Why payroll outsourcing continues to thrive.
By Gary Bragar and Liz Rennie
Not only did payroll outsourcing gain new clients during the recession, but 2013 saw payroll outsourcing’s highest growth in six years, led by client demand for multi-country payroll.
In 2013, the payroll outsourcing market increased to $14.8 billion globally, the second largest HRO service next to benefits administration. Payroll looks poised for growth through NelsonHall’s forecast period reaching $17.8 billion by 2018.
Per NelsonHall’s Q2 2014 Payroll Market Analysis, multi-country scope contracts in 2013 had double-digit upticks, led by multi- country contracts within a single region and multi-region contracts of two regions, both with increases in the upper teens. Global contracts, representing three or more regions, with an average 20 countries, increased in the high single digits.
Multi-country growth is driven by increased demand for centralization to bring greater corporate visibility of payroll data, demand for payroll vendor consolidation, and demand for simplifying interface architecture and payroll technologies, often as part of a HR global transformation project. In the market analysis, 50 percent of the vendors that were included currently provide multi-country payroll, with four of the vendors solely focused on multi-country payroll: SafeGuardWorld International, Celergo, CloudPay, and Acrede.
The mid-market, defined by NelsonHall as companies with between 500 and 15,000 employees, is seeing the highest increases in contracts, followed by the large market and the small market. Mid-market buyers are increasingly looking for integrated HR technology as part of the payroll service. Large market payroll demand is led by HR transformation projects, particularly for multi-country services. Small market organizations with a highly standardized payroll requirement, reap greater benefits by moving to cloud-based technologies and support higher uptake of manager and employee self services and electronic payslips. All payroll vendors offer either integration to HR cloud technologies whether they are proprietary or third party. More than two-thirds of providers offer payroll alongside proprietary cloud HR system offerings.
The overall drivers of why buyers are turning to payroll outsourcing include:
1. Control of costs and cost agility. Cost has remained the number one driver for the last five years: Nearly 90 percent of all buyers have outsourced payroll to either reduce or control cost. Reduced costs can be obtained in several ways including:
Costs of HR teams performing employee administration due to inefficient HR/payroll processes;
Integration costs to HR systems, especially where a major HR transformation is underway, requiring interfacing across multiple vendors; payroll integration protects investments made in HR technology;
Cost reduction of payroll support and processing, through greater offshoring and labor arbitrage; and
Cost agility to support business changes in volumes, to move to transactional pricing and away from the fixed cost of an internal payroll department.
2. Standardization and centralization of processes, governance, and technology. These factors can lead to increased efficiency, better quality, and greater visibility of information:
• Applicable to single and multi-country payroll replacing disparate systems;
• Applicable to all clients, including those which have recently undergone M&A;
• Consolidation of vendors and improved governance structure to support business change; and
• Where there is a major HR transformation underway requiring interfacing effort across multiple vendors, putting the payroll integration in place secures the investments made in the HR technology.
3. Compliance/risk management. With continual changes in regulations, maintaining compliance can be tricky:
• Payroll fines for non-compliance can be significant;
• With the loss of payroll expertise as the internal team ages, it can be preferable to give work to an expert than to keep rehiring;
• For smaller clients with few resources, this creates increased risk in terms of on time payments, accuracy, compliance, and backup of data.
4. Need for payroll cost visibility across countries. The globalization of manufacturing operations and lean methodologies is driving increased demand for payroll cost visibility across countries
• Multi-national countries want one contract with global visibility of cost and aggregated reporting of data; and
• Flexibility and scalability to add new geographies.
5. Need for greater payroll expertise. Clients continue to look for expertise and advice and seeking more stringent service levels.
6. Need to free up HR staff time spent on administration and transactional work to focus on more strategic activities, including workforce planning and talent management.
• Employee self-service helps to reduce the HR administrative burden
7. Better and more modern technology. Clients no longer want to run on legacy systems that have limited reporting capability, limited flexibility, and often no self services.
8. Better, easier service and employee experience, including mobile applications, self-service and anytime access to data.
The benefits to buyers of payroll outsourcing are many and include:
- Reduction in costs, averaging 33 percent through standardization, centralization, and improved technologies described above and labor arbitrage where applicable, via offshoring used in a high percentage of payroll outsourcing contracts. Vendors with the greatest volume of global managed payroll services are delivering the greatest offshoring of payroll services;
- Increased accuracy;
- Improved compliance;
- Better employee experience;
- Improved reporting and visibility of payroll information across the business; and
- Reduced administrative burden to focus its core competencies
As we move into the future, what can we expect from vendor delivery of payroll services? Providers will be able to build out offshore capability in Asia Pacific, including Manila, to support cost reductions through labor arbitrage and the ability to support multiple languages. Vendors will continue to drive payroll integration with HR SaaS technologies as cloud-based services become the technology of choice. Technology will also allow for paperless payrolls, electronic payslips, self-service, and mobile strategies. As technology improves payroll delivery, vendors are also targeting the migration of partial payroll (bureau) services to either cloud or fully managed payroll contracts.
Gary Bragar is HRO research director for NelsonHall and Liz Rennie is payroll research director for the organization.