NelsonHall has published its annual payroll services market analysis, Payroll Services: Globalization and Digitalization. The report includes an analysis of two dozen payroll vendors, their offerings, and their buyers' perspectives. The project provided 'behind the curtain' access to many of the major payroll solutions enabling the market today and shaping its path forward.

This blog is a three-part series of my observations from the project and thoughts on what to expect for the payroll services space as we move ahead. Part One features the payroll buyer perspective, including the buyer view of the impact of innovation available today. Part Two continues with a look at the managed payroll service providers pushing the pace of innovation. Finally, Part Three will focus on my perspective on the managed payroll services market's outlook and what to expect as we move forward.

Managed payroll services: buyer perspectives

The past year has seen a renewed interest in payroll as a key transformational area of opportunity for firms across sectors. While many have focused investments and initiatives in recent years toward cloud HR adoption and advancing talent management capabilities, payroll remained somewhat overlooked.

Fast forward to 2021 and payroll is squarely at the heart of the employee experience, with firms realizing that payroll is far more complex, vulnerable, and desperately in need of modern tools to increase efficiency, resiliency and enable the critical process to better support the strategic direction of the business.

85% of buyers interviewed confirmed that payroll transformation was either underway or planned over the next two years for their organizations, with nearly all citing the need for support from managed service providers as they lacked the ability to undertake the transformation alone. With payroll transformation and digitalization in focus and front of mind for buyers, vendor selection criteria (amongst single and multi-country adopters), centered on vendors that can offer proven expertise and qualifications for the countries in scope and enable digital payroll transformation through an affordable platform-based offering.

What has gone well

Collectively, buyers pointed to positive overall satisfaction for their managed payroll services and vendor relationships and further indicated a positive outlook for their solutions to meet their strategic needs over the coming three to five years. 

With the marketplace crowded and differentiation often coming by way of the user and client experience, vendors are underpinning offerings with a high-touch, localized expertise that focuses on enabling value for the client and driving long-term recurring revenue retention.   Buyers showed high satisfaction with their vendors, specifically pointing to the strength of partnership, flexibility, and caliber of personnel as the top aspects of their relationships. 

Further, in recent years, vendors have loosened adoption requirements, unpacking offerings to provide more incremental service options, and filling gaps through integrated partner solutions to meet the unique needs of buyers across sectors and sizes – with buyers pointing to a positive outlook and confidence that their solutions can still meet their strategic needs longer-term.

What can be improved

Despite the innovations of recent years and the work both buyers and providers have done, there is room for improvement. Most notable this year was the appetite for digital enablers to transform payroll, yet commonly buyers were somewhat unclear as to what their provider offered in this regard.

With AI/ML still maturing in the payroll space, many solutions still lack an intelligent technology infusion, with the highest maturity and satisfaction seen amongst the HCM tech platform providers offering managed payroll services. However, buyers commonly lacked understanding of how intelligent technology (AI/ML) can help them automate the complex process, as buyers were often unsure if it was present in their solutions or even offered by their vendors.   

Further, two critical components required of modern payroll operations that are surprisingly lacking in meeting buyer expectations center on integration and reporting. Like many aspects of managed payroll solutions, not all integration capability is equal and must be thoroughly vetted and tested – deploying any solution lacking seamless integration (both in-platform and to/from the platform) will negatively impact the user experience and reporting, as it prevents data from flowing freely across the operating model, and amongst key systems. Specifically:

• Integrations: 40% of buyers indicated not using, not needing, or didn't know if their vendor offered integrations to third-party platforms, with about half of those respondents indicating a need to integrate those systems in the future, including core HR in select cases (often a decision by the business to hold off on core HR integration for undisclosed reasons)
• Reporting: Overall, a mixed satisfaction levels; lower-scoring satisfaction was driven by a lack of maturity in the offering or capability, e.g., only offering Excel-based reports or "basic functionality" lacking in analytic insights, visualizations, or graphical representation. In select cases, buyers choose to conduct payroll reporting outside of vendor solutions, likely leveraging third-party reporting tools or platforms to supplement the lack of vendor capability.

Further, buyers pointed to a clear opportunity for vendors to support them with process reimagination of payroll service and processes. Those citing lower satisfaction pointed to a lack of proactive engagement by their vendors for continuous process improvement. While technology innovation has undoubtedly helped, more can be done to engage buyers with new solutions, tools, and methods for addressing their unique requirements. As with the feedback on digital enablers, there is also a gap in buyer understanding of what vendors can offer and what is possible in terms of payroll transformation and process reimagination.

Vendor opportunities

Buyer lack of strategy or change management plan

In reviewing feedback from both vendors and buyers, there is a clear gap in payroll transformation strategy that puts both parties in a poor position from the start, particularly for multinational firms seeking to enable global payroll transformation. Buyers are often setting out to transform payroll with a limited or no strategic plan, assuming that adopting a particular solution or vendor model will instantly transform payroll.  While this can certainly move the payroll operating model forward, it must be accompanied by a clear strategic path and underpinned by a comprehensive change management plan. I often see buyers deploy the latest solutions (across HR towers) without doing the uncomfortable work of shifting habits and adopting the solution's full potential, only to find that they didn't transform after all.

While payroll vendors have expanded offerings in recent years to include front-end advisory and business case support, change management is often a key element lacking and generally isn't a core competency or service offered by payroll providers. This is an area I think vendors have to do better in supporting buyers, as it benefits both parties over the long term.

Process reimagination and innovation

A key area of opportunity that resonated across buyers and was evident amongst vendors across geographies and solutions was the absence of ongoing, proactive process improvement and service reimagination. Buyers commonly pointed to an appetite for deeper proactive engagement and consultation by their vendor post go-live. Capabilities like design thinking and proactive outreach to introduce and incorporate new innovations and tools into client programs are lacking. Many buyers simply didn't understand what their vendors could offer or how it could be leveraged to meet their specific needs and maximize the value of the relationship.

Payroll service providers can look to HCM technology providers as a model for how this can be improved. The HCM technology firms do an excellent job of staying closely and deeply engaged with their user community, assessing their engagement, satisfaction, and monitoring usage of their systems to proactively help clients maximize the value of their investments and drive the transformation they seek. 

They also do a great job of enabling communication channels between vendor and client as well as client to client. This open collaboration leads to the platform community driving its future through steady user feedback, thereby shaping significant portions of the roadmap and enabling direct impact for users for the challenges they face daily; further solidifying the partnership; boosting the investment in the success of the platform for all parties; and driving long-term recurring revenues.

Part Two continues with a look at the managed payroll service providers pushing the pace of innovation.