Some answers, more questions on SAP’s multi-country payroll strategy

August, 2012

Enterprise software giant SAP is weighing up several key strategic decisions as it extends its multi-country payroll footprint in the cloud to 50 countries.

Webster Buchanan has teased out further details of SAP’s thinking following its acquisition of SuccessFactors, the Human Capital Management cloud-based provider. The SuccessFactors takeover, which was completed in February, marks a critical step in SAP’s efforts to expand beyond its conventional enterprise software roots into the cloud to compete with providers such as Workday.

While the international payroll market has lagged other sectors such as HR and customer management in embracing the cloud, that picture has been changing in recent years and a number of providers now offer SaaS-based services. Unlike conventional managed services set-ups – where an outsourcer will calculate payroll and manage reporting – pure SaaS payroll is a form of IT-only outsourcing where the provider solely manages the software. The key benefit is that it frees multinationals from the hassle of maintaining their own payroll IT infrastructure (including the burden of handling legislative updates) while enabling them to process payroll in-house.

Reducing IT burden is particularly relevant in SAP’s case, of course: its conventional enterprise software is acknowledged as a Rolls Royce engine, but it comes with a high-end support overhead.

SAP currently supports 49 countries through its conventional on-premise global payroll suite, and earlier this year it announced plans to make ten of them available through Employee Central, the core HR engine in the SuccessFactors suite. It has subsequently confirmed that it plans to make the remaining 39 countries available through Employee Central by early 2013.

The new set-up sees the two systems working side-by-side. Employee Central acts as the front-end user interface and global system of record for HR and payroll data, while the payroll number-crunching takes place behind the scenes in SAP’s HR and payroll system. As Raj Sundarason, VP Human Capital Management Solutions at SAP,points out, the main technical challenge SAP faces in combining the two is in building the fields and integrations required within Employee Central to enable it to store country-specific payroll data that maps to the SAP payroll system.

The limitations
Several points are worth keeping in mind about SAP’s approach. Firstly, the payroll service will only be available with the Employee Central HR suite, not as a standalone product – so it’s not going to be an option for companies looking for a payroll-only SaaS service.

Secondly, the migration of SAP’s payroll capability to SuccessFactors is no small task, and for speed SAP has made some pragmatic technical decisions that could have longer-term implications. In particular, SAP’s payroll runs on a ‘single tenancy’ model, as opposed to the more modern ‘multi-tenancy’ platform underpinning Employee Central – and rewriting its architecture would be a major undertaking.

This technical distinction matters, although its significance for customers is the subject of much debate – one that my erstwhile colleague Phil Wainewright, a cloud expert, has neatly summed up. Fundamentally, in a multi-tenancy set-up the vendor runs software services for multiple customers from the same platform, which should makes it cheaper to maintain (because functionality and country changes only need to be applied once) and architecturally, can lead to economies of scale.

Partnership questions
As details continue to emerge about SAP’s plans, some questions remain unresolved, and Webster Buchanan understands that SAP is in the early stages of working through a complex matrix of options. To begin with, in addition to the 49 countries that SAP covers today with its global payroll suite, there are another 30-odd countries handled by partners. Will they also be integrated with SuccessFactors – and if so, how and when?

Secondly, how will SAP cater for the remaining countries that it doesn’t currently cover at all? Judging by the limited country expansion it’s carried out on its own core system in recent years, it’s unlikely to build out further country capability itself. So will it help customers integrate other services on an ad hoc basis, or look for more formal integration partnerships?

And linked to that, how far does SAP plan to go in catering for customers that require more than just a cloud technology platform? SAP of course is an IT infrastructure company, not an HR services company – so what it’s providing through SuccessFactors is an IT-only service that enables customers to process payroll in-house. But the fact that customers choose to run HR in-house on a cloud platform service doesn’t necessarily mean they’ll want to process their international payrolls that way too. In reality, many multinationals – particularly mid-sized companies – prefer to rid themselves of the complexity of calculation, reporting and making payments by passing responsibility onto a managed services or Business Process Outsourcing (BPO) provider.

Recognizing this, SuccessFactors already has partnerships in place with Ceridian, the international HR and payroll provider, and multi-country payroll outsourcer Patersons, both of which pre-date the SAP acquisition. As recently as June, it agreed a separate HR systems integration and professional services deal with NorthgateArinso (NGA), a major SAP partner, to help customers roll out international HR and payroll projects and manage mixed on-premise and outsourced environments. (NGA also offers international HR and payroll outsourcing on an SAP platform, and it remains to be seen whether and how it will extend its relationship with SuccessFactors in the future.)

Assuming then that SAP builds out from these existing partnerships, its global payroll cloud strategy would ultimately evolve as a blended approach, combining its own IT SaaS services with an extended partner network. In addition to offering managed payroll services, those partners could plug the gaps in SAP’s existing payroll country coverage, and also provide systems integration and consulting services to help multinationals cope with the patchwork of systems and services that characterize most international payroll set-ups.

All of which will be watched with interest and a certain sense of déjà vu by SAP’s rival Workday – which has built its own international payroll strategy around a cloud-based integration platform and partnerships with NGA, Patersons and SafeGuard World International…