Providers find opportunities in globalization and expanding needs of clients as payroll evolves as the foundation supporting all other HR services.
by Andy Teng
It’s the most mature and foundational domain in the HRO spectrum, yet the outsourced payroll market these days is undergoing significant changes. That’s because payroll service providers are no longer just check (or more appropriately, direct deposit) processors. Among vendors big and small, payroll is the joist from which many other HR services hang.
While payroll processing remains a huge portion of the payroll market, the reality is that providers can offer their customer so much more than just simple, gross-to-net calculations and check printing. You might have noticed that vendors today offer a whole menu of value-added services, including benefits and HR administration, time and attendance, employee assistance programs, and much more. Sound like multi-process HRO? That’s because the line between comprehensive outsourcing and traditional payroll processing continues to blur as buyers and providers look to embrace outsourcing in a way that heightens the value that payroll vendors bring.
But making outsourced payroll more attractive is not simply about bolting on bells and whistles. The trend of consolidating payroll across many geographies under one provider continues to gain momentum, and major providers are helping to accelerate the movement. With many of them supporting clients’ globalization strategy, often taking on payroll for just a handful of employees in markets located off the beaten path, vendors are putting down a foundation upon which existing clients and new prospects can leverage as their needs lead them to explore new territories. More importantly, they are delivering a standardized payroll solution to workers located in areas ranging from the Americas to Zimbabwe, enabling HR to get a global perspective and access to data on their spend around the world.
Of course none of this is possible without strong technology integration. And with employee and manager self-service nearly a prerequisite of any payroll deal these days, a robust platform is a must. More importantly, any technology is expected to seamlessly provide users real-time access of employee data from around the world, especially as companies enter into a period of fiscal hawkishness. Furthermore, because payroll providers are also offering a plethora of additional services, integration with these functionalities as well as with major ERP systems is a requirement.
“One of the things we are focused on is being an integrator of all their enterprise services and capabilities to [address] a complete lifecycle,” said Jodi Hayes-Roth, senior vice president of HRO implementation and services for payroll giant Ceridian, which tends to clients around the world. She pointed out that there is a greater emphasis on providers offering enhanced reporting capabilities and integration with ERP systems, especially as finance professionals want more updated information around payroll spend.
To be sure, research firm NelsonHall recently reported that more than 90 percent of employers surveyed said that it is highly important for their payroll to be a part of an integrated HR platform covering both payroll and other HR services. Clearly, the firm noted, this has led some buyers to favor solutions that complement their existing ERP investments. It also demonstrates that enterprises around the world, especially those with multinational operations, value the ability to access core payroll data on a common platform.
For a company such as ServiceMaster, data access and ERP integration were key requirements in adopting an e-payroll system from TALX, which also delivers unemployment and employment verification services to the Memphis-based company. Greg Harmer, vice president of shared services at ServiceMaster, recalled that after the company implemented J.D. Edwards in 2005, which was used to replace a mainframe legacy system to process payroll, the company looked to adopt a paperless pay process, but it didn’t want to add another layer of bureaucracy to the ERP. Instead, it turned to TALX to integrate its paperless payroll solution with the J.D. Edwards system.
Harmer said the implementation resulted in a number of benefits, including a high rate of participation in direct deposits, which led to the elimination of 80 percent of the paper checks and other documents the company used to print, and allowed it to get rid of a printing facility. Furthermore, because more than 70 percent of the workforce today uses direct deposit (the company plans to use paycards to serve the remaining 20-plus percent not on direct deposit), it was able to significantly reduce the amount of time that workers used to spend on payday collecting their checks. And because they can access paystubs online before payday, they are able to address any potential problems before payday.
Although the company continues to process its own payroll for 35,000 employees in 800 locations, the outsourcing of the paperless payroll process is viewed by Harmer as an evolutionary step in not only service enhancements but also in productivity gains. Even as workers get more timely and 24/7 access to their paystubs, the company has been able to reduce its payroll staff and shift the retained organization’s attention to more strategic tasks.
“Now our workforce is smaller and focused on analytical and cost management and more service-oriented things toward employees,” Harmer said.
Value-added services like those outsourced by ServiceMaster are exactly the kinds of enhancements that many employers expect from payroll providers these days. Of course they are also interested in engaging in foundational processes such as benefits administration, recruitment, talent management, and others. As a result, vendors are continually adding to their capabilities or partnering with other vendors to deliver a comprehensive solution to customers.
“There are people coming at it from a bunch of different angles, and everyone is looking to add capabilities,” said Greg Secord, division vice president, ADP marketing and strategy, Employer Services International and National Accounts Services.
He remarked that as employers face dwindling internal resources and as compliance requirements grow more complicated, both domestically and internationally, these developments are forcing many HR professionals to consider more external support, either from their existing payroll service providers or from other vendors. He cites the example of leave administration, which has grown more unwieldy to manage in light of the recent changes in the Family and Medical Leave Act (FMLA). Because many companies are ill-equipped to address these changes, he said providers have an opportunity to assist and guide their customers through these changes as well benefit from upselling services such as leave administration, which ADP recently added to its platform.
Indeed, leave administration is just one of many services buyers look to outsource with payroll. A clear trend over the years is that employers have grown more comfortable with the idea of gradually adding services offered by their payroll bureaus as their needs have escalated. The flexibility allows employers to periodically assess exactly which services are core and which ones can be offloaded to a vendor it already works with.
That was the case for Jeff McCutcheon, senior vice president and chief financial officer at LaBranche & Co., a New York City-based financial services company that has, unsurprisingly, undergone some dramatic changes in recent years. When his company changed payroll vendors to CheckPointHR a few years ago, the company employed some 600 workers. Following a market restructuring, headcount fell to one-third of that, which led the company to reexamine the role its payroll provider would play in LaBranche’s new structure.
“One of the things that happened as we went from 600 to 200 employees was we asked ourselves, ‘Do we still need to maintain this function or that function,’” recalled McCutcheon, who pointed out that as he realized that the vendor could provide greater HR support, there was no need for the company to continue to maintain some capabilities internally. “The robustness of CheckPoint’s HR side became evident.”
Like other buyers of outsourced payroll services, McCutcheon said he relies on the vendor to continually upgrade and add services, or what he calls “keeping up with the Jonses.” What started out as just an engagement of payroll processing services has since expanded into offerings such as expense reporting, time and expense management, and even online learning. In LaBranche’s case, it’s a clear indication of how the payroll industry continues to broaden its offerings to clients.
Tim Padva, president and CEO of CheckPointHR, noted that while many clients still look to engage providers mostly for payroll services initially, adding on additional services as they become acclimated with outsourcing, a number of buyers enthusiastically embrace a full suite of functionality immediately. “It used to be they got onboard and they did payroll, and then self service, and then open enrollment. Now, the clients want it all,” he pointed out.
Beyond functionality, many buyers still look to their payroll providers for support with compliance. That’s because as the regulatory environment grows more complicated, and as internal resources shrink while companies open up new markets, outsourcing payroll appears more appetizing than to take on internally.
David Sibbet, vice president of sales and marketing for NorthgateArinso, a global provider of payroll and HRO services, explained that as companies develop business in new markets, the challenges of remaining compliant with labor laws in new countries become apparent. Turning to a payroll vendor experienced with the regulations within those areas is the most immediate way organizations can assure compliance, and he said buyers often build into their service level agreements (SLAs) critical compliance requirements with not just government regulations but also with internal corporate mandates.
Even relatively minor events such as changes in unemployment benefits and tax withholdings passed as part of the President’s stimulus package can be vexing to some payroll departments, and some providers say they are receiving more calls as a result.
Compliance concerns, along with business drivers, have led to a growing interest in adopting global outsourced payroll. Large multinationals have always wanted to consolidate their vendor base, but that’s simply not possible when they are located across many nations, especially when some operations are in developing regions. Still, some payroll providers continue to push a standardized platform as well expand their services across the globe.
Their efforts are having some effects on the vendor consolidation movement. According to Nelson Hall’s survey of buyers, the average number of countries supported by outsourced payroll is expected to increase this year from 4.3 to 4.6 on average, while the number of suppliers used by buyers will decline from an average of 2.3 to 2.1. As consolidation further occurs, it appears vendors with true global reach will best positioned to serve the large market, said Pat Goepel, the chief operating officer for Patersons Payroll, a U.K.-based provider expanding into the U.S.
Goepel explained that being able to deliver to clients a global perspective of their payroll activities has never been more important. As businesses seek to become more efficient and reign in their spend, they need a standardized platform from which the latest data in local languages and currencies can be extracted. While many mid-market companies will continue to work with in-country vendors, global enterprises will undoubtedly seek out those who are able to tend to their needs in a variety of locations. “We see the large market as a tremendous global opportunity,” said Goepel, who pointed out that Patersons can deliver services in 160 countries.
He noted that one of the drivers behind globalizing payroll is the need for business intelligence. Engaging with many outsourcing providers leads to too many data input points, and managing them can be overwhelming. Having one payroll vendor is seen as an ideal solution. Single-sourced “payroll has a lot of data-mining capability because it’s a lot easier to get it out of the one source than a bunch of subsystems,” he added.
Still, not all providers have the infrastructure to reach every country in which a client operates, and in those instances, it may have to source locally than through a global vendor. However, with providers such as ADP, NorthgateArinso, Ceridian, and Patersons all building out their reach, the days of having to rely on multiple vendors may be numbered.
Through evolutionary changes such as continued globalization, expansion of services, and greater integration of technology, the outsourced payroll market is proving that it’s no longer just a one-trick pony. In fact, payroll providers are playing a greater role in helping their customers develop a more efficient business, find appropriate talent, comply with new and changing regulations, and gain savings outside of payroll. Ironically, even as the multi-process HRO market has seen a decline in interest among buyers, the opposite it true in the payroll segment, where interest in value-added services is on the rise. This may be clear evidence that payroll, the granddaddy of all outsourced HR services, continues to be an evolving pillar of the industry.