Payroll is an undervalued industry. Whether you view it through the lens of payroll software, payroll bureaus or book keepers, payroll administration traditionally functions on low cost, desktop technology. Payroll bureau operate in a highly competitive low margin market.
At the low end of the software market, the presence of the free, government-backed basic PAYE tools (BPT) effectively handicaps payroll software from selling to over one million micro employers. But my prediction is that the payroll industry is well positioned for a price correction, like an undervalued stock in a growth market.
Most payroll professionals see auto-enrolment as yet another piece of legislation or business process that they are forced to deal with. But to me, auto-enrolment feels like the final act of a disruptive era in which payroll software will cease to be a single-function, standalone tool available at practically no cost, and will instead be transformed into a highly integrated multi-function tool. But at a price.
Read more about auto-enrolment:
- Auto-enrolment gets thumbs up, but millions unaware of where pension is being invested
- Auto-enrolment: Top five tips for small firms
- Are employers asleep or simply in denial over auto-enrolment?
HMRC started this transformation journey with RTI – the regular delivery of a mix of employee and pay data from payroll to HMRC. Auto-enrolment will finish the job by dramatically increasing the complexity and frequency of additional data transfers to and from multiple pension providers. Payroll professionals are already demanding technology solutions to cope with the increased mandatory data transfer workload that automatic enrolment has created.
I predict that payroll software and payroll services will increase in price as their responsibilities increase. “Impossible,” I hear you say. “Our customers will not accept increasing prices. They are used to seeing payroll functionality increase without corresponding price increases.” I acknowledge this point. It is historically true. But this time it’s different.
My observation is that so much of the pricing strategy for low-cost, “basic” payroll is defined within the shadow of HMRC’s BPT. There are a great many payroll software products on the market today that are free for less than nine users, which happens to be the upper limit for the BPT.
The Pensions Regulator (TPR) estimates that 250,000 micro businesses use BPT. By comparison, the Office for National Statistics (ONS) estimates that there are over one million micro businesses employing between two to nine employees – the inference being that there’s a very large number of employers in the UK who are used to paying nothing for payroll software because BPT is present in the market.
None of those businesses are exempt from auto-enrolment. All have staging dates between 2016 and 2018. Critically, though, HMRC have no plans to upgrade BPT to handle assessment and the only way that BPT users will be able to handle this is by manipulating and juggling their employees’ data through The Pension Regulator’s stop-gap standalone free assessment tool (created and supported at the taxpayers’ expense just like the BPT).
Read more from our payroll focus:
- Making payroll more efficient through adaption and improvement
- Payroll: Get it right, or risk losing business talent
- Want to keep your best staff for the future? Better make sure you pay them correctly
Systemsync recently commissioned a report from Iain Clacher of the University of Leeds that observed how payroll has used software to streamline its processes and automate many of the general payroll tasks (like submitting data to HMRC & e-payslips etc), but was desperate for new technology to take this one step further.
The report stated: “In analysing the potential value of automation, it is clear that there is both a need and a demand for automation. When asked to rank how important better systems and processes were to reduce the risks that are seen in the system, respondents (of the study amongst payroll professionals) ranked automation 4.63 out of 5. Moreover, almost 65 per cent of those who ranked automation as [of above average importance stated that]they would be willing to pay for increased automation.”
The survey also found that automatic enrolment has increased the costs of payroll to employers by 30 per cent, and a significant cause of this is the increased manual effort required to handle CSV files. Imagine the security nightmare of an industry handling the personal details of 20m people in un-encrypted plain text CSV files. Imagine payroll operatives manually logging in and uploading/downloading CSV files for over a million companies every payroll period.
Manual data transfer is the biggest cost and the biggest risk in the process. Technology and automation have to be part of the solution for ensuring the success of auto-enrolment and there is a clear demand in the market for it.
By redefining the overall resource balance for payroll users from people to systems, technology can redefine payroll costs, increase margins and drive business growth; allowing software companies and bureaus to increase margins and offer better services to their customers.
My view is that in 2016, the automated transfer of auto-enrolment data will become the norm and BPT will cease to be a practical alternative to commercial payroll software.
If that is true then payroll software will be permanently liberated from the metaphorical gravity well caused by the presence of BPT in the market. The payroll industry will be able to re-evaluate and redefine its products and services into a large, national marketplace in which the demand for outsourcing and automating complex business processes is rapidly rising.