Consolidation of Payroll Services Market a Likely Consequence of Rapidly Evolving HR BPO Market, Say

From: IDC
Published: Tue Apr 19 2005

LONDON, April 18, 2005 - According to a recent study from IDC, the Western European payroll services market is valued at nearly $10 billion, making it a substantial services opportunity. However, the market is also undergoing considerable change.

This change has been particularly apparent in the demand for fully managed payroll services - with a growing trend towards services that include not only support of the payroll application environment and call center based support of the employee but also expansion into non-payroll HR services such as pensions administration and recruitment. With multinational clients increasingly seeking pan-European service providers, able to support employees in multiple European countries, and with demand for HR services expanding beyond payroll outsourcing into end-to-end HR BPO, those payroll providers able to deliver service support outside of their core domestic market are rapidly emerging as the winners.

As the largest single transaction component of HR BPO contracts, payroll has become the critical battleground, with the resulting competition from HR BPO providers in the high-end payroll outsourcing market driving greater commoditization and price pressure. "Consolidation of the European payroll services market remains a probable rather than a remote possibility," said Mike Friend, research manager in IDC's European Services group. "The country-specific and fragmented nature of the European market currently means that the largest of the national payroll providers are generating revenues in the order of $100 million per annum but few have successfully seized the revenue-generating opportunities outside of their own domestic markets. The importance of achieving processing scale in order to drive down transaction costs makes consolidation both a market growth as well as a competitive strategy that will be complemented by the judicious use of nearshore and offshore processing centers."

Difficult operating conditions will continue to be a feature of the European payroll market, in which low growth rates, commoditization, and increasing competition from in-house payroll functions, pure payroll, software, and HR BPO providers will exert a downward price pressure. IDC therefore offers the following key recommendations:
· Payroll service providers should identify profitable industry and market sectors where real value add at a premium fee can be delivered to the customer.
· Where the market is highly commoditized, payroll service providers should migrate clients to standardized applications and services and exit unprofitable client relationships.
· With customer and government concerns regarding data privacy and data protection being addressed and safeguards now in place to allow employee data to be processed offshore, customer resistance to offshore service provisioning will inevitably decrease. Payroll providers should be prepared to meet the threat posed by competitors leveraging low-cost nearshore and offshore locations, from which to deliver payroll-processing services, by establishing their own offshore centers.

The study, Plenty of Scope for Multinational Payroll Delivery in the Multi-Local European Payroll Market (Doc #BP04L, January 2005), identifies leading payroll providers in Western Europe, offers a ranking of payroll providers, both by revenue and payroll processing volume, and compares and contrasts service delivery fees for payroll bureau and fully managed payroll services in Western Europe. The study also analyzes customer buying behavior, highlights major growth drivers, and provides recommendations for future growth strategies. The study is available to purchase from your local IDC office or at

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Mike Friend
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