll system simply offer additional functionality they can choose to use—or not.
These services “are an upgrade. You don’t know what you don’t know until an application is at your fingertips,” said Padva. “The more people learn, the higher the adoption and success rate.”
Indeed, the consultative support that traditional payroll service providers offer is leading to an expansion of contract scope. That’s because employers are continuously seeking more value beyond the basics. Payroll processing is the foundational layer that many deals are built on, but as the relationship evolves, services such as benefits administration, contact-center support, human capital management, and compliance support are incrementally added to the mix. Farther down the road, buyers may ask for help with plan and policy development.
But as employers look to their providers for these services, vendors face a particularly difficult challenge: how to make money on them. Small and mid-sized companies are price-sensitive, so delivering customized offerings becomes prohibitive—yet that’s exactly what many organizations want.
“The customers almost want it in a box customized with their name on it,” said Hayes-Roth. “You have to figure out how to make those services affordable.”
This will, indeed, become the most challenging aspect of transitioning from a payroll-only to a multi-process relationship. After all, the most successful HRO providers today provide little room for customization, although many platforms are configurable. To change their models now would simply hurt profitability and ultimately lead to higher pricing for buyers.
How service offerings will continue to evolve remains to be seen. For buyers such as Hughes, however, solutions available now in the marketplace are robust enough to address his needs. For instance, reporting used to be a sore point for his department because he needed the IT department to run Crystal Reports, which might take three days to generate. If the request were misunderstood, it would take another three days to get the right information, he added.
Through ADP’s services, he said, reporting is nearly instantaneous, allowing managers to quickly make decisions based on the data. As a result, his time can now be spent on strategic activities.“It makes us not reliant on IT, and we’re totally self-sufficient. I’m the only VP in the company that doesn’t need IT support,” he added.
So as employers look beyond outsourced payroll, expect many more end-to-end or multi-process engagements in the future. Under pressure to deliver more services with limited resources, HR leaders in many small and mid-sized companies will surely find the fast-evolving HRO marketplace an attractive alternative to retaining internal capabilities. And as price points fall because of technological advances and automation, an outsourced solution may prove too economical to ignore.