Local Payrolls are back!

Hi there! Is it just me or are there suddenly a lot of global payroll ads that celebrate the number of countries supported? And I get it, it's a key differentiator. But what I find interesting is that in 2023 investments trends were headed in a different direction: the local payroll is firmly back! In this newsletter, I'll tell you all about it.

I'm headed to Barcelona! Join me on April 18th for the groundbreaking conference FA!R Barcelona and get a 15% discount when you use the code FAIRANITA. And I still have some openings available if you need an inspirational keynote!

2023 HR Tech funding

Before we dive into payroll, here's a quick recap of the overall 2023 investment trends. The total amount raised was $4.6B over 275 rounds in 38 countries. That’s a 33% decline in rounds compared to last year and a 55% decline in funds raised. The chart shows the overview of deal count and value for the last 12 quarters:

The final two quarters of 2023 were particularly weak in comparison to prior years. Investors pared back spending at all stages. The only favorable exception was seed stage rounds, which held its own and continued to flourish. The other interesting observation: HR Tech Funding is going local as 61% of rounds were outside US.

HCM & Pay

HCM & Pay remained the largest category at $1.8B over 42 rounds, highlighting the market emphasis on administering and paying the workforce through comprehensive human capital management and payroll solutions. Within that category, local HCM Suites including payroll were funded most often.

As you can see in the chart below, companies continue to introduce HCM Suites without payroll ($0.5B), but the investment in suites with payroll was more than twice as large ($1.2B). And yes, a few companies are even experimenting with crypto pay - more on that topic in a future edition of the newsletter.

In 2021 and 2022, the growth of the HCM & Pay category was driven by massive investments in solutions to manage and pay the global and remote workforce (e.g., EoR services) with $1.3B and $1.6B in funding respectively. In 2023, these solutions hardly attracted funding and neither did multi-country payroll. Let's hope they onboarded enough customers in the past year, so they take in sufficient revenue to keep their operations going.

Local payroll is making a comeback!

I saw an increasing number of HCM Suites come to market with an integrated local payroll engine and that’s a promising development. In the last couple of years, founders typically created global HCM suites with an integration to a 3rd party payroll. And I get it: it's much easier - and faster - to build and release an HR solution without payroll. You can launch quickly and take advantage of an API to attach to the local payroll the client already has in place. You don't have to worry so much about rules and legislation, and maintenance is cheaper too.

But that approach is not without problems. Often, clients found out halfway through the migration that they needed to hang on to a local HR solution, simply because the global HCM suite did not have all of the required local data fields to feed payroll. Sometimes they built additional screens to capture that information. And I am noticing that several HCM suites are building a payroll engine, signaling a customer need to combine HR and payroll.

Yes, payroll is still a greenfield

Payroll is one of the hardest solutions to build, but necessary to have. Not only is it a legal requirement to pay your employees accurately and timely, but it also adds a significant degree of stickiness to an HCM Suite. This is caused by the complexity and risks associated with migrating payroll data and processes to another vendor or even another solution.

And while we often assume that there are more than enough payrolls, in many emerging countries it's still a greenfield, especially when you are building a cloud payroll. I find it encouraging to see that investors are increasingly willing to support founders worldwide by funding solutions in local markets.

The local payroll approach

The founders of local payroll solutions often adopt a strategy that focuses on creating an HCM Suite including payroll tailored for one country, using a design that can later support a regional approach. Once their solution gains traction and achieves adoption within their home country, these founders strategically expand into neighboring markets. This approach allows them to gain expertise with the local regulatory and business landscape on a measured, country-by-country base, ensuring their product is tuned to meet the unique needs of that region. This is especially prominent in emerging markets, where the demand for modern HCM solutions is high, and competition may be limited. The advantages of this regional expansion strategy include:

1. Cultural and Regulatory Alignment: By starting in a single country, founders gain a deep understanding of local customs, labor laws, and payroll complexities. This knowledge helps them create a solution that aligns perfectly with the specific needs of that geography.
2. Focused Support: Offering localized support and customer service becomes more manageable when you concentrate your efforts within a single country initially. This allows you to rapidly deal with customer queries and issues, and is an effective way to build experience and create customer satisfaction.
3. Scalable Regional Approach: The basic architecture of these HR Suites is capable to support multiple countries within the region. This scalability makes it easier to expand into neighboring markets with similar requirements.
4. Double-Digit Growth: Emerging markets frequently present opportunities for substantial market growth. These local HR Suites can quickly capture market share and achieve impressive double-digit growth rates, given the lack of competition in those regions.

The local market is larger than you think

I think it's also a smart approach. While the ads in our feed might give us the impression that all companies are going global, in reality, the vast majority of organizations is local. When they expand, they typically move across the border into a neighboring territory. And wouldn't it be great if you can manage those employees in the solution you already have? Don't let the ads fool you: there is a huge appetite for companies that offer modern HCM Suites with a local payroll attached. I'll keep you posted!

And if my article has made you are curious about these solutions, here are a few to check out (in no particular order): Workpay, JetHR, palm.hr, Kenjo, Paismo and Pade. And if you are in the process of building a local payroll, do reach out!

Have a great day, Anita

Do you need an engaging and insightful Future of Work keynote or in-house workshop? Please reach out! Or support me by buying my books Equal Pay for Equal Work and How to Select Your Next Payroll.

Did you enjoy this newsletter? Forward it to someone who might like it!