Choosing a global payroll outsourcer is often harder than payroll managers expect. Not only are there different outsourcing models, but the subtle distinctions between vendors' approaches impact everything from pricing to quality of service.
There is a misconception that the choice of global payroll outsourcing delivery models is binary. In reality, vendors adopt a variety of models, often with subtle refinements that distinguish them from their peers. Probing the ins-and-outs of these models can become complicated quickly, but it matters because the intricacies of each vendor model can impact everything from pricing to service quality. It can also shed light on common frustrations around communications channels, global standards, and recurring errors.
To help make sense of this complex picture, Webster Buchanan's newly published research report, “The critical nuances of global payroll outsourcing models” defines five models that are adopted by global payroll outsourcers and explains issues that arise from these different approaches. The different models are the following:
- Pure Aggregator—The first model in our taxonomy, a conventional “Pure Aggregator,” is where an outsourcer chooses to work exclusively with third-party in-country partners (ICPs), which process payroll on its behalf. In this model, the outsourcer bets on its expertise in sourcing and managing a partner network and handling the workflows and outputs that bring the global payroll puzzle together, as opposed to knowing the nuts and bolts of how to process every individual country payroll itself.
- In-house Processor—At the other end of the spectrum, some outsourcers take the opposite approach, seeking to retain country knowledge in-house and process all or most of their country payrolls themselves. This is what we call the "In-house Processor" model. This can be done by working with subsidiaries in individual countries—a kind of "wholly-owned aggregator" model—or through what we call "Backbone Outsourcing," where vendors provide payroll processing in multiple countries from a single technology platform.
- Hybrid Aggregator—In between, many outsourcers adopt a Hybrid Aggregator approach, processing some countries in-house—often those where they have high volumes of pay slips to process or run their own service centers—and partnering in others.
- Informal Alliances—Alongside the "Pure Aggregator," "In-house Processor," and "Hybrid Aggregator" models, there are other approaches to consider. Several vendors work through informal alliances, joining together on an ad hoc basis for each customer engagement. This includes working with different partners to adopt the role of a primary provider for different customers. Contractually, the alliance may offer a single global contract with standardized service levels and a single point of contact for governance of the relationship. But operationally, you are likely to be dealing with each country directly, which may or may not meet the objectives of a centralized, consolidated global payroll service delivery.
- Technology Platform Providers—Meanwhile the fifth model in Webster Buchanan's Taxonomy, "Technology Platform Providers," is a long-established approach that's come to greater prominence in recent years. Again, this model comes in different flavors, but is essentially a set up where the vendor offers underlying technology rather than full payroll processing services. This allows customers to plug in their own ICPs on a country-by-country basis. If your primary driver for a multinational project is to impose global standards, simply putting in a new layer of technology may not be the answer. You may find it harder to insist on delivering minimum global standards around controls and data protection if you are dealing with a hotchpotch of independent in-country providers. But if you’re looking for more standardized process flows and consolidated data and see benefits in retaining some of your best incumbent ICPs, this could be a cost-effective approach.
Why the Models Matter
Why do these differences matter? Well, for one thing, issues around timeliness and quality of service may have their roots in how effectively the outsourcer implements its model. For example, you might experience a flawless, fast turnaround payroll in one country where a Hybrid Aggregator processes payroll in-house and has extensively automated its workflows and processes. But then, you might suffer late delivery and recurring errors in another country where that same outsourcer relies on a partner and has failed to integrate the flow of data, leaning too heavily on manual handovers.
Conversely, if you're looking for specialist support for country-specific requirements, you may find yourself getting high-quality service from a Hybrid Aggregator’s third-party ICP and poorer quality service in a neighboring country where the Aggregator processes in-house from a shared service center but has failed to recruit sufficient depth of country expertise. It's not that one model is better than another. The way the models are implemented and managed can help explain significant differences in service delivery.
Different Models, Different Fees—and Other Approaches
Likewise, delivery models can impact the fees an outsourcer charges. This may explain fluctuations in price per pay slip from one country to the next, and even between suppliers operating in the same country. Fees will be dependent on several factors, from the volume of pay slips processed to the payroll processing engine being used. For example, sourcing and retaining the skilled resources to run a high-end global platform like SAP or Oracle payroll is likely to be more expensive than for a smaller local platform.
The global payroll vendor landscape is further complicated by the fact that within these five service delivery models, there are additional nuances. For example, some outsourcers blur the boundaries between in-house and third-party partners by embedding their own staff within a partner’s operations, while others go as far as acquiring strategic partners. Likewise, several of the best-known Accounting Services Networks, which consist of independent country firms providing accounting and payroll services under one brand name as part of a global network, share characteristics of the "In-house Processor" category. Some operate a partner model under their own brand, “white labelling” the services of a third party as if it’s their own firm.
Finally, some critical service delivery issues span multiple models—not least the way that the outsourcer communicates with its clients. Some outsourcers operate a highly centralized model where client communications are handled by a central coordination team. Others operate a more devolved model where clients can communicate directly with ICPs and local offices at a country level. This can potentially have a big impact operationally. If you want to know about the regulations around working-from-home allowances in a specific country (a topic close to many organizations’ hearts today), you may want to talk direct to a local office. The primary provider will add little value to a highly localized discussion (unless, perhaps, they provide a level of quality control). On the flip side, if you are operating multiple country payrolls from a shared service center yourself, you may favor more centralized communications that enable your teams to discuss multiple countries in a common language, such as English.
The most important thing to keep in mind when considering vendor models is that there are plenty of options, each with their own pros and cons. It’s not a black and white choice between in-house and outsourcing, platform, and partner. There are in fact many shades of grey. It's worth taking the time to understand the differences because you'll likely be living with your choice for many years to come.
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David Longworth is a Director of Webster Buchanan Research Ltd, a market research and consulting company specializing in global payroll. Webster Buchanan helps multinationals of all sizes and at any stage of their global payroll journey from starting out to vendor selection and implementation. To find our more, visit www.websterb.com.