How can Payroll catch up with innovation?
The Payroll industry has a somewhat “sleepy” reputation when it comes to innovation. Having worked in the Payroll industry for the better part of the last 10 years, my personal observation – from speaking with friends, colleagues, consultants, analysts, investors, etc. –is that most people consider payroll to be a rather mundane back-office “commodity” that is more of a necessary evil than an exciting place for innovation and progressive thinking [just to be clear: this is other people’s impression, not necessarily mine]. I personally haven’t come across a lot of young people coming out of school who have said: “Wow, I really want to work in Payroll! Payroll seems like a fun and exciting industry to work in.”
Which has led me to reflect on the state of the industry and the apparent lack of innovation and dynamism. I’ve asked myself three questions:
- What is the state of innovation in payroll?
- What are the drivers or inhibitors behind its current state?
- And most importantly: How could it be changed in the future?
So here are some of my thoughts and reflections. Note that these are based on my personal believes and views, shaped by my own experience. Feel free to challenge or disagree with any of them, in fact I would welcome a healthy, open debate on the topic and I am curious to hear other opinions and visions for the future.
What is the state of innovation in Payroll today?
Well, I would say innovation in the payroll space has been fairly slow. While Payroll is rather transactional and repetitive in nature (calculate gross-to-net each pay cycle based on pre-defined rules) and hence should lend itself to be enabled with smart technology (e.g. robotic process automation, machine learning, artificial intelligence, etc.), it is by and large still quite low-tech. Many providers have relied on outsourcing services, throwing people rather than technology at the problem to support the needs of their customers. Lots of payroll processes are still managed quite manually, with emails, spreadsheets and paper being sent around (yup, paper-based paychecks still exist in many places). Even the leading industry players have been slow to move to cloud-based solution and to offer more consumer-grade self-service capabilities in their software, which have been table stakes in other industries and in software solutions for other business functions (e.g. Sales, Marketing, etc.) for many years by now.
Why has innovation been relatively slow in Payroll?
A big factor in how quickly an industry evolves is how homogeneous or fragmented it is. When there are homogenous, fairly standardized solutions, innovation happens more quickly. That has to do with economies of scale and scope. Bigger investments in innovation pay off when you can amortize them across a large number of customers and homogenous solution deployments. Take the example of mobile app innovations. Lots of exciting new apps that most of us couldn’t have imagined 5 or 10 years ago have emerged since the introduction of smartphones. This rapid evolution has been possible thanks to the fact that the mobile industry his highly standardized. Today there are only really two global industry standards: iOS and Android. Imagine if there were 500 different mobile operating systems. The innovation around mobile apps would be much slower as developers would need to create each app for each different operating system, and the investment required to push big innovative solutions would be hard to justify.
In the payroll space, today we have huge amounts of fragmentation. Every country, every provider has different standards, different processes and different technologies. Having worked for one of the largest players in the industry, I can tell you that even within the same provider, a lot of times many different solutions and standards exists. In part that is the nature of payroll. It is different from country to country as different laws, tax regimes, social security regulations, etc. apply. However, at the end of the day the fragmentation and lack of standardization severely inhibits the industry to be able to innovate at a more rapid pace.
What can be done to overcome that innovation laggardness?
While all of us working in the payroll industry would agree that payroll is complex and requires specific local expertise (i.e. you must understand local tax and labor laws to apply the appropriate withholdings on different wage components), there are actually a lot more common aspects across different countries than might be evident at casual glance. As global payroll industry guru Max van der Klis-Busink pointed out in a recent LinkedIn post, payroll can be broken down into a few fundamental process steps, no matter which country you look at. So, if we focus on these common process steps, we can start to create more standardized, more scalable solutions. In fact, once we recognize the common aspects across global payroll operations, we can start to create a common operating system that can enable and benefit lots of different local solutions.
What does that mean in more concrete terms? Envision one central operating system that functions as the common foundation across all different local payroll systems and provides common features and capabilities independently of the local payroll calculation software:
- Establishes workflow and task management tools
- Provides a secure communication and data exchange platform
- Manages and organizes all the documents
- Creates self-service reporting and analytics
- Manages distribution of payslips and other documents to employees
- Offers easy standard connectivity to other systems (e.g. HR, Benefits, Time & Attendance, Finance, etc.)
This kind of central payroll operating system functions in a similar way as a computer operating system like MS Windows or Mac iOS. It offers common structures and features that all software applications independently of their specific functionality are built around and can leverage. It avoids that each local application has to reinvent the wheel thereby making new developments more efficient and driving faster innovation thanks to the scale at which the central operating system is being built and deployed (i.e. not just for one specific payroll service provider or country but for MANY providers and countries).
I believe this kind of technology environment with a powerful central operating system managing all the common processes and use cases complemented by local payroll software that can handle the specific local requirements will be the future of the payroll industry and will allow innovation to accelerate and flourish.
Payzaar helps you manage your global payroll more efficiently by using this same principle in its OPEN payroll platform. Payzaar integrates all your local payrolls in one single global platform. Consolidating all your HR & payroll data, automating your operations and streamlining your process in a secure system.
Payzaar leverages your existing payroll vendors and software, augmenting them with new powerful tools. So you can benefit from technology innovation without having to change everything you have built.
If you are interested and want to see how Payzaar works, book a demo with one of our solution experts.