Making the Move From Single Country to Global Payroll
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By Julie Welch
Unifying Payroll in a Global Operation
Global expansion is often an organic process, resulting in an acquisition here, a product launch in a new market there. While often approached strategically, oftentimes customer/client demand and emerging opportunities are the true drivers for globalized efforts. For a great many multinational organizations these expansions have bolstered employee growth as well—a fact that has forced payroll processes to adapt from a one country (or at most one region) model to that of a multi- country one. Whether these organizations are global conglomerate or simply smaller multinational companies with lower numbers of employees in just a handful of countries, the initial approach to handling payroll typically uniform; addressing each set of national payroll issues on an individual basis, as they arise. This pragmatic but uncoordinated method of operation inevitably leads to a fragmented scenario, with combinations of service providers, software vendors and in-house teams offering a service that varies in quality from country to country. Furthermore, this decentralized set-up does not lend itself to easy production of global payroll reporting; meaning that the organizational management can find itself struggling to access meaningful global payroll business intelligence. In turn, comparisons between countries, payroll process models, and/or providers can become an impossibility, as does any effort geared towards improving overall payroll efficiencies. This is a major reason behind why more and more organizations on the global stage are looking to leverage the possibilities of a more unified approach to their payroll.
Five years ago, Forrester Research noted, “The benefits of an integrated payroll — providing standardization, harmonization, and simplification — provide an antidote to problems such as failed compliance, payroll leakage, and inconsistent cross-border management information.” These words are still relevant today and such a strategy can enable the application of a consistent service across the entire workforce (regardless of geographical location), a reduction of vendor numbers, the mitigation of operational and compliance risks, an improvement in business intelligence data, and potentially (depending on the organization’s scale and current payroll set up) a drastic cutting of costs. However, Forrester went on to warn, “Adopting multi-country payroll undoubtedly makes sense in theory but many firms lack the scale to execute, find the economies of scale wanting, and fear resistance from local offices.” In other words, the transition from operating payroll on a single country basis to a truly coordinated global approach is not without challenge.
This special report is aimed at either the established multinational organization looking to move from single country to global payroll, or the organization looking expand beyond its own national boundaries for the first time and wishing to operate a centralized payroll from the start. The purpose is to provide a broad view of the opportunities, barriers and significant factors that any organization must tackle on its journey to global payroll, beginning with the potential benefits that can make the journey worthwhile.
Global Payroll Driver #1: A Centralized Service.
An organization with a workforce based in a single country commonly centralizes the payroll function – either with a dedicated in-house team, shared service center or via an outsourced provider – in order to realize the benefits that a single, focused payroll structure can offer. The same principle of an improved service with efficiencies and economies of scale accruing from consolidation can also apply to organizations working on an international scale with workforces in several countries. Common features of global, automated payroll are the broad application of best practise, improved accuracy and timeliness of processing, and an easier introduction of modern payroll tools such as electronic payslips, mobile access, and employee self-service. The benefits include not only a streamlined payroll function but also a contribution to employee engagement on a global level.
Global Payroll Driver #2: Fewer Systems and Suppliers
The ‘traditional’ patchwork approach to payroll across a number of national boundaries often results in a number of distinct software solutions, teams and/or service providers, each exclusively focused on their own territory. However smooth a particular in-country operation is, without some sort of global connection, efficiency has a natural ceiling. As multi-country payroll specialists, Webster Buchanan Research note, “building relationships with a smaller number of software developers and service providers enables companies to tighten up supplier management, benefit from economies of scale (since one partner will process in multiple countries) and in some cases, share project risk.”
Global Payroll Driver #3: Improved Risk Management
Over-reliance on isolated (and often non-compatible) country-specific payroll software and the knowledge and expertise of key individuals in the payroll process carries increased operational risks and necessitates a localized approach to business continuity planning. The lack of central governance also creates a potential fraud risk which can be reduced by a uniform system of controls (often aided by common software) also resulting in improved regulatory and statutory compliance.
Global Payroll Driver #4: Better Quality Reporting
An article from the Shared Services & Outsourcing Network, Ten Global Payroll Challenges (and How to Overcome Them) highlights, “The need for gold-standard reporting is of course one of the major drivers behind a move to a global payroll system. With a single system in place, the organization can retrieve crucial data much quicker and with significantly less human involvement than is the case with disparate regional systems.” Furthermore, the more integrated the disparate countries payroll data is, the easier and more meaningful the analysis, allowing the C-level decision-makers to genuinely compare the payroll in differing national workforces on a true like- for-like basis.
Global Payroll Driver #5: Cost Savings
Cost reduction is a key element of the business case for global payroll. A 2012 white paper from technology consultancy ISG, Global Payroll Chaos gives an honest opinion, “The burning question for many organizations is whether instituting a global payroll strategy will create savings, and the candid answer is ‘it depends.’ Savings at the individual country level are difficult to realize – unless the strategy displaces costly processes or systems, or unless the global organization taps into its greater purchasing power. Savings from consolidating interfaces, vendors, and reporting are often easier to value, followed by the ‘softer’ savings of increased compliance, greater visibility, reduced risk and leakage, and enhanced decision-making.” In fact, in headcount terms global payroll sometimes carries an up-front additional expense as the organization invests in resourcing its overarching ‘Central Payroll Unit’. However, An Everest Group study, Multi-Country Payroll Outsourcing (MCPO): A New Approach to an Old Problem found that, “Buyers are achieving 10- 20 percent direct cost savings and, in some cases, savings of more than 30 percent.”
What Are The Options? – Global Payroll Models
In 2009, Webster Buchanan described the then two most common technical solutions to unified management of payroll across different countries:
The integrated model: a truly centralized approach in which a single software engine is used to manage the core processing across multiple countries, with individual business rules and country requirements layered on top.
The aggregator or “broker” model: an approach in which the client organization enjoys a single point of contact and access to data, while the actual processing is done locally by a network of expert in-country partners (ICPs) who link back to the service provider or central unit via middleware technologies.
Both of these models are still current in 2012, and indeed most global payroll structures fall into one of the two categories, although the aggregator approach is more common in outsourced scenarios.
Still, for those organizations that have a wide variation in workforce sizes between countries, a two- tier approach may be used; whereby a “pure” global system may not fit the situation even though the organization wishes to accrue as many global benefits as possible. In the countries with smaller employee populations, the cost of centralizing the payroll management can outweigh the benefits (often outsourcing services apply minimum headcount thresholds or fixed start-up costs) and so the organization may implement a fully-centralized set up for the territories in which it has a larger presence—continuing with a local in-country approach (or some sort of hybrid structure) for the less-populated locations.
Finally, it is worth noting that a group of European payroll service providers have introduced a variation on the two traditional models. The Payroll Services Alliance (PSA) is a cooperative arrangement between five outsourcing companies who between them can offer expert payroll services in 27 countries. The setup is not an integrated approach (as there is no single system or database in use); however, neither is the PSA an aggregator. Instead the client contracts directly with the providers (rather than the work being sub-contracted to relevant ICPs) and the Alliance provides a single point of contact. The PSA member organizations have agreed common service level agreements and a single method of invoicing to leverage the advantages of their disparate in- country expertise; while at the same time allowing clients to deal with what is effectively a single organization. Established in 2010, it remains to be seen whether this approach will sufficiently differentiate itself to generate replication, but nevertheless this new approach holds promise.
Global Payroll – A Strategic Approach
Ultimately, regardless of which global payroll model best fits an organization’s size, staffing and locations, the question of how to achieve that model and fully leverage the benefits outline above is increasingly a question of strategy. As ISG have found, in 2012, “Rather than seeking order by issuing global vendor RFPs or country-by-country enterprise resource planning (ERP) build- outs, more and more global companies are starting with a purposeful global payroll strategy and governance model.” Perhaps due to the current state of the recovering global economy, international organizations are increasingly shying away from trying to implement global payroll in a single leap. The current trend is to establish a framework strategy that moves towards the goal of global unification in pragmatic and practical steps—identifying optimal payroll delivery models and the service providers which are best suited to organizational scale, complexity, and regional presence. Of course, when developing such a global payroll strategy, there are a number of key challenges that must be negotiated.
Global Payroll Challenge #1: Language & Culture
A recent Pay & Benefits magazine article observes, “Payroll is not only affected by local laws, but also by regional languages, currencies and time zones.” As such, any implementation strategy for global payroll requires a firm understanding of cultural overlaps and clashes between the different employees and countries in question. Further, national business culture can create embedded expectations of what is “normal” in terms of payroll practice and also the way in which business change is communicated (and the introduction of global payroll is undoubtedly a significant business change). As a 2011 Society of HR Management (SHRM) report illustrates, “A system designed for use in Europe or the United States may not work in other parts of the world. Beliefs about the organization’s obligations to employees, data security and privacy, and the role of HR can differ dramatically from country to country and region to region. An effective design in one location may be met with resistance in another.” As such, employee engagement tactics as global payroll is rolled out through the international workforce will differ according to geography.
Global Payroll Challenge #2: Legislative Compliance
Although regional similarities may exist (and in places such as the European Union, even regional legislation), the fact remains that employees in each individual country are subject to that country’s payroll regulations. Details on issues such as minimum wage, working weeks, overtime, third party deductions and declarations, mandatory reporting and even payment methods will all differ and a global payroll strategy must be certain of access to a deep well of expertise that can navigate the differing and constantly-changing legislative landscapes of the different countries of operation. Although it is likely that in many countries, an organization will be leveraging the knowledge of outsourced experts, a fundamental awareness of the diversity and coverage of the relevant legislation will enable the organization to be a more intelligent customer and appreciate what is, and what may not be, required.
Global Payroll Challenge #3: Data Security
Payroll information is both personal and sensitive and any move to a payroll strategy that involves transmission of data across national boundaries must take into account the rules of all countries involved in the transaction – both the country of origin and the country of receipt. As the above- mentioned SHRM report states, “When implementing… across national boundaries, issues associated with data privacy and data movement across these boundaries must be kept in mind. Different countries and regions have enacted laws and policies that can significantly affect the design and implementation, [and] global corporations must strike a balance between global consistency and local flexibility when implementing new technology.” That said, a number of aids to bridging these national differences are available. One such is the U.S./EU Safe Harbor Framework, which guides U.S. organizations to a self-certification that their data protection practices meet the stricter EU criteria. Another is the international standard, ISO 27001 which demands that organizational leadership regularly examine the company’s information security risks and implement information security controls.
Global Payroll Challenge #4: To Outsource or Not To Outsource?
As ever, a primary issue for any type of payroll system or service is one of cost. A 2010 AccountancyAge survey found that the “most important benefits of outsourcing payroll were perceived to be increased cost-effectiveness at 42.4%” and that over half of those respondents already outsourcing their payroll had leveraged headcount reductions as a result. However, the cost argument in favor of outsourcing must be balanced against the organization’s requirements in terms of accountability, control and data. Though the deciding factor may simply be whether the organization has, or can acquire, the in-house talent to effectively manage payroll across differing national boundaries, an ISG white paper points out that the key indicators of payroll complexity in any organization include frequency of pay cycles, percentage of electronic funds transfers, number of taxing authorities and banks, number of interfaces, and types of special pay runs (such as bonus, off-cycle, and manual checks)—factors that invariably alter the needs for specific expertise. Indeed, as the ISG report points out, “Attributes such as these are indicators of the payroll complexity for a given country, and they reveal the specialized knowledge you must have to consistently meet the most basic payroll requirements.” In the end, there is no “one size fits all” answer when it comes to payroll outsourcing; and as such, the cost and service implications of each option should be properly investigated, understood and evaluated before a strategic direction is adopted.
Moving to Global Payroll – The Bottom Line
The shift from single country to global payroll management (whether in-house or via an outsourced option) carries undeniable potential rewards but also real risks, and an organization must be certain of its precise requirements before deciding on a particular route to global operation. As the Shared Services & Outsourcing Network point out, “The first step towards a truly global operation is to review your existing processes and operations (local, national, even regional) and get as complete as possible of an understanding of how they relate to each other and how optimized they are in the first place.” Indeed, the need for a clear and strong strategy that encompasses issues of individual country compliance, cross-border data security and the less tangible (but no less real) barriers of language and culture is paramount regardless of organizational size, scope and regional footprint; although these factors are critical shapers of that strategy. As Andrew Pearson, CEO of global payroll provider Patersons, opined in 2011: “Taking a centralized, global approach can simplify payroll process as a business expands internationally. A single vendor and a unified, though scalable, solution means greater intelligence and simplicity in the always complex payroll world.” Undeniably true in principle, however it is for the individual organization to balance the rewards and risks and make a pragmatic (and strategic) business decision on whether global payroll is the way to go.
Such a strategy can enable the application of a consistent service across the entire workforce (regardless of geographical location), a reduction of vendor numbers, the mitigation of operational and compliance risks, an improvement in business intelligence data, and potentially (depending on the organization’s scale and current payroll set up) a drastic reduction in costs.”