In today’s highly interconnected world, many companies are starting to expand across national borders at a much earlier stage of their lifecycle than used to be the case. Both international trade policies and modern communication technology have made it easier for companies to sell their products and services around the world. Successful companies often scale internationally very rapidly after their initial domestic success. This also means that small, fast-growing companies increasingly face the complexities of having to pay their employees in accordance to very different local laws and cultural requirements, without having built up the mature processes and corporate structures of larger, more established organizations.
So as a rapidly expanding business what are some of the typical payroll challenges you will be facing and how can you best handle them?
The Challenges of Global Payroll
Payroll is a hyper-local discipline, driven by local laws and regulations. What applies to and works in one country will not hold up in other countries. For example, in Germany you need to properly capture an employee’s religious affiliation in order to correctly calculate church taxes to be deducted from their gross pay, in the US you are by law forbidden to ask your employees about their religious believes or affiliations. Without a deep understanding of local laws and customs, you will likely fail to stay compliant with local payroll regulations. Of course, for small and midsize companies it typically does not make sense to hire a local dedicated payroll expert in each of the countries where the company opens up offices. For small employee headcounts, it is typically the local HR or office manager who is tasked with “sorting out” payroll in addition to many other day-to-day responsibilities. Since that means this person cannot be a deep payroll expert, companies often outsource they payroll processing (and sometimes other related services like accounting, tax, legal services) to local service providers who specialize in understanding the local payroll requirements.
This model works quite well at the local level and is reasonably manageable as long as the number of countries is relatively small (i.e. 3-4 countries). However, as the international footprint grows, the complexity starts to build up. Before long the company is working with 10, 15, 20 or more local payroll partners. Each one manages payroll in their own specific way: different service scope, different processes, different payroll systems, different reports and data formats, different service levels, etc.
The complexity of many different local payroll partners takes on multiple facets:
- Getting visibility into what is going on in each country and governing the overall payroll operations centrally is virtually impossible.
- Given the lack of transparency, ensuring proper safeguards against potential fraudulent behavior at the local level and enforcing strong data protection standards is very difficult.
- Establishing process efficiencies via more centralized, shared service structures is also difficult since each country follows different processes and uses different tools.
- Reporting becomes a nightmare since each country generates data in different shapes and formats, and many companies spend inordinate amounts of time even creating very basic management reports.
- Building automation tools and integrations to 3rd party systems (e.g. HR or Finance systems) is often not viable at the local level given the size of the local operations and the sophistication (or lack thereof) of the local payroll partner.
Given these complexities, many companies end up with highly inefficient, manual, intransparent hodge-podge of local payroll silos.
The Benefits of a Global Payroll Solution
To remedy these complexities, progressive companies turn to integrated global payroll solutions that help to streamline and integrate their global payroll operations across countries. When talking about global payroll solutions, it is important to understand that no single global payroll system exists that works in many different countries around the world: even the largest global payroll providers like ADP do not have one payroll platform that can be deployed in any country but instead rely on many different local payroll systems, and they only have their own payroll operations in roughly 20 countries. However, over the past 10-15 years, so-called global payroll aggregator models have emerged that help to simplify and streamline the payroll environment for multinational companies by aggregating and integrating the various different local payroll operations. They generally offer the following:
- Standardized ways of running payroll processes across countries, i.e. consistent operating procedures and templates being used by all local partners
- Increased transparency and operational controls to govern the local payroll processes and ensure compliance with corporate policies
- Consolidate reporting to aggregate payroll data across countries
- Integration middleware and automation tools that can be applied across local payroll operations to increase productivity (e.g. by eliminating data re-entry from one system to another) and to reduce error rates (e.g. by avoiding data inconsistencies or manual errors)
- Central points of contact to help resolve local issues as needed
Closed vs. Open Aggregator Model
But not all aggregator models are created equal. It is important to understand the differences in aggregator models. The vast majority of global payroll solutions are built around a closed, proprietary aggregator model. What does that mean? They do not give you as a customer the choice in the underlying local payroll solutions. Which means you have to adopt the local payroll solution that the global vendor dictates. You will be forced to change your existing local payroll vendors to the vendor of choice stipulated by the global provider. So you have to go through a re-implementation of all your local payrolls – which takes many months, is very costly and implies significant operational risks and disruption – before you get the benefits of the aggregated global solution. And once you have the global solution implemented, you are locked into their network, i.e. you can’t change the local vendor. And the reality of course is: in some countries the local solutions that are part of the global vendor’s closed network are great, but in other countries not so much. So you will be forced to struggle with the under-performing countries. And unfortunately, this sort of lock-in means that the position of power shifts from the customer to the vendor which generally doesn’t translate into great service quality and value for money. The local solution providers realize of course that the customer is locked in, so their incentive is limited to go the extra mile in order to provide the customer with a great service. So much in fact that the local payroll providers in these closed networks will often prioritize their own local customers where they don’t have the same lock-in over the multi-country customers that come to them through the global network.
Recognizing the limitations and downsides of the traditional closed aggregator model, a new model for integrated global payroll solutions has emerged over the last few years, inspired by the new network economy models that have been pioneered by companies like Uber, Airbnb, Amazon, and Booking.com: The open payroll aggregator model. How does it work? You don’t have to change your local payroll solutions, this model is essentially agnostic to the local payroll solution or provider who executes the local payroll processing. Which means you have complete flexibility to choose the local payroll solution that suits your needs: stay with your existing local payroll solution if you are happy with it or switch to a different local vendor if you want to make a change. Or you can even run your payroll in-house if your scale and your team’s expertise makes that the best option for your needs. The open aggregator model is designed to give you as a customer maximum flexibility to choose different local vendors and local payroll delivery models while you get the full benefits of the aggregator model: streamlined processes, automation & integration tools, full transparency, strong operational controls, and consolidated reporting.
So why choose the open aggregator model? The answers are simple:
- More choice and flexibility
- Less disruption
- No lock-in
- Better service quality
- Lower cost
All things that are particularly important for fast-growing companies that don’t want to be locked down by rigid structures but strive to increase the efficiency and scalability of their global payroll back-office. Fundamentally, the open aggregator model – like other open platform models – shifts the power back to the customer by giving you full choice and transparency. Plus it democratizes the vendor eco-system, giving customers access to the best local vendors who provide truly exceptional service rather than steering customers to those vendors with the largest marketing budgets or who happen to be part of one of the closed global payroll networks.
If you want to learn more about how the new open aggregator model works and how it can help you simplify your global payroll operations, book a meeting here.