Much Ado About Payroll Outsourcing

When taken literally, the title of Shakespeare’s famous play “Much Ado About Nothing” implies that a great fuss is being made of something insignificant. But we can all easily agree there is nothing insignificant about payroll – not for those being paid, the company paying its employees or the vendor providing the payroll services in an outsourced environment.

As I reported yesterday on NelsonHall’s webinar, “Payroll BPO, How Buyers Benefit and What Providers Should Know”, two of today’s top drivers of outsourced payroll are, not surprisingly given the state of the economy and increased globalization, cost reduction/cost control and multi-country payroll requirements. Let’s look a little more closely at both of these.

Reduction and control of costs – this is the top driver in both the mid-market/national segment and the large multi-national segment, with a full 80 percent of all buyers outsourcing to reduce costs. And the savings are big…clients have reported anywhere from 10 – 50 percent, with an overall average savings of 25 percent. Providers are lowering buyers’ payroll costs by: 1) economies of scale via the one to many model; 2) labor arbitrage through offshoring and nearshoring of both back-office and front-office administration; and 3) improved quality of service/process improvement with better consistency and efficiency. For example, one vendor estimated that reducing “quill pen” (sorry, couldn’t resist the temptation to link back to Shakespeare) manual work and eliminating duplicate work can save clients 40 – 50 percent.

Multi-country payroll – large multi-national corporations are increasingly demanding a global/multi-country payroll platform environment wherein one single vendor – albeit with a SaaS solution or an ERP system such as SAP or Oracle PeopleSoft – can support multiple geographies with pre-defined country specific rules and templates. Providers that use ERPs and/or SaaS also use in-country payroll provider partners, as required, to ensure correct payroll-related activities. For example, although Patersons has more than 20 countries in which it can provide its own payroll services, it frequently uses a third-party provider to process in-country net payroll calculations. The third-party then passes the data back to Patersons Logon2 system, and Patersons in turn issues standard pay slips and reports.

Although the mid-market national segment is much larger today than the large multi-national market, we saw some very large multi-country payroll contracts awarded in 2009. For example, NorthgateArinso and AstraZeneca entered into a seven year payroll, HR administration, and talent management contract. The payroll component calls for NorthgateArinso to provide payroll services to AstraZeneca’s 65,000 employees across more than 100 countries (including Shakespeare’s native U.K.) And ADP was awarded a contract for managed payroll services by Swiss Re to support 10,000 employees and 2,500 pensioners in 25 countries (yes, you guessed it…including the heralded playwright’s own country.) Given that the large multi-national market is forecasted to grow at a much higher rate than the mid-market segment, we can anticipate seeing more large multi-country payroll contracts being signed this year.

There are many other drivers – beyond cost reduction and multi-country capabilities – behind outsourced payroll, including eliminating transactional work to enable focus on more strategic initiatives, gaining access to better technology without the capital investment, and ensuring compliance with ever changing tax laws and labor regulations. What are you seeing in the payroll outsourcing marketplace?

Gary Bragar, Lead HRO Analyst, NelsonHall

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3 Comments on “Much Ado About Payroll Outsourcing”

  1. Hi Gary,

    Completely agree with the 2 main trends you distinguish in the market today. Especially multi-country payroll outsourcing is a ‘hot potato’ for many companies. We often encounter a specific payroll situation which we refer to as ‘big head, long tail’: the big head represents a handful of countries with large populations for which a solid payroll solution can easily be found; the long tail represents a dozen or more countries with smaller populations. Ideally, companies bring both their larger and smaller populations together onto a single payroll solution as it will provide them with a single source for SLA monitoring, quality control and legislative compliance.

    In addition we also see an interesting new trend appearing in the market which we call ‘Hybrid HR’. Just as in biology, a hybrid solution mixes various characteristics to create a stronger end result. In HR and payroll, ‘hybrid’ refers to the fact that you can deploy a HR & payroll solution through a number of technology deployment options, with the aim of strengthening your final solution and finding the best fit for your company’s environment.

    As a result, you can run your workforce administration on your existing HRIS, but decide to outsource payroll in a number of countries – choosing between payroll processing, managed services, or comprehensive payroll BPO. In addition, you may want to run talent management processes OnDemand or ‘as a Service’. The end result will be a hybrid HR delivery solution which will be perfectly tailored to your company’s needs. Choosing the right HR technology backbone will play a critical role as it will tie the solution together.

    As far as Shakespeare is concerned I can certainly recommend a visit to the writer’s birthplace of Stratford-upon-Avon in Warwickshire in England, preferably during late summer – simply beautiful. In the meantime watching the movie version of ‘Much Ado About Nothing’ starring Kenneth Branagh is a perfect passtime.

  2. gbragar Says:

    Hi Michael,

    Appreciate very much your additional insight, including Hybrid HR solutions! Great for buyers to be able to select the right option that meets their needs.

  3. JS Mackie Says:

    To stay ahead or at the very least in terms of the mentioned ever changing tax, payroll and accounting laws is absolutely essential and not always feasible from an in house perspective.

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