Exclusive - SAP on the future of SAP payroll, including cloud payroll

Profile picture for user jreed By Jon Reed November 28, 2018
My slow-cooked piece on the future of SAP payroll - including cloud payroll - is finally ready. Here's the view from SAP's Daniela Lange, and my analysis. This is a deep read, so grab your hot beverage first.

Cloud HCM conversations are dominated by trendy talk of talent wars, workplace diversity, employee well being, HR analytics, and of course, the controversial impact of AI on recruitment and hiring.

SAP is no different, and this year's SuccessConnect in Las Vegas, which I attended, had a heaping helping of all of the above.

But for SAP's customer base, the future of SAP payroll is a vitally important topic also. Whether they are a SAP SuccessFactors cloud HR customer or an SAP on-premise payroll customer, the future of SAP payroll is on customers' minds. I pursued that topic at SuccessConnect across press conferences, podcasts, and a sit down with Daniela Lange, Product VP for Payroll, Time and Total Rewards at SAP SuccessFactors.

For the past several years at SuccessConnect, SAP has provided diginomica with an exclusive view on these topics, but this was my first time meeting with Lange, so let's start with her update. First question: does her purview span all SAP payroll offerings? Short answer: yes. Lange:

It is about SuccessFactors building the cloud solutions. It's also about continuing support and continuous innovation for our on-premise customers, and it's about migration strategy of how to get our on-premise customers into the cloud eventually. For example, this HR sidecar - that's the nickname for it - it was always a component of this exercise. It was my team's role to figure out our payroll strategy for the long-term future. Editor's note: if you're not familiar with the S/4HANA HR "sidecar" and why it was announced by SAP, see ASUG's post from Sherryanne Meyer, January 9, 2018.

Inside SAP's payroll strategy

And how would Lange describe that payroll strategy? She answers that question in three parts:

Why are we investing in our cloud payroll? What is the impact on our existing customers, on-premise and EC payroll customers? The third part would be about our vision.

Part one, Lange on SAP Payroll:

SAP Payroll is the most global and the most powerful payroll solution we have. 9,000 customers in 99 countries. We pay almost 100 million people. And it's not just the breadth of the country coverage, it's also the localization depth. As an example, we support 3,000 legal reports. We deliver more than 600 legal changes every year.

Lange on EC Payroll, which is SAP's cloud-hosted version of SAP Payroll, requiring an SAP SuccessFactors Employee Central Payroll license:

EC Payroll is the fastest growing product. We've had triple digit customer growth for three years now.

So, as Lange put it, you could argue that EC Payroll is doing "awesome," so why bother with an investment in a new cloud payroll product? She answers her question:

We know we must not be complacent about it. We believe that payroll is ripe for disruption, that leveraging modern cloud technology can make it so much better than what we have today. So this is really our investment into a very long-term future, because our board has decided to really invest in the payroll business.

We want to remain market leader for the decades to come, because we feel that this global and very heavy localization is one of our core capabilities. This is why we are doing it. Because we want to lead this disruption; we don't want to be disrupted.

Before we get further into the vision, Lange wanted to hit on the impact to existing customers:

The most important thing I want to say is that we are fully committed to our on-premise payroll customers and our EC Payroll customers. It does not mean that we are taking away resources to support them.

I think some customers may be worried when they hear this, but I think it's really good news because it shows our company's commitment to innovating payroll in the cloud. And there is also no need to worry. We won't abandon our on-premise customers. I think that maintenance commitment with 2030 that we made in the context of this HR sidecar is a strong testimony to that. Editor's note: SAP roadmap for supporting maintenance for on-premise SAP Payroll customers is a hot topic for customers. For more on this and how the HR sidecar impacts this, I again point you to Meyer's blog post.

But whether you're an SAP customer or any other ERP customer, no on-premise customer wants a forced march to the cloud. Lange:

We believe that when we are ready, we will have a sweet carrot and there is no need to use the stick. We believe that it will be so convincing that our on-premise customers will want to migrate when we are ready.

A common question all on-premise ERP customers have in this situation, and I think it's a fair one, is: where is the innovation priority? Will on-premise customers continue to receive new functionality?

So we obviously continue to do the support and the legal changes until 2030 in the same depth as we are doing it today. In addition to that, we also have this customer connect program where customers can bring in wishes and ideas, and we prioritize it in communication with our customers, and deliver continuous improvement.

Nevertheless, the focus of our innovation is in the cloud, so on-premise today and beyond 2025 with the HR sidecar is really about continuity. It’s to provide planning security. The HR sidecar is a bridge solution. It's to give our customers the security we are not going to pull their payroll out from underneath their legs. So that stands for continuity, whereas SuccessFactors and the future of cloud payroll stands for innovation and digital transformation.

I'm intentionally avoiding turning this post into a focus on the HR sidecar, which will run on HANA and will be supported until 2030, but when will this option be generally available to customers?

The plan is to make it available in 2023. So customers will have until the end of 2025 to migrate to the sidecar if they need to. Like I said, we expect that the large majority of our on-premise customers can migrate directly to SuccessFactors and won't need the sidecar at all. But we know some customers have very complex requirements, and they really need to be in on-premise for a bit longer.

The SAP cloud payroll vision

Now, onto the cloud payroll vision:

Keeping payroll compliance is quite painful today. Our main goal is to take that pain out of payroll, and this is really where modern cloud technology opens doors. Where we can do things that in the old world, we could only dream about. The key is really automation. We want to automate legal compliance. That's one big goal, to the extent possible.

The legal requirements are a good example of why SAP sees modern cloud tech as worth investing in for payroll. Lange:

Conventional payroll systems are usually monolithic systems, right? And they are like a plate of spaghetti. Like when you pull on one end of the spaghetti, you don't know what happens to the rest of the pile of spaghetti, right? This is how it is with legal changes. Once you apply a legal change somewhere, you have to test the whole thing to ensure you know what's going on. And this is a big cost factor, this regression testing and fixing afterwards.

So how does cloud change that?

Modern cloud technology is all about modularization. So to stick with my pasta metaphor, we are moving away from spaghetti to ravioli. Which means when you apply a legal change, you know the impact is confined to just this module. This allows us to get rid of these regression testing efforts. And to automate things.

Shielding customers from the pain of configuration updates matters also:

Another aspect of this is: we want to be very strict in separating what code is legal compliant code and what code is customer configuration, so this way we can push legal changes into our code without the danger of messing up customer configuration.

So these two aspects of modularization, and a very strict separation, is what will allow us to push the legal changes into it. So the legal changes are not going to get easier, but the pain is going to move away from customers more towards us.

Automation plays a central role here:

We really believe that the best payroll is the payroll we don't see - it just works.

There's more to SAP's modern payroll vision, however. And this is where S/4HANA comes in:

We also don't see payroll as a siloed application. We see a lot of value in making it an integral part of the intelligent enterprise, that can talk in real time, to time management, to benefits, to EC, to financials, and so on.

She sees more real-time benefits:

I think we can create new insights, and quite a lot of business value. Talking about real-time, we also want to get rid of this batch process. That payroll knows at all times what the actual labor cost is. So it will take the panic out of this payroll cycle. So if we have our digital boardroom graphic up, we can drill into those insights and know.

I also think that the companies will pay their employees in [different] frequencies, or even as employee self service. Or this will no longer be dictated by software limitations. It will be a business decision. Do companies want to compete based on their flexibility?

Last but not least, Lange said something that genuinely surprised me:

We want to make payroll fun for employees. Now that's probably biggest stretch of imagination.

Making payroll fun might push some readers into a state of disbelief. But for an intermediate step, I think we can wrap our heads around the goal to make payroll "smart." Lange:

Also, I want to be able to talk to my pay statement and ask, "This 401K deduction, why is it less this month? Does this make sense to me?"

And now for the kicker question: timing. How close are we do productizing this vision? Are we in the planning stages? Is there a formal timeline.

It's really too early to talk about this. At the next SuccessConnect, I can give you an update on this. This is our focus area for our future, for our cloud payroll. This is the we want to focus on to make our cloud payroll competitive for the next couple of decades.

My take

What I like about Lange's articulation of SAP's future cloud payroll vision is that it is quite specific in terms of the benefits of modern cloud technology. That's refreshing because for years, we heard from so many ERP vendors that as long as customers are happy with a hosted offering, that was "cloudy" enough. SAP clearly understands the inherent limitations of a hosted offering when it comes to truly taking advantage of the SAP Cloud Platform, microservices, intelligent services, APIs, and so on.

Where SAP is going to feel pressure on this is timeframes. "Smart" payroll is even more ambitious than your classic multi-tenant cloud payroll, which is hard enough to build. What Lange articulated here is much more than the "payroll as a service" I talked about with Rob Enslin at SuccessConnect 2017.

Now you are adding in the challenge of S/4HANA Cloud integration, including finance, as well as intelligent payroll services. But in the meantime, companies like ADP have announced next-gen payroll offerings. Aggressive competitors like Oracle HCM and Workday are also moving fast. So SAP will not be able to remain vague on timelines for too long here.

You may be wondering why this article didn't come out right after SuccessConnect. Answer: I wanted to get more clarifications from SAP based on how SAP's official views have evolved from briefings I've had in the past. Unfortunately, the briefings in question were under NDAs that have not been lifted. The good news: those NDAs do not impact the updated messaging and information you are reading in this piece.

I would prefer that SAP lift those prior NDAs because I think readers, including customers and partners, would benefit from an understanding of how this discussion with SAP on payroll as a cloud service has evolved. Readers know that we are fans of transparency here at diginomica, and we are always pushing to share as much as we can in the public domain. That often goes counter to the traditional analyst model, but we believe there is a limitation to the analyst backchannel and a real benefit of public conversations, even on sensitive matters.

I expect these NDAs will be lifted in time, and that will allow me to give readers more of a back story than I can now. But I ultimately decided that the on-the-record conversation here was noteworthy in its own right, and worthy of publication.

At the SuccessConnect 2018 press conference, I pressed the issue of so-called "next gen payroll" (my term, not SAP's) at the press conference, which included Greg Tomb and Amy Wilson from the SAP SuccessFactors leadership team. That led to this tweet from the event:

Steve Bogner is a well respected SuccessFactors expert and consultant; his podcast earlier this year with several other experts on why cloud payroll matters to SAP is well worth a listen. Well respected and kind-of retired HCM guru Naomi Bloom issued this warning in July 2017:

There has been rampant speculation how SAP is going to balance its existing payroll investments and the role of what Bogner calls "multi-tenant true cloud payroll". I am not going to air out that speculation here, but I would suggest that the best antidotes to such speculation are the kinds of firm statements and frank commentary, of the kind Lange offered us here.

I will speculate on one thing that has nothing to do with NDAs, but is simply my own speculation: I believe the vision of not just multi-tenant payroll but "smart" payroll, well-integrated into S/4HANA and the SAP Cloud Platform, has changed the development challenge. Or, if not changed, it makes for a different development challenge than what outsiders might think of when they imagine building a cloud payroll solution. Whether that has changed timeframes in how SAP has planned this project I have absolutely no idea. That's all from me, not SAP, and I have no idea if SAP agrees with this view.

I like SAP's payroll vision as Lange articulated it, but it's also very ambitious. There is another piece of "true cloud" wisdom, which is to get a baseline product out, and iterate it from there. I believe in cloud business there is a danger in elaborate development efforts with uncertain timeframes. Why? because user adoption is everything. Land-and-expand for the win.

SAP appears, at least to me, to run the risk of falling into that too-much-time-in-the-lab trap here. It will be up to them to prove me wrong on that point. However, I do want to applaud Lange for her frank and articulate vision. It's not easy to put things with such high stakes on the record. She is, in my view, the right woman for this job.

Finally, I asked SuccessFactors customer advocate and expert Jarret Pazahanick for his views on all this, and his advice to SAP on-premise payroll customers. He focused his advisory on customers considering EC Payroll:

After doing multiple strategic reviews for large SAP Payroll customers on if moving to the SuccessFactors Payroll cloud made sense for them, my recommendation for any current customers considering SuccessFactors Employee Central (SAP Payroll single tenant hosted by SuccessFactors) is to be extremely cautious, do a lot or research, talk to other customers and talk to truly independent advisors who have your best interests at heart.

It is often extremely difficult to make a business case with real ROI due to the “Wild West” SuccessFactors partner ecosystem that is treating a SAP Payroll to SuccessFactors Employee Central payroll project as a new implementation so they can maximize consulting revenue. To make it worse, very often they are not familiar with the Payroll Control Center, TaxProfileFactory, Employee Central, EC to ECP integration or replication so the “new” payroll projects end up coming with some real risk and often don’t even get the new functionality implemented for them so it becomes a very costly “lift and shift” to a single tenant hosted version of the software they were already on.

My hope is the combination of SuccessFactors putting tighter controls on their partner ecosystem combined with a “rumored” new Cloud Payroll offering gives the roughly 9,000 SAP Payroll customers a no-brainer option to move to when the time is right. Given the current landscape there is no rush for a majority of SAP Payroll customers to move to SuccessFactors Employee Central Payroll and my recommendation would be to use the investment dollars to innovate around the edges (i.e. Payroll Control Center, Overpayment Functionality, Update Garnishment rules) unless your organization is completely moving off OnPremise for all SAP technology.

I suspect SAP doesn't agree with all of what Pazahanick has to say here, but Pazahanick's comments are actionable, so SAP has the chance to prove him wrong also. This is also a good reminder that a trusted consulting partner, well-versed in cloud and product, is vital to achieving success in a cloud transition so choose carefully. And, as Pazahanick says, getting independent views is the right choice - for any major project, HR or otherwise. I would add: seek out user group advisory and peer networking opportunities. Get to SuccessConnect, etc. Learning from fellow customers is at the core of a good project approach now.

Updated, 6:15am ET November 29, with additional subheadings, resource links, and a few tweaks for reading clarity. Speaking of which, I also taped an on-site podcast at SuccessConnect with Pazahanick which gets into these issues and more.