Trends 2018: Traditional bureau payroll declines as buyers seek tech-based managed services Trends 2018: Traditional bureau payroll declines as buyers seek tech-based managed services

Trends 2018: Traditional bureau payroll declines as buyers seek tech-based managed services
02 Feb 2018

For employers in many industries today, the need to support the technology of tomorrow is pressing, and for some even critical to survival. In catering to the requirements of a global workforce that is more diverse, dispersed, and tech-savvy than ever before, this means that HR and payroll functions need platforms that can not only help to standardise processes but also engage employees by improving the user experience.

As a result, many HR and payroll departments have jointly starting exploring suitable technology to both transform their global operations and provide personnel around the world with an optimum means of accessing services. This situation has resulted in technology-based managed payroll services being in increasing demand.

According to our ‘Next Generation Payroll Services Market Analysis 2017’ , the global payroll services sector continues to grow at a compound average annual growth rate of 4.1% and is estimated to be worth more than $21 billion by 2021. The top five drivers for adopting payroll services comprise:

  1. Access to best-in-class technology: These days, most buyers focus on technology first, services second, with demand for technology-based managed payroll services on the rise;
  2. Boosting process efficiency: Payroll processing remains a largely manual process, but potential purchasers are looking for advanced automation capabilities to increase their efficiency and effectiveness;
  3. Improving compliance: Regulatory changes around the world, which include the European Union’s General Data Protection Regulation, are becoming more complex, demanding and difficult to comply with;
  1. Enhancing access and visibility into global data in real time: Analytics software to help analyse historically-rich payroll data has become a must-have tool in order to improve insight into business operations, which at the same time enables the payroll function to move from being a simple data processor to a strategic business partner;
  2. Reducing costs: Financial pressure continues to drive the need for a more reliable, manageable and scalable payroll model that offers predictable operating costs.

Buyers are also looking for payroll systems that both integrate with their existing global HR and business applications and align with their corporate IT strategy. Therefore, payroll outsourcers are basing their offerings on cloud-based platforms as well as various forms of ‘intelligent’ technology – in fact, a huge 80% of new payroll service contracts are now based on such cloud-based systems.

Key areas of investment

With technology a key component of global payroll transformation, vendor investment is focusing on the following key areas:

  • Cloud: All suppliers are now investing in and selling cloud-based payroll services, either exclusively or as a primary option;
  • Integration: Pre-configured connectors are being upgraded to provide dynamic plug-and-play integration with leading HR systems;
  • Analytics: Real-time, analytic reporting has now become standard, with all payroll vendors providing some level of capability. Some also offer Analytics-as-a-Service or plan to do so over the coming year;
  • Automation: Suppliers are continuing to boost automation capabilities, which include robotic process automation, artificial intelligence, machine learning and chatbots to replace manual payroll processing activities.

Small organisations are still the primary users of payroll services by volume, mostly for partial payroll/Software-as-a-Service (SaaS) contracts, although mid-sized companies are close behind - and, in fact, lead the market in both revenue and market share terms. The mid-market remains the “sweet spot” for cloud transformation and managed payroll services and growth is expected to continue here.

For large companies, payroll services continue to be bundled as part of multi-process HR services deals, but standalone managed payroll is starting to become a more attractive option as enterprises increasingly move to the cloud. This means that many multi-process HR service providers are now offering standalone payroll services for the first time, no longer requiring them to be bundled with HR offerings.

The multi-country payroll sector, meanwhile, continues to grow at twice the rate of the overall market, representing 17% of total standalone payroll service revenues. Single and multi-country contracts make up most of the market, but multi-region and global contracts are also growing as organisations of all sizes go for global payroll transformation.   

Africa and the Middle East are emerging as key target markets for global payroll providers due to their economic growth and investment levels, the complexity of their regulations and the possibilities they offer as low-cost, nearshore locations to support both European and local operations. As a result, many vendors plan to expand their capabilities in the region.

Plus ca change

While most suppliers currently have some form of near- or off-shore facilities to provide payroll services, the mix varies greatly from supplier to supplier and from deal to deal based on customer needs and their own capabilities.

Demand is growing for payroll processing to take place in-country rather than at near- or offshore locations, however. The aim here is to take advantage of both local expertise to help ensure compliance and local language knowledge in order to deal with employee enquiries more effectively.

Incidentally, India and the Philippines continue to be the go-to offshore locations of choice, although Mexico and Hungary are also gaining in popularity. Malaysia and Singapore are the favourites for undertaking nearshoring activities, on the other hand.

Interestingly though, the potential impact of organisational change remains the top inhibitor for employers failing to sign any payroll outsourcing deal at all. Although apprehension about moving to the cloud may have eased, many buyers still believe that payroll transformation will have too big an impact on operations - and most lack the necessary skills to manage the associated change. In addition, there is still a reluctance to cede control to third-party vendors irrespective of efficiency gains or other benefits, which leads to a status quo with existing providers.   

Last but not least, although SaaS-based financial models may have made it easier to build business cases, most purchasers still experience difficulties in demonstrating enough return on investment or proving the case for outsourcing. While they may need technology-based managed services, what they want is innovation and added value beyond basic, tactical payroll management. As a result, the search is on to find providers prepared to work in partnership with them to create value. 

Pete Tiliakos (@PeteT_NH) is a principal analyst at NelsonHall and has shared global responsibility for research into HR services. He has been a member of the HR services analyst team since 2016 and is known for his extensive knowledge of the global payroll outsourcing market.

For employers in many industries today, the need to support the technology of tomorrow is pressing, and for some even critical to survival. In catering to the requirements of a global workforce that is more diverse, dispersed, and tech-savvy than ever before, this means that HR and payroll functions need platforms that can not only help to standardise processes but also engage employees by improving the user experience.

As a result, many HR and payroll departments have jointly starting exploring suitable technology to both transform their global operations and provide personnel around the world with an optimum means of accessing services. This situation has resulted in technology-based managed payroll services being in increasing demand.

According to our ‘Next Generation Payroll Services Market Analysis 2017’ , the global payroll services sector continues to grow at a compound average annual growth rate of 4.1% and is estimated to be worth more than $21 billion by 2021. The top five drivers for adopting payroll services comprise:

  1. Access to best-in-class technology: These days, most buyers focus on technology first, services second, with demand for technology-based managed payroll services on the rise;
  2. Boosting process efficiency: Payroll processing remains a largely manual process, but potential purchasers are looking for advanced automation capabilities to increase their efficiency and effectiveness;
  3. Improving compliance: Regulatory changes around the world, which include the European Union’s General Data Protection Regulation, are becoming more complex, demanding and difficult to comply with;
  1. Enhancing access and visibility into global data in real time: Analytics software to help analyse historically-rich payroll data has become a must-have tool in order to improve insight into business operations, which at the same time enables the payroll function to move from being a simple data processor to a strategic business partner;
  2. Reducing costs: Financial pressure continues to drive the need for a more reliable, manageable and scalable payroll model that offers predictable operating costs.

Buyers are also looking for payroll systems that both integrate with their existing global HR and business applications and align with their corporate IT strategy. Therefore, payroll outsourcers are basing their offerings on cloud-based platforms as well as various forms of ‘intelligent’ technology – in fact, a huge 80% of new payroll service contracts are now based on such cloud-based systems.

Key areas of investment

With technology a key component of global payroll transformation, vendor investment is focusing on the following key areas:

  • Cloud: All suppliers are now investing in and selling cloud-based payroll services, either exclusively or as a primary option;
  • Integration: Pre-configured connectors are being upgraded to provide dynamic plug-and-play integration with leading HR systems;
  • Analytics: Real-time, analytic reporting has now become standard, with all payroll vendors providing some level of capability. Some also offer Analytics-as-a-Service or plan to do so over the coming year;
  • Automation: Suppliers are continuing to boost automation capabilities, which include robotic process automation, artificial intelligence, machine learning and chatbots to replace manual payroll processing activities.

Small organisations are still the primary users of payroll services by volume, mostly for partial payroll/Software-as-a-Service (SaaS) contracts, although mid-sized companies are close behind - and, in fact, lead the market in both revenue and market share terms. The mid-market remains the “sweet spot” for cloud transformation and managed payroll services and growth is expected to continue here.

For large companies, payroll services continue to be bundled as part of multi-process HR services deals, but standalone managed payroll is starting to become a more attractive option as enterprises increasingly move to the cloud. This means that many multi-process HR service providers are now offering standalone payroll services for the first time, no longer requiring them to be bundled with HR offerings.

The multi-country payroll sector, meanwhile, continues to grow at twice the rate of the overall market, representing 17% of total standalone payroll service revenues. Single and multi-country contracts make up most of the market, but multi-region and global contracts are also growing as organisations of all sizes go for global payroll transformation.   

Africa and the Middle East are emerging as key target markets for global payroll providers due to their economic growth and investment levels, the complexity of their regulations and the possibilities they offer as low-cost, nearshore locations to support both European and local operations. As a result, many vendors plan to expand their capabilities in the region.

Plus ca change

While most suppliers currently have some form of near- or off-shore facilities to provide payroll services, the mix varies greatly from supplier to supplier and from deal to deal based on customer needs and their own capabilities.

Demand is growing for payroll processing to take place in-country rather than at near- or offshore locations, however. The aim here is to take advantage of both local expertise to help ensure compliance and local language knowledge in order to deal with employee enquiries more effectively.

Incidentally, India and the Philippines continue to be the go-to offshore locations of choice, although Mexico and Hungary are also gaining in popularity. Malaysia and Singapore are the favourites for undertaking nearshoring activities, on the other hand.

Interestingly though, the potential impact of organisational change remains the top inhibitor for employers failing to sign any payroll outsourcing deal at all. Although apprehension about moving to the cloud may have eased, many buyers still believe that payroll transformation will have too big an impact on operations - and most lack the necessary skills to manage the associated change. In addition, there is still a reluctance to cede control to third-party vendors irrespective of efficiency gains or other benefits, which leads to a status quo with existing providers.   

Last but not least, although SaaS-based financial models may have made it easier to build business cases, most purchasers still experience difficulties in demonstrating enough return on investment or proving the case for outsourcing. While they may need technology-based managed services, what they want is innovation and added value beyond basic, tactical payroll management. As a result, the search is on to find providers prepared to work in partnership with them to create value. 

Pete Tiliakos (@PeteT_NH) is a principal analyst at NelsonHall and has shared global responsibility for research into HR services. He has been a member of the HR services analyst team since 2016 and is known for his extensive knowledge of the global payroll outsourcing market.