German payroll gets interesting.
Payroll was where it all started. Back in 1951. The first business use of computer software. The intrepid innovators at Cambridge and the Lyon's Tea Room Company built a computer, the Leo, and then built a payroll. Genius. It was a remarkable project.
I remain weirdly fascinated by payroll.
As I keep reminding my regular readers, I'm currently studying strategy and innovation at Oxford. I'm attempting to apply the models I'm learning about there to my work with my clients. I used the CDC model to have a look at Utmost, and how they are establishing the category of the extended workforce. I also rely a lot now on O'Reilly and Tushman's explore and exploit model for managing innovation in established organisations. The concept of the ambidextrous organisation is particularly useful, as so many larger vendors need to balance existing product execution with the next big thing.
The third module looked at global strategy. The module was led by Akshay Mangla, with Marc Szepan and Matthew Amengual also running sessions. Global strategy is complicated, and it was rather nice to dust off some of the stuff I did many years ago in my Pol Sci degree about how governments and business work and don't work well together. I also learnt a lot more about global supply chain theory and business in India and China. Covid loomed large in a lot of the discussion and readings.
Image via the freshtrax blog
Ghemawat's website is excellent, and the HBR paper from 2007 remains very relevant. For those who don't have access to HBR, this 2008 paper covers similar ground.
Most global software companies are predominately an aggregation play. There is some 'clever' arbitrage on tax, and some labour arbitrage with engineering capacity. In some cases there is a bit of adaption, for instance with product translations, and data centre placement. But Microsoft word is fundamentally the same product across the globe. It has nestled everywhere, settled everywhere. Cloud infrastructure is another example of a very strong aggregation play.
Back to payroll.
Payroll software requires a very high level of localisation to be successful. There is no global currency, there are no global employment laws, there are no global pay as you earn rules. Local requirements dominate. In tech terms, there is a very high feature complete barrier. Laws also change, so maintaining a payroll is challenging. Payroll involves high levels of trust. Most customers don't like to experiment with payroll, and switching costs are high. On the plus side, every company needs a payroll. Most payrolls are local. Think of it as high up on the triangle.
Having a tightly integrated HR and Payroll offering is highly attractive. In the North American market, the likes of Workday, Oracle, Ceridian, SAP, UKG go to market touting the benefits of that integration, and HR to payroll attach rates run somewhere between 50% and 90%, depending on the vendor. CEGID in France does the same, as does Payfit in the SME space.
When payroll and HR are tightly integrated, HR data quality is massively better. Payroll data makes for more accurate and richer workforce analytics, and better compliance control in finance. This is, in essence, the original ERP promise.
In Germany, the SAP payroll has conferred and still confers a significant competitive advantage for SAP, in that it is the dominant payroll in the German enterprise space, with several 1000 customers. Any vendor wishing to sell core HR capabilities in Germany usually ends up having to integrate with SAP payroll today. While other vendors may sometimes win parts of the HR landscape, inevitably SAP still owns the stickiest part of the pie.
The SAP German payroll though, has been around for the best part of 30 years, and while it offers a high level of functional completeness, it is showing its age. It can be hosted in the cloud, but its basic design premise is on-premise. Going back to the Geroski theory, on-premise payroll is deep along the S-Curve.
Workday has had success in core HR in Germany, winning several high profile accounts, Connecting Workday to SAP payroll has become easier and more standardised. However, it is my conjecture that if they are really going to succeed as strong alternative to SAP in HR and Finance in Germany, they will require a payroll. This week, Workday made the formal announcement that they are building a German payroll. This has been a long time coming, as Holger notes.
In the press release Holger goes on to comment.
“Payroll is the hard stuff for enterprises, but they have to get it right every time. Always on payroll, smart audits, and spotting anomalies — all of
these capabilities drive autonomy and better control so payroll runs
automatically and intelligently on its own, removing much of the manual and
sometimes error-prone work. That’s where payroll and HR are going, evolving to
be autonomous and self-driving and bringing with it dramatic levels of
An announcement, is just that, an announcement, and the Workday engineering and product teams will very very busy over the next couple of years. Nevertheless, this fundamentally changes the HR tech conversation in Germany. It will force SAP and other players to step up next generation payroll efforts. Workday have also announced plans for an Australian payroll, so expect similar disruptions there.
There is so much talk of transformation in HR in Germany, but it seems to me that payroll is ripe for significant change too. This will be a long game.
(Disclosure: Workday, Utmost, UKG are or have been clients)
I advise leading and emerging HRTECH vendors and their investors, guiding them to build better products and be more successful.