The Takeaway: A Q&A With Adrian Reed and James Grundy on Innovation and Automation in Global Payroll
Global Payroll: Addressing the Challenge of Local Complexity and an Evolving Workplace Through Technological Innovation
Why does the payroll market need to evolve?
The global payroll market is currently worth $10 billion (2021) and is forecast to grow at a CAGR of 5.8% to 2028. (1) This is due to multiple factors that have resulted in a power shift in the balance of the employer/employee relationship. There is now a ‘war for talent,’ alongside the inexorable rise of flexible working changing the focus of what employees want. Companies now look beyond geographical boundaries to source the best talent and embrace advancements in technology to facilitate remote/hybrid working. Employees reassessing where they want to be located has stimulated the need for employer of record (EOR) solutions to help navigate the local payroll complexities, along with global mobility platforms to help companies leverage their existing workforce.
The emergence of the contract worker has increased the complexity of scheduling, onboarding, benefits, and, ultimately payroll. This sits alongside an increasing shift to digital payroll in emerging markets, resulting in innovative ways of paying employees—such as digital wallets and on-demand pay—stimulating growth and increasing the addressable market. Furthermore, the ever-changing regulatory landscape creates a burden on payroll vendors and HR teams, at times overlapping with the sentiment of the employee, i.e. the EU adoption of the Equal Pay and Pay Transparency Directive, which creates an opportunity for companies to look more appealing to current and future employees.
What are the key challenges for getting payroll right?
While many HR discussions evolve around flexible working, DEI and RPA, etc., pay remains the most important entitlement that an employer provides. Yet the payroll function continues to lag other areas on the digital transformation journey and data integrity. Data reliability, standardised payroll processes, manual spreadsheets, and human error are all key challenges payroll teams face on a regular basis. Even where modern payroll technology has been adopted, the fear of failure is driving a reluctance within payroll teams to forego manual processes. This duplication not only impacts efficiency but inevitably leads to the problem teams were attempting to avoid in the first instance: payroll errors. Finally, security and compliance concerns have become increasingly tougher to manage across multiple stakeholders. With significant fines for non-compliance - getting this wrong can be expensive and brand-damaging. Data security is no longer a nice-to-have, it’s a must-have. There have been some high-profile companies in the news, notably Amazon, which have been underpaying new parents, patients dealing with medical crises, and other vulnerable workers on leave. As many as 179 of Amazon’s warehouses had potentially been affected.(2)
What are the key benefits of the greater automation and digital transformation?
At a basic level, creating automated, standardised payroll processes minimises the risk of human error and the need for manual spreadsheets. Greater integration of systems and APIs reduces the need to manually upload information, eases process configuration, and unburdens the IT team during onboarding. Companies that have improved cyber resilience over recent years and have consolidated their tech vendor portfolio have reduced the risk of security breaches where sensitive payroll data is no longer handled manually. The enhancement of the employee experience through self-service tools facilitates employee onboarding, payroll set-up and access to employee benefits. This also alleviates the burden of requests on the payroll team, and the resulting lower level of manual errors reduces the financial stress on employees from late or incorrect pay. Providing greater alignment of data between payroll, HR, and finance and treasury functions will inform overall business strategy and provide tighter management of payroll costs with global visibility over time, resources, and costs.
Why does the payroll market continue to see strong investment activity?
The mission-critical nature of payroll continues to drive strong investor appetite and M&A activity across the vendor ecosystem. M&A has been a tried and tested method of accelerating organic growth that balances the defensive, low-churn nature of payroll vendors and drives customer wallet and geographic expansion. A scarcity value for sizeable payroll platforms and strong unit economics has manifested in premium valuations for vendors that have a highly differentiated proposition, can demonstrate strong growth, and enjoy a dominant position within a particular geography or segment. Due to the large, stable, and growing market, driven by cloud adoption and continued innovation, and the convergence of software and services, we expect to see continued interest in payroll platforms. However, there is likely to be greater scrutiny of the impact of automation and AI on operational leverage meeting the needs of the evolving workforce trends and security.
You and your colleagues are attending the upcoming HR Tech convention in Las Vegas – what other key trends do you expect to be high on the discussion agenda?
The importance of attending key events like HR Tech is to keep your finger on the pulse of what the large global players are focusing on, but also to see how the new innovative start-ups and growth companies are challenging the status quo. Key topics at this year’s event are unsurprisingly focused on the impact of AI and the use of data. This then plays into the long-running theme of automation and how you can reduce manual inputs and focus on value-add to enhance employee experiences. This includes self-service interfaces, flexible payroll, a more holistic approach to flexible benefits, and different forms of continuous life-long learning.
Read the latest quarterly report from Houlihan Lokey’s HCM practice here.
(1) Business Research Insights, Payroll Outsourcing Market Report Overview (May 2023).
(2) The New York Times, “Inside Amazon’s Worst Human Resources Problem” (2021).
