All around the world, small and medium enterprises face the same key challenges. At the top of that list is financial and cost management.
In its Future of Work and People report, HR software and services provider SD Worx said that this issue applies to SMEs of all sizes, whether they are one-man bands or scale-ups.
The next priority on the list is payroll management, a problem that arises as SMEs start to grow and recruit their first employees. But the situation is nuanced and differs from company to company.
German organisations, for instance, face problems with payroll compliance and payment due to complex local legislative and accreditation requirements. Dutch companies also struggle more than other European players in drafting contracts, employment regulations, and policy documents.
Lorenzo Andolfi, HR advisor at SD Worx, says: “Doing payroll in the right way requires expertise due to compliance issues, which can be very different from country to country. There are also challenges in working with sensitive employee data, which has to be secure and protected.”
When a European SME has grown to approximately 150 employees, their main concern is to optimise payroll processes. This goes beyond simplifying data input and having a good partner on their side to cover complexity. Usually it’s accompanied by workforce management and talent management.
The importance of HR digitalisation
At the 100 employee stage, meanwhile, HR digitisation becomes the key focus. This is because, at this stage, SMEs generally need their operations to become more structured. At one end of the spectrum, it’s about automating manual, repetitive processes and tasks to boost efficiency. This often involves replacing basic technology, such as spreadsheets, with more sophisticated systems that include a centralised database.
At the other end, larger SMEs want to consolidate disparate systems from multiple vendors into a single payroll and HR system. The aim here is to centralise and streamline their HR landscape and minimise administrative time and effort.
“Companies want to create efficiencies, boost productivity, and optimise the way they work,” Andolfi says. “Another catalyst is creating a positive employee experience to be more competitive in the market, which covers everything from attracting and engaging to retaining people.”
At this point, employers often begin to put staff policies in place and consider more active personnel planning. Their top three areas of investment here comprise learning and development, collaboration or teamworking, and employee wellbeing.
Once companies exceed 50 employees, the next important milestone tends to be geographical expansion. Diverse and complex legal, compliance, and payroll regulations across jurisdictions can cause huge headaches for organisations. Other testing issues include developing positive industrial relations and creating effective diversity, equity, inclusion and belonging (DEIB) initiatives.
How SMEs tackle the expertise gap
But Andolfi believes that a key problem for SMEs in tackling these challenges, no matter what their size, is “a lack of knowledge and expertise”.
He adds: “This is particularly true if we’re talking about legal compliance, especially with employment law. There are so many mandatory issues that businesses have to cover, with consequences if they don’t, including the risk of penalties and fines.”
In many small and medium businesses, their founders have existing, trusted relationships with financial advisors(accountants and the like) and may turn to them for support. When companies face additional challenges, like payroll compliance and tax advice, it makes sense to turn to their existing financial advisors for support. But there are country-by-country differences in business practice.
Companies want to create efficiencies, be more productive and they want to optimise how they work
In the Netherlands, the focus is on finding guidance on employment contracts and how to draft them. Assistance with tax issues is the top priority in Germany. In the UK, it’s more about facilitating communication with the authorities.
Two out of three financial advisors also choose to work with external payroll and HR providers. This is particularly common in Germany. Financial firms often refer clients to specialist software or payroll and HR advisory companies, as they do not have the necessary in-house expertise themselves.
The same is true in the Netherlands. Dutch financial advisors mostly handle payroll themselves using third-party software. That said, they often subcontract payroll and HR advisory services or refer customers to third-party providers.
However, by choosing a global provider, SMEs can alleviate the strain on their financial advisors and improve their payroll and financial management capabilities.
Payroll as the starting point
When starting down the HR digital transformation route however, Andolfi believes that the digitalisation of payroll should always be the jumping-off point.
“Payroll needs to be the starting point as that’s the foundation,” he says. “It has an immediate impact on employee satisfaction and trust, and it affects the entire company, so it should be considered a hygiene factor.”
Andolfi adds that “you need to get the basics right or you can’t build things up effectively over time.” A key consideration in this context is to opt for a cloud-based platform.
Advantages of cloud-based technology include enabling employees to work from anywhere. It also offers employers multi-country support to facilitate international expansion. This means that not only are such systems easier to integrate with other applications than on-premise ones, they are also “future-proofed”.
“Integration is something that goes hand-in-hand with the cloud,” Andolfi says. “You need to be able to grow as a company, so it’s important to have the foundations right to enable scalability and flexibility. Otherwise, you could find integration very difficult in the future.”
But he acknowledges that some stakeholders are wary about adopting cloud-based systems.
Getting the most out of your payroll initiative
A second factor as to why payroll is the place to start when embarking on a digitalisation journey is that such process-oriented activities are easier to automate than people-oriented programmes, such as DEIB.
“Another reason why the implementation of payroll, time and attendance, and core HR systems is more widespread is that it can be easier to cope with people challenges in a manual way,” Andolfi says. “With other systems, such as onboarding or learning and development, implementation is more complex and requires more change management.”
Due to SMEs’ general sensitivity to cost issues Andolfi also recommends that, together with financial advisors, they select their technology partners carefully. He advocates looking for organisations that are willing and able to consult over how client requirements can best be fulfilled within a given budget.
“It’s about trying to address their issues by looking at what’s feasible,” Andolfi says. “We develop a roadmap to see what’s the right thing to do, and then proceed in a way that works for the organisation, with cost concerns being a primary consideration.”
A second suggestion is to go for a vendor that is well equipped to cater to the organisation’s international expansion needs. SD Worx, for example, provides two payroll services packages to support SMEs as they start to develop their international operations.
The first package, which most companies start with, is SD Worx GRO. This approach is for growing companies that expand to other countries and are looking for peace of mind and expert services to support their journey abroad. This offers cross-border managed payroll services and access to legal and compliance experts based in 150 countries worldwide. They register customers with relevant government agencies, support contract setup, and act as advisors about local payroll regulations.
“The advantage here is that you only have one contractor, so you don’t have to deal with multiple, separate agreements,” Andolfi says. “It’s an easy-to use service that’s handled by local, in-country experts.”
Taking a proactive approach to growth
The second package is SD Worx Pro. This “lite” version of the full SD Worx system builds on an existing payroll foundation by adding core HR functionality to the mix. A central employee database enables cross-border reporting, with an employee self-service applications bundled in.
“It’s flexible and grows together with the organisation, helping you promote a single way of working across all countries you operate in,” Andolfi says. “It’s one partner, one platform, one contract.”
He adds: “In most cases, companies react to challenges, situations, and problems after the event. A partner that can proactively help you prepare for the future rather than just react when problems occur is invaluable”
Possible considerations here include boosting employee engagement by giving employees access to on-demand rather than monthly salary payments. This approach is already becoming increasingly common in sectors, such as retail and hospitality. Employers can adopt it by simply switching on the earned wage access functionality in their payroll system.
“A key catalyst for digitalisation is SMEs wanting to move forward and become more efficient. But another is to provide a better employee experience because, with the war for talent still raging, having the tools in place to attract, engage and retain people is an important differentiator for them,” Andolfi says. “But another is to provide a better employee experience because, with the war for talent still raging, having the tools in place to attract, engage, and retain people is an important differentiator for them.”
As European companies grow, the HR landscape is becoming increasingly complex. By digitalising key processes, businesses can gain greater insights, oversight, and foresight over their people and payroll management.
