It may be hard to imagine anything good coming out of the Canadian government’s multibillion-dollar Phoenix payroll fiasco, but it has provided a golden opportunity for Ceridian.
The Minneapolis-based, Toronto-run technology company is one of three finalists competing to build a replacement for the federal pay system, which paid 40 per cent of federal employees incorrectly after its 2016 launch.
Ceridian has launched a new public-sector vertical to capitalize on being named a finalist in the bidding to replace the Canadian federal government’s infamous Phoenix payroll system. In an exclusive interview with The Logic, CEO David Ossip also detailed the HR software company’s plans to expand internationally via acquisitions like its recent purchase of Australian firm Riteq.
Ceridian has a significantly smaller workforce and less experience with very large clients than SAP and Workday, the other finalists for the Phoenix contract, and Oracle, which was shortlisted but not chosen as a finalist.
However, its work with the Canadian government has given it a marquee name to drop as it pursues an ambitious plan to take its flagship payroll product into new markets around the world.
In an exclusive interview with The Logic, CEO David Ossip explained how he sees Ceridian competing against the giants of the field, and why acquisitions are the key to its plans for international expansion.
Ceridian makes human resources software, including a flagship payroll system and workforce management tools that include scheduling, timekeeping and attendance tracking. The firm, listed on both the Toronto and New York stock exchanges, brought in US$746.4 million in revenue in 2018. About half its 4,000-plus employees are based in Canada, with the rest in the U.S., Europe, Australia and a sizeable development team in Mauritius. Ossip, a South Africa-born Canadian, became CEO after selling his startup Dayforce to Ceridian in 2012 in what he called a reverse takeover.
The company isn’t entirely new to the public sector. “We have played in government,” said Ossip. The firm’s existing clients include the city governments of Pittsburgh, Columbus and Halton Hills, Ont., as well as Elections Canada and the Canada Mortgage and Housing Corporation. But the bid to replace Phoenix “really is the first federal project [and] it’s of a different scale.”
Scott Berg, managing director of equity research for enterprise and application software at Needham & Company, said the public sector has big potential for the firm. “The size of the [public-sector] opportunity is massive, relative to Ceridian’s revenues today,” he told The Logic.
Ceridian hired Gianluca Cairo, previously chief of staff to Innovation Minister Navdeep Bains and then-procurement minister Judy Foote, to lead the new public-sector vertical. Federal conflict-of-interest commissioner Mario Dion cleared the appointment. Cairo became one of several executive hires with sector expertise brought in to oversee divisions dedicated to major industries like financial services, retail, health care and manufacturing.
Ossip said he expects the public-sector vertical to start winning clients rapidly, just like the others have. “Normally, we get traction relatively quickly,” he said, noting that the company has signed customers like American Express and BlackRock in financial services, Kraft Heinz and Colgate in manufacturing and Trader Joe’s in retail. (Those accounts predated the recent executive appointments.)
On the company’s second-quarter earnings call this year, Ossip cautioned that the company doesn’t expect the new public-sector division “to be material for a number of years.” Ceridian went public on the Toronto and New York Stock exchanges in April 2018, and had a market cap of just over $9 billion as of Friday.
Berg said “Ceridian stacks up fairly favourably” against its rivals for Phoenix, noting that the firm’s payroll software, workforce management and talent management products are all at least as good as competitors. Its only disadvantage is that unlike its competitors, it “doesn’t have a customer that large,” he said. For example, Workday’s software is used by Walmart, which has over two million employees. But Berg said Ceridian won’t have the same problem with state- or province-sized clients.
Ossip noted that individual departments within the Canadian federal government are not much different in size than its existing public-sector users, and that municipalities tend to have more complex contracts like those for police and emergency services.
He’s confident that Ceridian can compete against the larger firms. “We are regarded in industry as the best when it comes to payroll complexity,” and other factors including time calculations and scheduling, he said, noting that “the number-one challenge of the government is to pay people accurately.”
The company doesn’t have to customize its payroll software for each new government client, because it’s built around a “rules engine” that continuously calculates pay based on time and employment terms. By contrast, Phoenix contractor IBM said the federal government asked it to make more than 1,500 changes to the software on which the system is based.
Ceridian plans to pursue public-sector clients in the U.S., Canada, U.K., Australia and Ireland—all the markets in which it currently offers its payroll system—as well as New Zealand, where it launches in 2020. “Also, in all those countries, there are a number of provinces and states that all typically have similar types of problems and challenges that you see at [the Canadian federal government],” Ossip said.
The company is also looking to go global, with ambitions to launch its flagship payroll system into more than a dozen new markets. “Our plan is to be in about 20 different countries natively, within, say, three years,” said Ossip.
The company’s current business is heavily focused on North America; in 2018, it made 99.6 per cent of its revenue in the U.S. and Canada. It began to push beyond the two countries in July 2018, when it launched its payroll system in the U.K. The company has since rolled out the product in Australia, in April, and Ireland, in September.
In September, Ceridian bought Riteq, an Australian workforce management software company, after seeing early traction for its own such software with clients like telecommunications giant Optus and the jewelry retailer Michael Hill.
Ceridian will add about 100 employees through the Riteq deal, giving it a larger regional workforce as it enters New Zealand. “Once we have that going, we’ll move to [Asia-Pacific] next, which is somewhat related, much like the U.S. and Canada,” he said, declining to specify which countries it’s targeting next, but adding via email that the company is still “exploring potential expansion areas.”
On Ceridian’s 2019 first-quarter conference call, Ossip also cited “expansion possibilities in Asia” and named Germany and South Africa specifically, while emphasizing no decisions had been made. The company already has customers using its workforce management software in 50 markets. It’s also translated the platform into 20 languages, including Chinese, Hindi, Thai, Spanish and Portuguese.
Ossip said Ceridian will continue its acquisition strategy in new markets. “There are many companies that, I would argue, have 20- to 30-year-old technology, that are somewhat stalled because they can’t continue to deliver value,” he said. “Those companies for us are very attractive…. We need access to their people, their customers and their partners.”
Training new people on payroll rules and systems can take up to two years, Ossip said, but staff at existing local HR software firms already understand workforce management.
Ossip also uses acquisitions to gain expertise on local regulations, as he did with the Ceridian-Dayforce deal to understand U.S. tax rules. “In the U.S. you’ve got about 10,000 tax jurisdictions, and each of them have many different taxes,” he said, noting that it wouldn’t have been possible to build that part of the system “in, say, under 10 years.” The deal also brought in a large amount of client data on which the company could test its product to ensure it was paying people the right amounts on time.
Ossip said it now costs Ceridian between $1 million and $2 million to do the necessary research and development and localization to offer Dayforce in a new country. The company can then sign up more clients using the acquired companies’ staff and partner network. “We enter the market not trying to sell two or three customers per year, [but] 50 to 100 customers in the first year,” he said.
Berg is “very favourable” on the acquisition strategy. “You can accelerate those local efforts much more quickly, because those local people have that knowledge,” he said, adding that Ceridian has the resources to make more of such deals. The company reported cash and equivalents worth US$237.9 million at the end of the second quarter of 2019.
Berg said Ceridian’s immediate international opportunity is “supporting their North American customers that have employees in [expansion] countries,” noting that it will take a couple of years before new markets are big revenue contributors.
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But he also sees limits to Ceridian’s international prospects for payroll. European countries have sufficiently different payroll regulations that multinationals tend to use local software in each one, and there aren’t many with both large populations and a big U.S. corporate presence. Ceridian could enter Germany and France, but “after that, I think the road’s really limited.”
As for Asia, “I have a difficult time seeing anything outside of an extension into Japan,” Berg said, noting that payroll in China is extremely complex and that no providers have successfully entered the Indian market.
Ceridian’s moves are bringing it in even closer competition with some big rivals, but Ossip isn’t concerned. “We understand pay, I think, better than anyone else,” he said, noting that, by its own estimates, the company pays one in five private-sector workers in Canada. The company will be hoping to be able to say the same for the public sector and other markets soon.