The classic model of having an internal payroll department doesn’t work today for many businesses. Here’s why delegating back-office activities to a professional business service provider is a time and cost-effective solution.
HR and payroll are some of the most important tasks within the back-office arena - we are talking about employees’ salaries and their well-being and at the end of the day, no business could run without its people. It is vital that the employees get paid correctly and on time, because even a minimal mistake can send a shock wave of discomfort and mistrust through the business.
Payroll is ever-changing
The classic model of having an internal payroll department doesn’t work today for many businesses. Often companies will expand to many countries at once, led by their sales and marketing teams, then followed by other departments like service personnel, operations, etc.
It is becoming more common to find companies with operations in 20+ countries, but with less than 100 employees per country in many locations. This is a challenge when trying to justify the need for a full back-office department in each country, and it is the reason why independent service providers exist.
As a Business Development expert, I have come across multinational companies that analyse their payroll procedures and go to service providers for solutions and support. These companies usually spend a lot of time, effort and money in pulling together a detailed Request for Proposal (RFP) document, yet many have the same goal: “We are looking for costs savings in our payroll process”.
Selecting the right payroll solution
When looking for a global payroll solution, the focus or decision factor should be on finding the solution that best equips you to be compliant in the countries you are entering. If, on top of this, the solution is cost efficient and gives you the right amount of technology to meet your needs, the solution will not only be right for your business but also easy to sell to key internal stakeholders.
For many businesses the thought process is the other way around, they start with the ‘cost saving’ factor. The issue with this approach is that, as you build your solution, you realise that cost cutting comes back to you soon enough in the way of additional services needed (that cost more money) and inefficiencies in the managing of the process which requires many more hours put into managing your international operation. You may even run into compliance issues, facing fines that amount to sometimes of millions of dollars.
Another erroneous approach – one that is more prevalent in the US - is to buy an expensive technology solution and assume it will work in any other country the company expands to. It may work well in some countries, but based on my experience with international deals, less than 10% of the companies were in a position in which purchasing an expensive technology solution was the right move. These technologies do give you an appealing platform and lots of functionality, but when it comes to local compliance most of the solutions:
- come up short
- are not fully adapted or
- require additional work (at an additional cost).
In many cases they still don’t do the job.
Countless times, I have witnessed clients choose an aggregator for their global payroll needs, following promises of functionality and cost savings, only to find out one or two years later that the spending ended up being higher, even though they still had immense issues to manage the operation globally.
A simpler and more efficient approach
Here’s where expert support helps you make an educated decision that really works for your business. When you think global payroll, think compliance with local regulations and about the fact that you need to find a solution that ultimately helps get employees paid on time and accurately. Then, start adding other requirements, like those related to platform functionality, integration, etc.
There are two common scenarios for external payroll support, you can:
- contract with local vendors; they will have local knowledge and are fast to adapt to changes in local regulation
- choose an aggregator; a global firm that sub-contracts to local vendors (all or most of the time) and sells you a platform to manage the work - and hopefully see what’s being done everywhere.
The cons of these two options are that if you choose local vendors, the amount of time your HRP team will need to dedicate to managing these relationships is immense - and on top of that, most of the time there are language barriers. This means that since you don’t understand the local regulations, you are ‘blindly’ trusting the local vendor.
From the aggregator perspective, the common issues are:
- lack of access to the local vendors
- lack of flexibility to quickly contract new services or change existing services (because they have themselves a contract with the local vendor) and
- most importantly, they won’t be able to service you in locations where the local vendor would lose money, because they are forced to see your relationship with them on a one-to-one basis.
Also, most times the platforms aggregators offer are not truly global, they won’t work in the countries you need, or they will require expensive interfaces.