Delivering timely and accurate payments to your employees has a direct impact on their morale and engagement. Your payroll team plays a crucial role in delivering the right results to your employees and your business.
How much is your employees’ time worth? And how much are you willing to invest in protecting your company’s credibility?
A question of cost comparison
Calculating global payroll return on investment (ROI) can be complicated, as the total cost of ownership (TCO) isn’t solely based on cutting costs. Bill Kirwin, the Gartner Inc. analyst known as the “Father of TCO,” puts it this way: “TCO is really about process improvement and best practices that result in lower costs and improved service levels.”
Gartner defines TCO as “a comprehensive assessment of information technology (IT) or other costs across enterprise boundaries over time. For IT, TCO includes hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training and other productivity losses.”
For payroll TCO, consider questions such as:
- What is the trusted source of data?
- Is that data current?
- Where is the core HR data coming from?
- What kind of software is being used?
- Is it a legacy software platform?
- Is there a longer-term strategy to replace the HR system?
Though it’s possible to get a positive ROI from an in-house solution, it’s a considerable investment, one that many businesses aren’t in a position to make. Many companies have large employee populations in a few countries and smaller employee populations in other countries. The cost to obtain country-specific modules plus staff for in-house payroll and tax competencies for each country can prove to be prohibitive.
Country regulations change frequently, so you must factor the time, cost and work effort to keep these solutions compliant. Employees must learn new software, data must be transferred effectively, and a foundation of processes must be established.
Is payroll processing core to your business?
Many companies think that the best way to save money is to keep processes in-house, including payroll. Though this may make sense for certain businesses in certain situations, it often introduces inefficiencies and opens the company to unnecessary risk. This is especially true for companies with a global presence.
Consider your current payroll processes: How many people in your organization touch the payroll activity, and how much of their time is spent on it? Is that their core business function?
In countries where you have a thousand or so employees to process, you may be able to budget for a payroll team. However, for a smaller office, it may be the general manager of a particular country who also processes local payroll. More than likely, the general manager is not an expert in local payroll laws, and even honest mistakes can lead to serious consequences, including fines, labor strikes and, in certain countries, jail time for noncompliance.
In addition to noncompliance consequences, your company may experience damage to reputation that’s irreparable. So, although having your current staff manage your international payroll might appear to be the least-expensive option, it can put your company and people at significant risk.
Outsourcing global payroll for improved ROI
The potential complexity and consequences of in-house payroll often make a centralized managed payroll solution a much better return on your investment. In a centralized global payroll solution, an outsourced vendor manages the end-to-end payroll process, including integration from an existing HCM, validation of data input, in-country gross-to-net calculations and balancing, along with all the downstream processes of payroll reports, tax and legislative filings, and bank and general ledger file creation. The global payroll solution becomes your shared payroll services organization providing the local expertise across your global footprint.
The cost model is generally based on an employee-per-month or employee-per-pay-slip service fee, allowing you to develop a more predictable cost model based on your growth plans. This reduces your internal talent costs by eliminating the need for more costly country-specific competencies and experience, as well as overcoming staffing fluctuations due to peak processing or time away from the office issues such as vacation, holidays, sickness and other types of leave.
Here’s an example: An organization has 6,000 employees across multiple countries. It has a fragmented approach to payroll, with a local vendor solution in each country. And though the company utilizes a legacy HR solution as its core HR master data source, it hasn’t quite built up the functionality for capturing all the payroll-relevant data requirements in each country. At this point, it’s just holding master data. Staff manually input necessary data locally to ensure payrolls are completed on time, and then re-key data into the HR system after-the-fact, if at all, for corporate reporting.
Utilizing the Gartner TCO approach, the company benchmarks its capital costs, administrative costs, technical support and end-user operations.
Capital costs include the hardware, software and network costs for each country. Administrative costs include legal, vendor oversight and management. Technical support includes development of interfaces to core business systems as well as ongoing day-to-day maintenance activities such as network monitoring and loading balancing alongside installing routine patches or implementing broad scale upgrades. And finally, end-user operations include all resources that touch the payroll activities, which encompass the payroll team but also the partial resources from Finance, Treasury, HR and business line managers.
If the company opts to outsource its global payroll, much of the related capital investment would transition from a capital expenditure that amortizes over time to an operating expenditure, allowing the expense to be deducted in the accounting period during which it was incurred, thus reducing the corporate tax liability. The global payroll provider will also assume all hosting, monitoring and maintenance responsibilities.
Choosing the right partner
It’s important to keep in mind that not all global payroll models and providers are alike.
Administrative cost savings should be achieved through a single-partner contract and an ongoing single-vendor relationship. Some vendors will require in-country contracts, so this burden may be lessened but not removed.
Integration of your existing HCM, time, benefits and finance systems with a single environment—not country-by-country—is key. Your business will change, so integrating into a single environment prevents the headache and costs of ongoing upgrades by country.
A vendor with a granular global reporting solution who will work with you upfront to standardize processes and harmonize payroll data across all your countries will substantially reduce your team’s work effort to collect, collate and produce accurate global analysis and reports each pay period.
Using an outsourced solution does not mean that you eliminate your end-user operation resources. You will still maintain responsibility for gathering variable input data, obtaining management approvals on variances such as overtime or shift changes, and approving the final payroll.
Typically, companies will set up a centralized or regional shared services group to manage the retained functions and redeploy employees to other areas of the business. Cost savings will come from spending less time on non-core business tasks. Cost savings should also be achieved in the type of talent required, as you should no longer require a redundancy staff of multilingual, experienced payroll and tax specialists for each country.
The global payroll provider’s expertise in compliance or cultural issues specific to each country helps clean up the myriad areas that could have led to litigation or fines. Having an organization that monitors and manages compliance, while giving advice and support on legislation and regulation changes when needed, will allow your company to focus on other important areas of business. This has a positive effect on the growth of the company—and on its profits.
Furthermore, management at all levels could now rest easy, knowing that their employees are taken care of and their business interests are safe. Calculating global ROI—and then acting on those calculations—can be complex and daunting. But with the right global payroll partner, the process is worthwhile, and likely to lead to improved performance and significant cost savings throughout the organization.
Learn more about the advantages of a global payroll solution, including compliance across borders, integration with HCM software and improved processes and at multinational organizations by contacting us now.