Building an Efficient Global Payroll Service: Outsourced or Captive

SSON News and Analysis
Posted: 07/09/2012

global_payroll

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When it comes to outsourcing global payroll, there are different options - captive or outsourced to a BPO, and in some cases both. The following session looks at the challenges and benefits of both.

Participants include:

Craig Warren, Director of HR Global Services, Rockwell Automation
Jeff Stiefvater, Payroll Administration C+B Global Operations, Caterpillar
Roy Cartwright, UK HR Shared Services Manager, Caterpillar
Alan Clack
, UK Payroll Manager Shared, Caterpillar
Daniil Shash
, Business Development Manager, Intercomp Global Services

SSON: For those of you who are outsourcing to a BPO, what are the advantages of a BPO over a captive?

Craig Warren
: The primary benefits that we have seen are access to technology, increased cost effectiveness, and enhanced performance measurement.

SSON: So you firmly believe that a BPO is more cost-effective rather than operating through a center?

Craig: It can be in some instances depending on what you are trying to accomplish.

SSON: How long have you been outsourcing to the BPO? Have you been down the BPO road longer than the captive center?

Craig: No, we started off with captive payroll operations and as we have grown geographically and revenue-wise I think we have moved more along the lines of outsourcing. Where we are at now in that there has been a strategic decision to move towards outsourcing, so we are in the process now of a region and country-by-country basis figuring out the economics of that, of when that makes sense, the right provider for that move that transition, and where on the outsourcing continuum we will be once we move to that place, because that is also going to differ by country and region.

Jeff Stiefvater: When you outsource to a BPO in a country or region is it primarily just the payroll function or are you outsourcing some of your HR functions?

Craig: That’s a good point. When I talk about payroll outsourcing, it really is specific to the payroll function or processes although in some areas we do have other HR activities outsourced.

Jeff: Are you typically outsourcing with the same provider or is it multiple providers?

Craig: We have our largest business processing outsourcing deal from a HR perspective in the US where we have payroll, part of the HRIS, relocation and benefits delivery outsourced to a single provider. In the rest of the world we are leaning towards - and have actually started this in EMEA and Latin America, identifying a regional payroll provider.

SSON: What do you think the advantages are to operating through a BPO rather than captive or rather than outsourcing your payroll to a BPO?

Jeff: In the US we made the decision to keep it in-house. There were two main reasons for us. One: the cost. We didn’t perceive we would get a cost advantage by outsourcing it. Number two; we did not feel the outsourcing provider would be able to meet our more complex requirements specifically. Probably the biggest challenge would have been around the ISEs: our International Service Employees.

The third thing is as we began to really look at our processes and were they defined well enough to ensure that we could work well with an outsource provider, we ultimately decided that no, they probably needed to be more solid with less special processing required in our payroll processing before we could really get a benefit by doing it outside. Recently in Mexico we have been evaluating our payroll solution and it appears that we are going to probably keep it in-house as well: primarily the main driver there was cost.

SSON: So basically through outsourcing you are not going to save any more costs than functioning through your captive center.

Jeff: Yes, that’s the case that we have found in the Americas.

SSON: And what about the UK situation?

Alan Clack: One of the things we have found is that we have got lots and lots of different companies within the UK all with different terms and conditions which is quite complex to say the least - timeframes, old paydays and things like that - and I don’t think any provider could do it at the cost we do it or with the speed that we do it and the response that we are able to deal with the current situation that Caterpillar is going through.

Roy Cartwright We have a bureau-type arrangement for 10,000 employees in the UK and that’s like 15 different payrolls.

SSON: Alan, you mentioned in a previous conversation we’ve had that you don’t see that there is such a term as global payroll.

Alan: No, there is no such thing.

SSON: Why do you think there is no such thing as global payroll?

Alan: Everything is country-specific: tax regimes in different countries, national insurance or whatever term, the way the court orders work or judgment debts and things like that. They are all different and country-specific. You could have a system but it would have to have an individual database for each country. I have actually worked with one in a previous life: I worked for a little firm called Capital One and I paid all of the people all over Europe and South Africa, Canada and into the Far East but every one of those is an individual database - running off the same system, I accept. So it’s just a different payroll and the T&Cs have to written for each one specifically.

Daniil Shash: I think I can respond. I believe and I’m sure that it is possible for one company to process payroll globally and this is actually what we do from one shared service center in Budapest. You are absolutely right, there needs to be proprietary software or some software designed by another company but there should be a software which is able to consider different countries specifics so each country legislation and taxation rules are put upon the payroll for each country. So yes there is a different payroll process for each of the countries and obviously there are specialists knowledgeable about legislation and the specifics of each country. However if you manage to gather all the processes and specialist in one location – you are able to deliver high quality global payroll services.

SSON: Craig, do you believe there is such a thing as global payroll?

Craig: Yes I actually do although I do understand the points that were made to the contrary. We did quite a bit of work at a core process level defining what aspects of the payroll process are consistent on a global basis and which of those - to the point that was made earlier, are country-specific that and are very unique. From our perspective we are moving to deploying SAP as our global HRIS so we are putting quite a bit of energy against that deployment. As we do that, a significant amount of the data that is required to process the payroll on a country-by-country basis will eventually be feeding out of SAP. The degree to which we can standardize our payroll processes globally, we are attempting to do that.

Now I totally agree the comments that were made around on a country-by-country basis. There are things that are different - but if you look at the payroll process there are some elements of employee master-data that you are always going to need to run payroll. If you are doing time-tracking, there is always going to be a time-tracking system that is always going to need to feed the payroll system. There is always going to be the need to do a gross-to-net calculation; there is always going to be some sort of tax-filing with governmental authorities. There is going to be some type of accounting activity that is going to have to be done. So at some levels there is some global consistency in terms of the core activities and if you move towards standardization of those as you move towards outsourcing, we believe that that is a degree of globalization that allows us to get some benefits out of that, that if you just went with a regional or country approach you wouldn’t really realize.

Alan: I understand that you would have a T&A system feeding in for hours etc, no problem with that at all - but obviously you still would end up with a separate, for want of a better term, database for each payroll because you would need the rules written within that, and the way it pays people. The UK uses some form of BACS; other countries use Swift and all sorts of things in between. You would have to have it specifically - so yes you can have common processes, but actual physical payroll would be different, wouldn’t it, in each country?

Roy: I think you could probably get a global payroll provider, I think, although, Jeff, we have looked at that and have not found anybody that suited our purposes yet - maybe that is because we are unbelievably complex. For all sorts of reasons: Caterpillar has acquired a number of companies in the UK, and as Alan said earlier we have kept common terms and conditions because when you harmonize, you always harmonize up and that is too expensive. So I personally think you can have a global payroll provider but you still have the national payroll issue around.

SSON: In terms of managing multiple payrolls from a regional or global centers, how then are you all specifically dealing with requirements to have local expertise on tax, social security, compliance etc?

Jeff: Our strategy going forward at this point in time is really to look at the country or the regional solutions and try to consolidate them into one shared services organization that does the payroll for that region, however we define that to be. The best example we’ve got is what we did in Mexico about two years ago. We had ten facilities, each running a local payroll, and we brought them in to one shared services organization under one system and were able to get quite a good cost benefit as well as ensuring the accuracy, and consistency of the payroll across the country. Caterpillar has a lot of opportunity to continue to take that to other areas of the globe, and as we continue to grow, and as we continue to use our HR system, and implement our HR system globally I suspect that we are going to create additional service center organizations within country or within a region. For example, potentially having our HR service center in the UK process an Italy payroll is maybe a solution we go to in the future. But we aren’t that far along that strategy across the globe: it’s probably something that will evolve quite a bit over the next five to ten years.

Roy: One of the issues we’ve got - which is our own fault because as you say we don’t have a global HR system yet: we have PeopleSoft (which in my view is probably not as good as SAP, but we’ve got PeopleSoft) but we’ve only got it across 80 per cent of the corporation so we’ve still got 20 per cent including absolutely nobody in Italy on PeopleSoft. I agree, Jeff: when we get them on PeopleSoft then we can run the payroll from Planet Zogg if you like! But until we get a common HR system it is going to be pushing water uphill.

Jeff: Right: so that is part of our challenge going forward, to continue to make sure we get our population onto one common HR system that we think is a key piece in order to leverage it into using more of a common payroll system going forward. We also face challenges from our business units that are expanding globally because they want to be entrepreneurial and build their own business: for example in China we have had some challenges where business units will decide they need to open a facility there and since we aren’t as advanced as we would like to be in the shared services organization they may choose to go off and develop and implement a payroll with a local provider there as opposed to discussing with the other business units that are located in China and finding out how to put in the most efficient payroll solution. Then again, those are the challenges that we are going to be addressing over the next year and we recognize there is a big opportunity to become more efficient as a corporation by leveraging HR shared services or payroll shared services more on a global basis.

SSON: Craig, can I ask you how are you at Rockwell dealing with the requirements for local expertise on issues like tax, and compliance?

Craig: I guess to piggyback on the comments that were just made, we’ve faced exactly some of the same issues that it sounds like Caterpillar is facing, and to get our arms around that part of our global strategy is really a set of guiding principles with a group that has to decide when someone is doing that: say there is a new facility and they are going off and doing payroll, alright, they need to touch base with this committee of IT and HR and payroll people to make sure that all of the concerns from a compliance and IT security and data privacy perspective are addressed - but also make sure that if there is a broader intent to move to a single provider, or we already have relationships with a provider in a region, to see if we can leverage that rather than having them start from ground zero.

Specific to compliance issues that are relative to payroll compliance and tax compliance and data privacy in terms of processing, we really are to a great degree relying on our outsourced providers because really when we are defining our requirements, part of what we are expecting them to do is really keep their system current on whatever the appropriate regulatory and legal changes are in the environment. We are also relying on - where we don’t have a payroll presence in every country where the provider may be just totally doing the payroll - the local HR people because, particularly in Europe we are finding, totally doing the payroll in a central fashion with the outsourcing provider without any input from a finance or HR person from the country isn’t realistic for where we are at with our deployment, so there still are either finance or HR people in the country who are still, to some degree involved in the payroll process who we are also relying on as a double check on that to keep the supplier honest. Then we have regional payroll managers who also are accountable for keeping a broad view of things in the regulatory environment -not to the degree to the provider would because they because they are really down in the weeds, but at a more macro level.

SSON: You sound fairly advanced in that area. Daniil, this certainly is an area of concern: trying to deal with local issues whether when outsourcing or through a captive center. How is Intercomp providing solutions within that area and what pain points are you hearing from people who are trying to overcome this challenge?

Daniil: We provide our services from a shared services center in one country. The first thing we do is hire people knowledgeable of local legislation - so in Hungary we have people who have knowledge of Italian, German, Slovakian legislation, etc, so they are able to process payroll. But of course this is not it: we make sure we have partners in each of the countries we provide service for. I mean legal firms, and maybe an accounting company, who always keep updating us with new information on the legislation in the country. This is how we make sure that we are compliant. As for logistics, we have a local partner in the countries who do logistics for us.

SSON: I would like to ask you all now: what value do you put on having your employees paid from one core application, whether it be outsourced or whether it be through a captive center - and is there real value in doing it apart from saving costs?

Craig: From our perspective it sort of has two things. One of them is in regions or countries where there is not a HR information system in advance of our implementing SAP, actually regionalizing the payroll to a single system or reducing the number of systems actually will assist us in terms of all of the data we will need to convert for the SAP implementation, thereby making that implementation easier so that is something it does on the front end.

On the back end in areas where we have already deployed SAP and we have multiple payrolls being done internally or being done with a provider other than our preferred regional provider, that makes our overall payroll delivery model more complex because the data that is going into payroll needs to be updated manually in multiple systems, at least in SAP for want a personnel administration transaction impacting payroll and also in the payroll provider’s system. Where we want to get to in the value for us is eventually - when everyone is up on SAP and we get people to the preferred one or two providers per region - we will have an automated interface from a controls perspective that increases the internal controls around the rigor of the payroll process and that also reduces our costs what we get out of doing dual or triple manual system maintenance to keep the systems in sync. So there is value in that perspective to us and also in keeping that data in sync from a reporting perspective.

Alan: As we said earlier we do a number of different payrolls. I think what you gain from having a regional center is the expertise within that center. You can possibly employ somebody of a better standard, with more knowledge to control, make sure that processes are more common throughout the group - because everybody will go off and do their own thing in various places. In a previous life I put a system in for a large multinational company called TNT that had one database for everything - HR, T&A, payroll, the whole lot - and by having one point of entry for everything, the flow of data between the systems was without doubt far more efficient, and the numbers of resources needed within the group, to do the HR, T&A, payroll functions within the system came down by 50 per cent. I understand where the people who are going onto SAP are coming from, because everything’s all in the one place - and that is without doubt the best way to do things. It’s never going to be perfect from an HR perspective, a payroll perspective or an accounting perspective, but it means that all your systems retain information on the one database - and that’s key.

Jeff: Clearly we’re processing a large number of people with a minimal staff because we process the US payroll from one central system. So what that drives is common processes for us. It keeps our pay practices common; we’re able to leverage the knowledge of the few to benefit a large mass of employees.

Daniil: When you have a single ERP for your global offices, a single provider gains more value since they are able to give you the data in one format - you don’t have to deal with all the different formats from different countries, which saves your time.

SSON: Several of you have mentioned the importance of the data from a global payroll, which you might not get from multiple payrolls. What importance do you place on this data ?

Jeff: Right now we don’t have a way to get global payroll data in one common format, to use, analyze, look for opportunities to improve the business. It’s just not something we’re able to do at this point in time.

Roy: Neither payroll nor headcount data, that easily. We’ve been promising to implement PeopleSoft globally for the last eight years at least. Cost is an obstacle: it’s the countries where we’ve got the smaller employee population that get pushed to the end of the queue. Cat has grown dramatically in the last five or six years - almost doubling the number of employees, until the current situation. We’ve moved into new countries - China, etc - and we’ve put our resources into putting those countries onto PeopleSoft rather than countries in Europe, where we’ve got much smaller employee populations.

SSON: How do you offset the return on investment from those smaller countries against those from countries with bigger populations?

Roy: I don’t think anyone’s ever done that analysis, because we just find ways of running the payrolls, usually from a local provider. One of my goals - and Jeff’s aware of this - is to get at least a common payroll provider for Europe, or at least most of Europe.

SSON: OK. Finally, where do you see payroll going for your own organizations over the next five years?

Jeff: I don’t know if we’d ever get to a point where we’d be totally outsourced. If anything, I’d say that we may lean towards bringing more people back internally and running off PeopleSoft payroll since that’s our HR system, and trying to leverage the ERP systems to help provide a payroll solution where it makes sense and adds value to do that - which may ultimately be the larger populations that we have. In some of the locations I think it’ll be hard to justify putting the payroll in via PeopleSoft, because the employee volume is so small and the costs would be extreme. But I would say that Caterpillar will get to where we will have more regional service centers providing payroll, and we will consolidate a lot of our payrolls over the next five years into one system - whether it’s insourced or outsourced, we don’t know yet - that’ll be provided by a shared service group for that region or country depending on where we see there’ll be most value.

Craig: I would hope that within five years we would be able to find one or two preferred providers within each region, and be a good portion of the way towards implementing and transitioning from either existing outsource providers or from the captive model to the preferred providers. I guess we’re the opposite of Caterpillar in that with our ERP deployment we’re not purchasing SAP’s payroll functionality, so because of that our intent is that that’s going to be an activity that has to be done outside. At a minimum, outsourced using somebody else’s system to run it, and best-case having the entire process outsourced - because that’s not going to be a technical ability that we’re going to maintain.

Daniil: I’d like to share my vision of the development and growth of the global payroll providers themselves. Now we have two types of payroll providers: one of them uses a vendor management model, and the other uses a shared service delivery model. The trend is moving to using the shared service centers model: having one center for a region and providing payroll from that service. Vendor management is more complicated and more costly for the end client. As our experience tells us shared service center models are more interesting for people who are looking for a payroll provider.

There are a lot of reasons too that make sense to switich to outsourcing. In our practice the most important are: cost saving – BPO is usually more cost effective than in-house processing, provides access to professional knowledge of a provider and concentrates on the core business.

SSON News and Analysis
Posted: 07/09/2012

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