The following article originally appeared in Delancey Street Partners January 2017 Report: Human Capital Management, Special Payroll Sector Update.
There is no better example of a true “HCM curiosity” than the ever nebulous topic of “global payroll.” Many HCM pundits enjoy debating the eventuality versus practical impossibility of a single, truly local everywhere, global payroll platform. Meanwhile in the “field,” operators of multi-country businesses have no time for such lofty HCM conjecture – they actually need to employ and pay people, accurately and in a timely manner, and must do so in a cost efficient way.
While the pundits debated, historically these businesses have had to find (or create) their own unique solution to this dilemma. Often this has been done by patching together a multitude of disparate systems and providers region by region – not easy or efficient. The more challenging the geographic requirements, the greater the stitch work of global aggregators (providers that manage other providers), BPO providers, or single country or regional payroll providers, local accounting firms, et cetera can become.
Management of a multi-country network like this is a big source of pain for HR and country managers. But it also creates the big opportunity that global payroll today presents.
It’s topics like these where Delancey Street Partners (DSP) turns to the real experts. Professionals that have walked the walk, built the businesses and have the battle scars and sage advice to show for it. In this Special Payroll Report, DSP turns over this prickly global payroll topic to HCM industry veteran Brian Radin, Chief Revenue Officer of CloudPay.
DSP: Hello Brian. To kick things off, can you tell everyone how you originally got into the Payroll/HR space?
BR: It really was by accident. After graduating from Penn and getting a Masters at the Newhouse School, I thought it would be a career in broadcasting or media, and I did spend 3 years in the cable industry (at its emergence in the mid-80’s). But I decided to head back to get an MBA at Wharton and my career after graduation took different paths through consulting and private equity.
Eventually, I knew I wanted to build my own business and saw an opportunity to do that at ADP, a company I only knew as the name on my paycheck! So I joined a newly formed strategy and development group and ultimately through an acquisition got ADP into the PEO business, which I renamed ADP TotalSource (the largest PEO today). I loved the PEO value proposition for small businesses (still a very new concept in 1996), so I left and co-founded my own PEO and grew it for nine years, before selling to a partner in 2007. The PEO business provided insights into much broader areas of HR than at ADP, and offered a window into possible future opportunities, some of which I would ultimately pursue like global payroll.
Brian, you obviously have seen a lot over your career. What’s the biggest change you’ve seen in HR over the last decade?
That’s easy, technology. The HR space has in many ways always been a step-child in the C-Suite. But the emergence of SaaS and cloud solutions have brought HR from people-driven processes to the ability to deliver capabilities and information that have been readily available in finance, supply chain and CRM for a number of years and given HR leaders more ammunition for budget and visibility.
We are also in the middle of a trend of large corporations focusing on single-source solutions versus best in breed. HR executives seem to be willing to give up some capabilities for the ease of a single vendor/contract delivering multiple solutions across the human capital spectrum. Obviously Workday is in the middle of this evolution, but the world is cyclical, so it will likely change again over the next few years as more innovative and cheaper technology emerges. The question for me is whether VC money will stay in or bail on these newer vertical solutions.
You’ve been in leadership roles at very large businesses like ADP and smaller venture-backed companies like CloudPay over your career, how is it different managing people and working in these different sized organizations?
There just is not enough room in this Q&A for my thoughts here, but I will summarize simply by saying that not all large organizations are slow and “dumb,” and start-ups prescient and agile! Each has its pros and cons, but there certainly is a commonality among the people that work in each, clearly one group is more about stability, the other about taking risk. As a leader you have to understand these characteristics and try and instill risk- taking in structured environments, and counsel against simply living for today in others.
How would you describe your personal leadership style and give us some “HR lessons learned.”
I try and lead by example. I would never ask one of my team to do something I wouldn’t do as well. I have had success by giving my report’s clear direction, being transparent in setting goals and letting them go get them, while providing guidance and support. However, people are the hardest part of starting or managing a business, because they are not machines, they are often driven by emotion, not logic. This has been one of the toughest lessons I have learned over the years, especially when dealing with individuals that I like or have contributed, but I know intuitively that a change needs to be made...my counsel is take action, even if it is hard, otherwise you may suffer the negative consequences that could have been prevented.
In your professional career, what are you most proud of?
Creating jobs. Over the years through my startups I have been able to provide great roles for individuals from sales to client service to finance, and then watched their career development and see how each took pride in how we grew a new business together. Beyond that, I was able to get to know many personally, watching their kids go from grade school to college, all from what we started...it’s hard to get that feeling in larger organizations.
Brian, you’re extremely knowledgeable in global payroll. Let’s cut to the chase, what exactly is global payroll and are there any truly global (technology) platforms?
Global payroll seems to have multiple meanings depending on whether you are the provider, customer, analyst or consultant. Many corporations think having 20- 30 providers in forty countries is a global payroll solution, analysts often define it where a provider has its gross to net payroll engines, and still others just believe if you get data from in-country partners (ICP’s) into a single database, that’s global payroll.
First, global payroll is actually a bit of a misnomer. The days of multinationals putting out huge RFP’s for all 70 of their countries across the globe and having the expectations that one provider can deliver the “best” solution in all regions and market sizes is pretty much gone, and even if they start that way, they usually end up with a piecemeal solution or no change at all.
To CloudPay, global payroll consists of multiple countries within a single region or potentially across regions in clusters. In every footprint, there are many, in fact most countries where the populations are less than 200 heads, even if they have a small number of geographies with over 1,000 employees. This is often called the “big heads & long-tails” phenomenon.
Also, there are 196 countries in the world, which means covering the globe with a single technology would require building calculation engines in each geography...nobody is even close. SAP’s on-premise payroll software (ADP GlobalView’s and NGA’s primary engine) has “only” 54 countries and is the deepest platform in the world. Consequently, everybody uses ICP’s for most of their populations. So in one sense, there is absolutely not one truly global platform.
But payroll is more than gross to net calculations, in fact, we believe all of the processes prior to the calculation (integration of data from HRIS, pre-processing, approvals, etc.) and post-calculation (payments to third parties, payments to employees, analytics, etc.) are the real backbone of a solution. CloudPay’s technology is built with that in mind, which means our ICP’s must use our application to do everything, but run the gross to net.
With that being said, we are always looking at economic ways to eliminate ICP’s, to remove the “last mile” of liability and reduce overall costs. We recently did a deal with Ramco to license their payroll engines in over forty APAC countries, which we will bring into our cloud and further reduce ICP dependence. Today we process over 72% of our checks without ICP’s, and are targeting 80% by end of 2017, but ICP’s will always exist and our hybrid model is likely the closest to a truly global technology.
Okay, let’s hear the elevator pitch, what is CloudPay about, what do they do extremely well and what is their revenue model?
CloudPay is the next generation payroll solution for multinational businesses with complex global payroll requirements. CloudPay is the world’s only cloud-based platform for integrated global payroll, analytics and payments processing and delivery. CloudPay's solution ensures that employees get accurate and timely payments while centralizing all payroll data to allow organizations to improve the performance of their global operations. We believe that payroll processes are truly global, which has allowed us to build a standardized tool set that applies across the world. Our platform enables us to effectively serve the “long-tails,” a space that the big players have been unable to deliver, since they use ICP’s or their core platform does not scale down cost-effectively (e.g., SAP). We believe in:
- Giving customers greater transparency into the “black box” of global payroll
- Providing an elegant interface within the CloudPay technology environment
- Building better tools to manage all portions of the payroll processes
- Standardizing information to better processes and drive down cost
- Developing an agile product roadmap
CloudPay derives revenue from implementation (completely done in-house), a license fee for its software and a country per check fee.
Global payroll is still relatively small in terms of industry market size. How do you define the market opportunity for global payroll?
If you define the market as any opportunity to convert in- country solutions to a global platform than the market is in the billions, but that is just not the case. This market sizing reminds me of what people thought about PEO’s (and many still do), any small business can buy it, so the market today is less than 7.5% penetrated! That’s just unrealistic. Most small business owners do not want the co-employment model, so the market is much smaller. Same applies for global payroll, many multinationals just will not undertake a global transformation (expense and inability to change), so, the market is much smaller. In 2015, ISG claimed there were about 430 global payroll deals, that’s defined as more than 3 countries moving to a single platform, with an estimated total ACV of about $250M – $300M. The real market is closer to that annual number. For CloudPay though, there is plenty of market, so I am not that focused on sizing.
How do you see the landscape changing? What is the biggest innovation currently occurring in the global payroll space?
To be honest, this is not a fast-forward industry, but it is beginning to catch-up to other enterprise and consumer spaces. CloudPay has made a big bet on providing better, more transparent technology, with a focus on enhancing user’s experiences. We are also delivering a unique set of data, not just basic payroll results (e.g., number of global pays), but insights into a customer’s processes and team performance and then benchmarking results against our universe of data. We are trying to help customers measure what they do so they can actually become more efficient at lower costs. Multinationals are also starting to be more proactive in addressing global compliance, stimulated by the controversial EU directives on privacy and security. They always knew compliance issues existed in their far-flung operations, but just looked the other way...that’s changing.
In a traditional payroll model, providers tightly focus their products by customer size (SMB, mid-market, enterprise, etc.). Is such an alignment relevant in global payroll and where are the big boys (SAP, IBM, Oracle) in terms of the global payroll offering?
Bill, market segmentation is not as clear in global payroll, and frankly that is one of the problems in the market. The simplest segmentation is pure software versus managed services, but in terms of markets served, there is no real clarity among the primary global players. In fact, a major buyer frustration is that most of the managed service providers say they “can do anything,” which in reality they can’t serve all segments seamlessly and cost- effectively .
CloudPay’s mission is to be the leading global payroll solution for the middle market (200 pays to 7,500 pays). Since our application is based on standard workflows and in the cloud, it is ideally suited to scale up, but also to scale down to service those “long-tails.” We believe that the middle market is under-served and wants enhanced technology as well as superb service.
The larger software players are continuing to move solutions to the cloud (e.g., SAP on-premise to Employee Central payroll), and more focused on competing with Workday’s HCM than licensing payroll.
The big managed services companies are using SAP as their core payroll engine, which at the right scale (“big heads”) is affordable and delivers solid functionality (ADP GlobalView, NGA Global). The problem is that almost no deal is only “big heads,” thus they must use alternatives in the middle and down market, which are not true global applications, rather they are a combination of ICP’s or acquired in-country software companies, that are not unified. Consequently, we hear all the time about how ADP Streamline (their middle market and SMB offering) and NGA are not integrated with their SAP platforms, data is out of sync, each country runs differently, and it is difficult for customers to have any visibility into the status of their payroll processes.
The old lift and shift solutions are not in vogue, but the move to multi-pillar BPOs (payroll, IT, HR) may return and players like IBM, Xerox, Infosys may come back to the space in a bigger way to serve this market.
Brian, given your vast payroll background, I have to ask you this one. What’s your take on some of the newer, micro payroll models (freemium/near-freemium)?
I believe that there is always a market for great technology that meets customer needs. With that being said, I wonder how many will ultimately survive. Many of the SaaS-based solutions are built principally for employers with less than 10 employees, the same market as QuickBooks’ users. I think the valuations of some of these models are crazy, just do the math. US SMB payroll is a commodity, think about how many small payrolls you have to sell at $1.50/check to reach even $50M in revenue and justify huge multiples.
Consequently, these companies start to look upmarket for bigger deals and suddenly they face more traditional players (like ADP, Paycheck, Paycom, Paylocity, etc.) with broader solutions, which better meet that market need. Also, the beauty of these solutions is how self- service oriented they are due to the technology. But as soon as you move upmarket, customers need more hands-on service, you move from primarily being a technology SaaS solution to greater managed services, which is much more expensive to build and operate and has many more service implications and begins to deteriorate your splendid margins, you see this over and over again.
New payroll technology platforms have enabled recent entrants to compete very effectively in the marketplace, what will be the next big payroll trend compacting the market the next 5+ years?
This is true in US payroll, but not really in the global space. I had a global payroll start-up in 2009 and I left the space in early 2013. When I arrived at CloudPay in November 2015, very little had changed. The reality is the same players are delivering the same solutions. Some regional players are attempting to grab broader business (SD Worx and activpayroll in EMEA, Ascender in APAC and Adam in LATAM to name a few), but are still only in small footprints and using ICP’s with minimal technology. Others are forming marketing partnerships to get more critical mass (Ceridian joined the Payroll Services Alliance), but the majority are still operating as they were (ADP, NGA, SGWI, and Celergo) in 2010.
There are some trends that have begun to impact the market and I see them continuing into the future.
Greater momentum for payroll & HR shared service centers
Emergence of a true Compliance as a Service solution
Customers getting greater access to the technology...more self-service
Major players are and will have to rewrite antiquated software platforms
Final barriers to customers buying SaaS solutions will fall
In payroll this has been difficult, as each center may use different software or partners. CloudPay’s standard technology is an ideal platform for payroll shared services, it’s the same around the globe, which makes training and managing customer teams easier and provides unique analytics into process and performance management, critical for running a global shared service center. We have actually doubled-down on this trend by announcing a formal alliance with OneSource Virtual, the leading Workday integration and services partner. We will jointly be delivering global workforce administration using the Workday platform as the system of record and our certified connectors to move data to our CloudPay solution, all with a Tier One call center. Nobody has this type of solution and we see it as an alternative or supplement to the shared service concept.
The other area that I think will emerge is a true Compliance as a Service solution. Global CFOs and risk managers comprehend the broad country by country regulatory risk, but don’t really know how to handle it beyond asking their auditors or tax firms to monitor and respond. Attempts to deliver these solutions, like Radius, have had mixed success, and are not really a SaaS subscription model. We get asked about these in-country services all the time (e.g., can you review our work council agreement), but do not have a solution other than possible referring a customer to our ICP. If an intellectual subscription service was available, I believe compliance and piece of mind would drive the purchase, making this a highly profitable business.
Fill in the blank, a great payroll business does ____.
A great managed service payroll business optimizes the intersection of technology and service. That is, build great technology that allows the provider to deliver more information and insights to customers on demand, while enhancing tools to ensure on-going quality service. In the global space, it also allows multinationals to sleep better at night by better serving their employees and keeping companies truly in compliance.