The channel is benefiting from demand for outsourced human resources (HR) applications from the public sector, with Northgate Information Systems signing a £3m deal to outsource payroll services for the London Borough of Sutton.

Northgate will administer the council's payroll system from its data centre in Hemel Hempstead. All the HR users at Sutton have an online link to the system.

The company already provides a similar service to the Greater London Authority and the Royal Borough of Kensington and Chelsea.

Malcolm Aldis, managing director of HR systems at Northgate, said this was a growing area for the company, with other deals in the pipeline.

"As a private sector company with a lot of experience we can offer better value than the internal IT department. Because we own the application we can develop it to fit the needs of individual councils," he said.

Sutton council wants to reduce the administrative processes currently carried out manually, according to Annette Madden, executive head of business services for the authority.

Dave Meaden, public sector managing director at Northgate, said the public sector is seeking private expertise and experience from suppliers as a result of the government's e-government targets.

But he warned that the channel must have a comprehensive offering to succeed in this market.

Other channel players in the payroll space include Specialist Computer Holdings (SCH), with its SCS payroll outsourcing business. SCH recently acquired Hays Payroll Services to bolster its business.

Robert Morgan, chief executive at outsourcing consultancy Morgan Chambers, said payroll services could be very profitable.

"You can use it as a bedrock for other services. Councils are forced to go into competitive tender and if you can differentiate and remain competitive you can succeed in this market."