Global Payroll Outsourcing; the past, the present and the future

By Bjorn Reynolds, CEO of SafeGuard World International

Traditionally multinational companies have managed their multi-country payroll needs in diverse, often fragmented ways. Historically multi-country payroll delivery has been managed through ERP solutions or by contracting local vendors in each country. ERP solutions often deliver enhanced reporting benefit and the ability to automate processes and standardise delivery, but often at a heavy cost. Conversely the use of in-country vendors can deliver greater cost efficiency, but payroll data for reporting and standards in process from a compliance perspective combined with understanding the plethora of international payroll legislation and labour laws becomes challenging and resource intensive.

The ERP payroll platforms enable companies to process the payrolls on one platform which usually integrates their HR, Payroll, Time and Financial systems allowing for cross functional automation, one repository of data and the ability to centralise functions or offshore the delivery aspects. This model can work well but has a number of limitations; specifically the high implementation and customisation costs mean that these solutions are only economically viable in countries with large employee populations. Typically Global organisations that have large ‘Tier 1’ Country populations (for example representing more than 70% of the global workforce) combined with a number of ‘Tier 2’ and ‘Tier 3’ countries which have lower in country headcounts. For the Tier 1 countries the economics and business case for ERP solutions is justifiable and measurable, but for the Tier 2 and Tier 3 countries, ERP solutions are generally not considered viable. This is known as the “long tail”; multiple countries with lower employee populations around the World either deploying local in-house payroll systems or using local outsourcing vendors for payroll delivery. This can lead to a number of issues around cost of delivery, visibility of payroll data, lack of clear consistent processes and controls combined with a lack of clear compliance on a global level. This creates the effect of a multi platform operation as these countries would all be delivered on in-country payroll systems or alternatively they would be outsourced. This leads to an additional cost burden to the company and also increases the risks in terms of compliance as there would be no standardisation of payroll processes.

The alternative and more traditional way of multinationals processing payrolls is a continuation of the long tail theme where each country chooses its own provider and either runs it on local systems in-house or outsources the payroll process. The reason for this is that historically there has been no other way of processing and consolidating the global payroll – the net effect of this for organisations is high local payroll costs as they need expertise in each country, multiple vendors which reduces the companies opportunity to leverage its global size and get better cost savings on the economies of scale. This can also lead to compliance issues as again there is no commonality of controls or processes across the globe.

With globalisation becoming far more of a factor over the last ten years, new technologies enabling greater global potential for companies and new labour markets becoming accessible to multinationals, there has been a step change in the way payroll has been viewed by organisations. A trend has started to emerge for greater visibility of employee data and with Sarbanes Oxley regulations becoming ever prevalent there is now considerable pressure on companies to ensure they have the correct control mechanisms in place throughout their organisation and that these reach the acceptable audited standards.

As a result of this the global payroll vendor started to emerge. To begin with these were large domestic payroll providers who could leverage their brand and knowledge and operated in different countries already. However as the market grew from demand their solutions were often reactive and whilst did the job they often fell short in terms of global payroll services. The reason for this was they did not have the opportunity to develop the technology which would create the business benefits companies were looking for. Instead they built their solutions on ERP platforms and as such their models have the same benefits and the same limitations.

This gap has allowed payroll companies to enter into the market and compete with the bigger brands, companies far smaller but who have looked at the market requirements and limitations of both the ERP model and the traditional outsourced model of multiple vendors and are able to overcome this and deliver a new concept to the market previously not available.

The emerging standard in the global payroll marketplace is a SAAS (software as a service) based platform, which is the payroll hub holding all of the employee pay data and pay history.  These platforms can encompass any country and does not have the capital outlay of an ERP to implement. As a SAAS model, there are no large internal costs for maintenance and also it leaves no footprint on the clients IT infrastructure. The payroll hub is also the reporting tool which allows companies to analyse global payroll costs at both summary and granular levels.
Over the last few years, a number of payroll outsourcing vendors have started to provide multi-country payroll services. The market is still young and growing but there is now much more choice than a few years ago, enabling organisations to re-evaluate the traditional ERP route and benefit from ‘best of both world solutions’. The outsourcers themselves have different operating models between them, ranging from centralised or off-shored services delivered through ERP platforms (often causing the same limitations as discussed before) to the use of in-country partners for local delivery, backed up by centralised service centres.  Often Global payroll reporting tools or systems are available that act as the conduit for the delivery of services and enable payroll data reporting. However, where the real benefit lies for the organisation is being able to have a service delivery model that becomes a ‘one stop’ solution for the customer. Typically outsourcers are able to rapidly deploy services into new territories under a standard umbrella of deliverables, and conversely can contract services in accordance with client’s needs. The outsourcer’s ability to help the organisation standardise its processes to enhance compliance and efficiencies, and enable greater reporting of payroll data all under one contract and SLA delivers the commercial value that organisations are looking for.  Increasingly in the current economic climate, additional value is added by the outsourcer’s ability to provide additional but intrinsically linked services, from assistance managing Labour laws and employment contracts, through to international benefit sourcing, employee and Tax authority payment services and HR administration services. This all enables the organisation to ensure its compliance and accuracy of pay but at an economically viable cost.

The next few years will see even more of a step change as more technologies become available to enable the services that are being provided, but the world is a long way off from an inexpensive Multi-country payroll platform that ensures the compliance organisation wants and needs. The payroll services market globally continues to grow at a fast rate as a result of the value added to international organisations, many of whom are seeing tangible business benefits as a result of these services.

Bjorn Reynolds is CEO of SafeGuard World International, a UK based global payroll services provider with capabilities in 140 countries.