On-demand ERP vendor Workday announced an update to its software Monday as it rides a wave of publicity from a recent high-profile customer win.

Payroll is a major new component of Workday 4.0. To date, the company, which was formed by PeopleSoft founder Dave Duffield, has focused on human capital management (HCM) -- otherwise known as human resources -- as well as financials and procurement. A company spokesman described the payroll capability as key to landing bigger customers.

"I think as we get into these larger enterprise deals, those are the places where payroll is tightly coupled with HCM ... We'll continue to link to [payroll providers such as] ADP or Ceridian, but this does open up new opportunities in larger enterprises," said Andrew McCarthy, communications director.

McKee Foods is serving as a pilot customer for the payroll function, which will be generally available later this year. Initially, Workday will support processes for U.S. payroll, with Canada and Europe to follow. The company claims its underlying payroll framework and calculation engine mean it won't have to rewrite the entire stack from scratch for new regions.

Workday made the right move by developing the capability, according to one observer. "Definitely, payroll is a must," said China Martens, an analyst with the 451 Group.

"Clearly, they've learned from the past on the internationalization front," she added. "Where PeopleSoft, like its peers, to be fair, ran into some trouble was in not doing enough on the internationalization of its software when going global."

Workday is also integrating its software with third-party products. A link to Salesforce CRM will enable users to automatically activate and deactivate users from the Salesforce system as they are hired and leave the company.

While customers would require a separate license for those third-party applications, Workday will support the integration, spokesmen said.

The software updates arrive as Workday is enjoying a wave of buzz. News broke last week that it had scored a major deal with manufacturer Flextronics, which has 200,000 employees, and that Salesforce is now using its HCM module.

Observers say the Flextronics win -- beyond a major boon for Workday -- serves as a general validation that the SaaS (software as a service) model can work in the largest enterprises.

"Workday is on the forefront," said Ray Wang, an analyst with Forrester Research. "Their win against Oracle and SAP proves that SaaS can scale in the big leagues."

But as Workday begins servicing such sizable accounts, there are lingering questions about the cost efficiency of the on-demand model. ERP juggernaut SAP has drawn back its rollout plans for Business ByDesign, its hosted ERP offering for the midmarket, saying it needs to fine-tune it to ensure a satisfactory profit.

Workday's product has a smaller footprint, which will help it avoid such growing pains, spokespeople asserted.