Ten Global Payroll Challenges (and How to Overcome Them)
Global Payroll Providers
As multinationals continue the search for process excellence and economies of scale, more and more processes are being standardized and centralized, whether within a true shared services organization or otherwise. One of the more recent entrants to this increasingly crowded stage is payroll: more and more organizations are making the move form disparate local, national or regional payroll systems to one global payroll operation, centralized and optimized and yielding significant cost savings. But its not without its challenges....
Challenge #1. Optimizing local payroll operations
It’s all very well to make grand plans for optimized, perfectly smooth global payroll operations, but if your processes are a mess at a local level you’ve got little to no hope of moving everything global without a great deal of heartache. Furthermore, as one of the primary benefits of moving to a global operation is saving on cost, it’s vital to know where cuts can and can’t be made: where can you afford to drop staff numbers and where is some kind of presence absolutely indispensable?
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 an understanding of how they relate to each other and how optimized they are in the first place.
"There’s a range of issues to look at including payroll efficiency, costs, risks (are any of the country operations dangerously dysfunctional, or are there compliance issues?) performance, supplier relationships and so on," says Keith Rogers of Webster Buchanan Research, a market research and consultancy company focusing on people management and multi-country payroll. "This helps companies define their strategy – and in today’s climate, this is all about pragmatism rather than purism. We find that strategies are often developed on a regional rather than global basis and in larger-scale projects, companies tend to divide up their countries into different tiers, focusing their primary efforts on Tier One. The aim is to deliver quick wins – you need that of course to get initial project approval and to keep stakeholders on board."
Challenge #2. Ensuring compliance
No matter how pressing the cost drivers – or any other motive – no organization can afford to move to a global payroll system if this involves risking a lack of compliance with accounting legislation in any of its countries of operation – and of course this includes the audit requirements posed by Messrs Sarbanes and Oxley (SOX). Concerns over compliance have traditionally been one of the main inhibitors preventing firms from moving to a global operation; the need to keep a degree of local knowledge within the system has led many companies to maintain relatively broad and bottom-heavy payroll organizations, frequently leading processes far from best-practice scenarios.
However, improved technology, increased familiarity with the shared service center concept (particularly the rise of "hub-and-spoke") and the rise of global outsourcing providers have all combined to ease the way to a compliance-friendly payroll model. Organizations looking to outsource payroll – whether to a single provider or numerous – should be confident (not forgetting the due diligence, of course) that their providers are able to ensure compliance for each and every jurisdiction they’re active in. Meanwhile firms looking to keep at least the majority of their payroll in-house can turn to a number of existing methodologies to ensure compliance doesn’t inhibit best practice.
"A balanced scorecard approach can work well in this instance. Using the BSC nine steps of success can be used to map a high level scorecard and build lower levels from this, in order to align local best practice and KPIs with a global one. This should include audit requirements for Sox and any other countries requirements such as the Data Protection Act in the UK," says Jeanette Hibbert, UK Payroll Manager at the Kerry Group.
Challenge #3. Getting the right balance between optimized global processes and local flexibility
Combining elements of the two aforementioned points, it’s vital for organizations to achieve a healthy balance between getting the global system optimized and retaining the necessary flexibility at a local level. There’s no point having ultra-pared-down software running a super-Lean global payroll system if local legislative and cultural idiosyncrasies, and rapidly fluctuating employment terms, mean your operators have to go outside that system for a high proportion of their activity.
At the other end of the scale, a single global system capable of catering for every single one of those idiosyncrasies for each and every one of your organization’s employees doesn’t exactly fit the definition of "Lean" – and as no off-the-shelf package fitting that description yet exists, building the system from scratch would almost certainly entail the kind of expense that drives CFOs over the psychological edge, so working with a vendor to tailor an existing system to your needs is the logical step to take.
"Where companies use an on-premise system, the leading multi-country vendors have built systems that can handle core payroll processes for all countries centrally, and then layer local country capability on top," explains Keith Rogers.
Meanwhile, outsourcing, here, is increasingly seen as a way to square that particular circle, with providers having already made the lion’s share of the investment – but organizations need to be totally confident in their partner’s ability to make those crucial local refinements at minimal extra cost.
"If you go down the outsourcing route… the leading vendors’ approaches vary: some have built their own outsourcing backbone to deliver services in multiple countries, others act as ‘aggregators’, working with payroll providers in individual countries and then linking everything together through their own middleware to provide a central interface to the customer," says Rogers.
Challenge #4. Getting accurate, real-time reporting
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; again, this helps with compliance and audit issues as well as more obvious benefits like headcount reduction.
Furthermore the single source for and format of that data means that analysis thereof is simpler by orders of magnitude. Comparisons between countries’ (or regions’, or localities’) effectiveness and efficiency can be done on a true apples-to-apples basis, while monitoring factors like compensation costs and absenteeism can be carried out across the organization using relatively simple and low-cost tools. The ability to perform this analysis contributes towards the agility which in critical times can prove the difference between success and failure.
Organizations looking to retain payroll management in-house while moving to a global operation need to ensure the systems they’re putting in place allow for this kind of reporting – it should indeed be one of the cornerstones of the technology. Meanwhile those turning to outsourcing providers should include reporting time and accuracy in any KPIs being included at the SLA stage.
Challenge #5. Keeping down technology acquisition and maintenance costs
Implementing global payroll doesn’t come free (but then what does?). However, done right, cost savings can materialize relatively quickly thanks to the reduction in headcount consequent to centralizing processes, and reducing the support required on an ongoing basis: this is a significant factor since support costs tend to make up a large proportion of IT expenditure and the retained team will only – in an ideal model - be dealing with one platform rather than a number of different and distinct systems geographically. Up-front costs aren’t limited to the system acquisition and implementation, however: your global payroll organization is going to need new infrastructure including at least one and more likely (thanks to the ever-present requirements of contingency planning) a number of centers, and some training costs are frankly unavoidable.
Taking these cost factors out of the equation too is of course a significant driver towards outsourcing – in all areas of business, not just payroll. While most analysts maintain that cost alone should not be the determining factor in any decision regarding outsourcing, it’s a rare outsourcing deal that ends up costing the buyer more than keeping the process in-house would have done – and in the case of global payroll, outsourcing from the outset means organizations can reduce costs significantly at the technology-acquisition stage and almost completely in terms of support going forwards.
Challenge #6. Ensuring employee confidentiality
Data protection is always a critical issue, and especially so in the payroll arena thanks to the sheer number of employees whose data needs to be protected. While the idea of moving to a global system tends to set alarm bells ringing on the shop floor thanks to what’s seen as a reduction in the number of control levels in place, theoretically speaking at least the smaller number of people with access to the data and of access points into the system (not to mention the much-reduced-if-not-entirely-eliminated points of "translation" between different systems) should lead to increased data security.
In general, says Jeanette Hibbert, before making any transition policies should be reviewed in line with existing general data protection requirements: "Security should be tight on access levels and restrictions and data kept should be assessed to review whether it is necessary and if so – how will it be kept? Paper copies mean expensive secure storage and lengthy query resolution times; data management systems where information is scanned can alleviate this problem – security access can be built into these tools."
Outsourcing global payroll doesn’t mean these concerns aren’t still of great import to an organization; however it does mean that the organization’s ability to control matters is somewhat reduced since much of the data processing is happening outside the organization itself. As such, data protection issues must be high up the agenda from the beginning of negotiations and a series of checks and balances needs to be put in place to ensure any providers handling employee data are doing so in accordance with expected norms of security. Due diligence is once again a watchword (or two).
Challenge #7. Getting the right KPIs
The relevant metrics for a global payroll operation don’t vary significantly from those used to measure the success of payroll on a smaller scale (although of course that doesn’t mean they’re any less relevant). What is of particular relevance to any global operation is, of course, the ability to analyze metrics on a country-by-country or region-by-region basis, as discussed earlier.
"Again, I would measure this on a balanced scorecard," says Jeanette Hibbert. "Payroll KPI’s are measurable regardless of location and the aim is always to pay accurately and on-time. A simple spreadsheet can be compiled with the analysis built in – these could be issued to each locality and reviewed centrally. Issues to be measured would be: accuracy; timeliness; customer service levels: and cost. Customer surveys in each locality are important and should be issued at least annually to ensure the business is not suffering."
Kevin Rogers adds at least one other metric into the mix: "We recommend five key performance indicators in Webster Buchanan’s Payroll Performance Scorecard: Quality (Accuracy), Timeliness, Compliance, Cost, and Customer Satisfaction. We then propose some optional indicators. For example, if you're measuring quality, you might find it useful to determine the ‘origin of errors’: was the error created by payroll itself, or by HR or the line of business? By analyzing the root cause of errors, it’s easier to determine solutions when performance targets are missed."
Challenge #8. Ensuring buy-in from the C-suite
As with any transformation process, the support of the board can be critical in ensuring a successful transition. Payroll tends to be one of the less-glamorous aspects of running a business and as such practitioners often have to fight extra-hard for attention from the top – especially when proposing a transformation requiring a significant level of initial investment at a time when spending on discretionary projects might have been pared down to the bone. However, with all the advantages of moving to a global payroll system having an impact on organizational health it’s vital to keep exerting the requisite pressure to get things moving forwards.
A coherent, accurate and all-inclusive business case is crucial – particularly, says Jeanette Hibbert, one that emphasizes the unique advantages of this particular transformation.
"The benefits of the transition should be built into a business proposal following the review. The reporting benefits would be a key success factor – not many organizations have this ability at the moment," Hibbert enthuses, adding that "costs should also be reviewed here with probable ROI listed."
Challenge #9. Prioritizing geographical transition
Moving to a global payroll system – whether outsourced or in-house - from a geographically fragmented one can be done all at once – but it’s an absolutely mammoth and risky operation and almost certainly an entirely unnecessary one. Phasing various geographies into the system in a systematic manner, while increasing the duration of the transition, conveys a number of significant advantages: primarily, instead of employing a large number of transition specialists to cope with the integration of all countries at once into the system (a frankly ludicrous challenge) a smaller team can be recruited or trained to concentrate on fewer areas at once. A phased approach also allows for the ironing-out of the inevitable teething problems that will arise (and as a result of this element some organizations may decide to introduce smaller, less-critical country-operations into the system first).
No single correct modus operandi exists for this prioritization since each organization’s requirements are different from those of the next. The decision as to which areas get brought into the system in which phase may be down to external factors (when outsourcing, for example, it may be that the provider’s own systems, center-locations or linguistic capabilities make it sensible to adopt one geography before another); or it might be that internal political, structural or financial factors mean one area takes preference over another (or, from another way of looking at it, is used as a guinea pig in the globalization experiment!). What’s crucial, however, is that a timeline for these phases is set significantly in advance of the transformation - so that all potentially disruptive factors (particularly the human one) can be taken into account long before go-live – and stuck to with the minimum of disruption.
"Also," adds Jeanette Hibbert, "logistics should play a part; a logical order should be used geographically. It should be decided where the central management function should sit – then logic would dictate that the local expertise would be best used to roll that area out first... There should be a subject matter expert in each country on the project for their area in order to ensure the project results in progression, rather than regression to manual operations."
Challenge #10. Getting the right structure: how many centers and why?
Again, the precise structure of an organization’s global payroll operation depends on a great many factors. Firstly, of course, as with any shared service-type operation there are significant risks associated with putting all organizational eggs into a single basket: merely for safety’s sake it may be considered more sensible to have at least two processing centers each capable of taking over the other’s workload in case of disaster. Too many centers, at the other end of the spectrum, mean inefficiency, a lack of competitiveness and a reduction of many of the gains that the move to a global system is intended to generate.
As a result of the local compliance requirements - and the value in retaining local knowledge - mentioned earlier some degree of payroll presence in each country of operation is all but unavoidable and, as a result, whatever the global structure, total centralization is pretty much a pipedream at this juncture. However, the greater the degree of centralization the greater the cost savings so it’s vital to ensure the organization has a firm stance on point 3 (above) right from the beginning of the planning stage.
In Jeannette Hibbert’s opinion, "the ideal solution is to have a centrally managed global payroll, split regionally, with at least one subject matter expert in each country (depending on levels of automation). The central global office should really be used to manage the whole process and provide data analysis to the organisation (if a central office is not in place it would be difficult to operate global policies, best practice, KPI’s, benchmarking etc). With video conferencing, Web-ex and other technical facilities this should not prove too much of a challenge – although face-to-face support for remote sites should always be provided periodically. Dotted-line management at remote sites can help the in-country payroller feel supported – which can be a problem typically in these circumstances. In terms of disaster recovery – there should always be a secondary support at the remote sites, and technical disaster recovery would depend on which method the organization chooses to explore."
For those organizations looking to outsource global payroll this is all somewhat less of an issue. However, the structure of the provider’s organization may remain a lesser or greater factor (for reasons such as timezone compatibility, linguistic capabilities etc) depending on the degree of interaction between buyer and provider. It’s important to make a full assessment of how any potential provider’s structure is going to impact upon your own needs as an organization before going any further down the line towards a deal.
Intercomp Global Services are payroll delivery specialists with an extensive client base of more than 420 companies, including businesses listed among the Fortune Global 500. Intercomp Global Services supports payroll processing in countries located in Europe, the Middle East and North Africa, Asia Pacific, and the Commonwealth of Independent States (CIS). In key countries, we also provide local services that include human resources (HR) administration, accounting, and labor consulting.