So what is the difference between a Payroll/HR Service Bureau and a Human Capital Management Technology provider?

This question continues to be asked by thousands of HR and Finance Executives trying to make a decision on the type of partner they should choose to help them with their HR, Payroll, and Benefit Management needs. There are fundamental differences between the two, but often the areas of distinction are cloudy for the decision makers. The risk of choosing the wrong partner can be extremely costly to any organization.

So when and where did the distinctions become so cloudy?

The evolution of HR, Payroll, and Benefit technology in the cloud has significantly changed the landscape for the industry. A shift in how technology is delivered to the customer and the expectation of service has led to the existence of a gray space for organizations with the DNA of a Service Bureau versus those with the DNA in technology development. Executive leaders of these vendors have an internal struggle to answer the most basic questions: Who is our ideal customer and how do we best serve them while increasing shareholder value? Clearly, these should be simple questions to answer, right?

But, these vendors are under pressure from their investors, both public and private, to market themselves to best maximize industry valuations. This corporate reality often results in organizations presenting themselves as something they are not, and ultimately, it’s the client that pays with a bad partnership decision.

What are the distinguishing characteristics between Service Bureaus and HCM Technology Providers?

Service Bureaus cater to the bell curve of customer requirements—our industry calls this a vanillaservice model of product and service capabilities “in the box”. A packaged product and service model with an assembly-line support infrastructure, built for significant volume, that generally yields improved profitability, but this means that all customers have to be placed into “the box” or the business model breaks down and the customer experience is impacted. The good news for the industry and for HR Executives alike is that the technology offered by the top tier Service Bureaus generally delivers significant functionality with a level of configurability that serves a broad base of customers. So essentially the “box” has gotten bigger and for thousands of customers the “box” works well and their business objectives are being met.

It is a pretty common practice amongst service bureaus, to either license software from a third party technology provider OR purchase a company that has developed a technology that better serves their customer base. Acquiring technology has been successful in the past, however, it does come with limitations often exposed by sophisticated buyers during their due diligence process. Service Bureaus tend to struggle to deliver system changes to accommodate unique client requirements. If the feature gap is significant, buyers should consider evaluating vendors that have proprietary technology that can improve user adoption and result in better outcomes.

Human Capital Technology firms have product development in their DNA and as a result when faced with trying to solve business problems, they rely on their ability to enhance their technology to meet the needs of their clients. HCM technology firms develop solutions that solve the business needs of certain buyer profiles so understanding the architecture of the system, core and enhanced functionality, configurability, user tools, and the marketplace the platform was designed for will help ensure a positive outcome.

Organizations are often like Zebras and Zebras all have their own unique stripes (requirements). If you believe you may be a Zebra, make sure the HCM provider likes working with Zebras and press them to demonstrate how the system will address your needs. Be careful not to assume that every provider of HCM technology can effectively handle complex payroll and tax management. In fact, many HCM providers rely on third party technology to address the complexities of payroll and tax, so make sure you understand the product evolution of the vendors you are considering.

In addition to technology solutions, many HCM Software providers have recognized and can deliver services beyond just technology. The industry refers to these services as Administrative Outsourcing Services (ASO), like tax filing, printing, garnishments, and benefit administration. When moving from a Service Bureau to an HCM Technology Provider, be sure to understand the level of services offered and how those services are delivered.

If you do your homework, conduct a thorough due diligence, and be transparent during your vendor evaluation, you will increase your odds of choosing the right partner.

Key Questions to ask the vendor to best determine their DNA:
  • What is their recommended due diligence process?
  • Are they trying to understand your unique requirements?
  • What is their billing method? Transactional or PEPM?
  • Did they develop their own platform or license or purchase it?
  • What client level of control will you have to system administration and configuration?
  • Do you have to contract for outsourced administrative services or can you manage internally?