MCPO Growing Faster Than Multi-Country HRO Market: Everest

Multi-country payroll outsourcing (MCPO) is in the emerging rapid-growth phase, ahead of other standalone multi-country HR process outsourcing markets on the maturity curve, according to a new study by the Everest Research Institute titled, HRO Market Update: Multi-Country Payroll Outsourcing (MCPO): A New Approach to an Old Problem.

Everest defines MCPO as transfer of ownership of some or all payroll sub-processes for at least two countries on an ongoing basis. Everest found that from a smaller base, MCPO is growing at a much faster rate than the multi-country HRO market – between 2006-2008, while MCPO grew from $91.5mn to $202.9mn, registering a 49 percent growth, multi-country HRO grew only 12 percent during the same period, up from $ 1055.3mn to $1313.2mn.

The study analysed 84 multi-country payroll deals signed as of December 2008, where 3,000 employees or more were covered. According to the study, the key business drivers leading to increasing adoption of MCPO among MNCs included cost reduction, compliance, improving management control and insight, vendor consolidation, expansion into newer geographies and technology rationalisation.

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Gaurav Gupta, principal and country head, Everest Group, says, “While there are suppliers that cover more than one market, only a few have adequate country coverage across all regions. We have seen more and more suppliers creating partnerships with ERP providers to offer single platform-based MCPO in a pay-as-you-go pricing model. Since 2007, we have witnessed entry of offshore-led suppliers like Infosys, TCS and Caliber Point, to offer a combination of ERP capabilities along with a global sourcing delivery model. In 2009, we expect to see more such suppliers entering the market.”

According to the study, the suppliers can use any of the three outsourcing models for payroll, namely – technology, selective and comprehensive – or a combination thereof. The study also points out that the average contract term for MCPO deals is 4.9 years compared to multi-country HRO deals, where the average contract term is 6.4 years.

The study further found that 62 percent of the MCPO deals covered four or more buyer countries. The most common implementation approach in MCPO remains a phased roll-out. Further, in almost all MCPO deals, buyers include core payroll sub-processes including payroll preparation, payroll calculation, payroll distribution, reconciliation, and payroll tax reporting and filing.

Rajesh Ranjan, research director-HRO, Everest Research Institute, who also co-authored the study, remarks, “We observe that buyers include Asia Pacific more frequently in MCPO deals than they do in multi-country HRO. Out of the 104 multi-country HRO deals signed as of December 2008, only 30 deals included Asia Pacific. However, out of the 79 MCPO deals till December 2008, as many as 58 deals included Asia Pacific. While a full-scope multi-country HRO still remains a challenge in Asia due to weak business case in the region and limited supplier capability, MCPO helps buyers gain control and visibility into their regional payroll cost and headcount information at a palatable cost.” Most of the buyers in APAC are MNCs headquartered in North America and Europe, adds Ranjan.

Another unique characteristic of the MCPO deals that Everest observed is the prevalence of co-opetition. Gupta says, “In MCPO deals, we often see suppliers competing as well as partnering with each other. This partnership is further complemented with their partnerships with local payroll providers to provide in-country payroll calculation, tax filing, and limited local help-desk support in countries, which the supplier doesn’t directly cover on its own.”

Gupta concludes, “Though there are challenges associated with MCPO, including that of a business case for small employee base countries, organisational and cultural challenges, language and currency issues, and concerns around data security and local expertise, possible solutions are already in place to address them.”