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Multinational companies have more options than ever before to service their global payroll, but not every provider model is suited to every use case.
The best approach depends on variables like number of countries, population sizes, reporting requirements, compliance, and variability of the payrolls. There are also non-payroll considerations, such as the business’s appetite for change initiatives.
Big transformation projects rarely turn out exactly as anticipated, and factors like time, cost, security concerns, interoperability, or fit within the organization’s broader digital transformation roadmap are all important factors in deciding the best approach for payroll to enable international expansion.
Sometimes the best model is not the one that ticks every single box on a list; it is the one that can most realistically be implemented within reasonable costs and timeframe.
Global Payroll Aggregators—A Straightforward Value Proposition
The aggregator model has been around for more than 15 years. It was first introduced by companies like ADP, Celergo, Safeguard, and CloudPay. The aggregators’ value proposition is simple: a fully outsourced, one-stop shop that delivers global payroll in all jurisdictions in which you operate.
Aggregators have made payroll a service which can be delivered at scale through a network of shared service centers and select in-country partners within the aggregator’s network. This model has important benefits, but also certain drawbacks. Under this model, customers delegate the task of finding and managing local payroll partners to the aggregator. The model offers standardization and allows the payroll team to delegate the time-consuming, repetitive work—such as performing calculations every pay cycle.
All communications and information are centralized and flow in a single channel. On the flip side, the aggregator model is typically rigid and specific local requirements often fall outside the scope handled by the aggregator and require the customer to contract for additional add-on services. Aggregators often constrain the direct interaction between the customer and the local payroll partners, creating a layer of operational complexity that slows down communication between the business and its ICPs. This can have a negative impact when payroll issues need to be escalated because communication is not direct, and is relayed through the aggregator.
Rolling out an aggregator solution comes with significant disruption and change in the local payroll environment. The organization’s existing payroll solutions need to be reimplemented from scratch. The kicker is that if an organization decides to leave an aggregator, it will have to do the same all over again—reimplement those payrolls with whatever new solution it chooses in replacement.
Professional Employer Organizations, Employers of Record
A professional employer organization (PEO) and an employer of record (EOR) are both experiencing a surge in popularity amid the ongoing COVID-19 pandemic and the rise of remote work. A PEO/EOR allows organizations to employ workers anywhere without having to establish and maintain a local entity. The PEO/EOR provider legally acts as the employer for the workers that the customer wants to hire and takes care of the workers’ payment and social security obligations.
This model gives companies agility and flexibility and reduces regulatory and compliance burdens. This is ideal for businesses that hire globally and want to employ people in regions where they have no physical presence, as well as for quickly creating and supporting small teams in different locations.
However, this model tends to be expensive. Fees include a per-employee minimum of $600 to $1,200 per month and 5% to 10% commission on the gross salaries, which is significantly more expensive than local payroll services. It also means that the employees are not contractually tied to the customer’s organization, which creates a degree of separation between the workers and the business that may not be desirable in the mid to long term.
In most cases, the PEO/EOR model makes sense for small populations of less than 10 employees per country, when the business doesn’t have enough critical mass or permanent presence in a country yet to invest in its own legal entity.
Decentralized Local Providers
A third option for businesses that are expanding internationally is to use a network of ICPs. Like the others, this approach has certain pros and cons that need to be considered. The best part of using local providers and keeping payroll somewhat decentralized is that cost is lower and local market expertise is outstanding.
By contracting with a specialist in each country, organizations can access the best regulatory and compliance expertise in the market, and often pay lower rates than they would if they used an aggregator’s analogous service. However, this approach, too, has certain disadvantages.
First, selecting and maintaining a sizable network of ICPs to service the company’s many locations is time consuming and more hands on than the aggregator model. Second, unless you’re using a multi-country partner that covers a significant portion of your footprint, your processes, deliverables, service level agreements (SLAs), and other operational considerations will be different from one partner to another. This implies less standardization, which means less transparency and more effort needed to exercise effective control over your providers. One of the tangible impacts this can have is that it can be difficult to get your reporting in order. This means data will likely be siloed in each country and your team will need to work to make it interoperable. This will also make the integration of your payroll data with other systems (HR and finance) quite challenging.
In-house Delivery—How Much Can You Handle?
Doing it all in house is certainly an option for some organizations. If you are willing to carry the cost of having dedicated payroll specialists processing your payroll for each country you operate in, nothing gives better control than doing it all yourself. A distinction should be made, however, between centralized versus decentralized models. It’s possible to manage your payroll completely in house but to do so in a highly distributed, decentralized way. This can result in some of the same issues described above when using multiple local providers, such as a lack of visibility and poor reporting capabilities.
If payroll is managed in house, care must be taken to guarantee there is uniformity of processes and especially of data formats, so each country doesn’t end up becoming a silo. This model also creates a certain level of people dependency risk. If one of your in-house payroll experts leaves, you may find yourself scrambling to replace their expertise and cover the needs of the countries that were supported by the individual.
Platform as a Service
Platform as a Service (PaaS) is an innovative new model that has emerged over the past four to five years. It is a solution model that delivers a centralized, standardized, and reliable service experience while giving customers complete choice and flexibility how and by whom the local payroll operations are executed. It goes to the core of what most organizations want from their global payroll: beyond accuracy and timeliness, they want a certain measure of oversight, control, transparency, and auditability.
The benefit of this approach is that it is provider- and model-agnostic. The platform can be overlaid on top of the organization’s existing payroll landscape and mediate between different vendors and in-house or outsourced payrolls, minimizing the amount of change and disruption required. With the central platform overlay, this approach drives a standardization of processes, introduces automation tools across the entire global network, and integrates all the local payroll data into a global data warehouse that is easy to integrate with third party systems—HR, finance, etc. The result is a mix of the above models—PEO/EOR, decentralized, in-house—that can all be combined and aggregated through a PaaS solution.
Organizations going this route receive the same degree of control, standardization, and oversight that aggregators deliver. They can, however, tap into best-in-breed expertise of smaller, local ICPs, and they can integrate both in-house and outsourced payrolls into a single, cohesive operating model. Like the others, the PaaS approach isn’t without some drawbacks. The most significant is that it is more hands on than working with an aggregator, as the business will engage in and maintain multiple one-to-one relationships with its ICPs. This requires a greater time investment from the in-house payroll team so there is a direct tradeoff between control and time required.
We live in exciting times in today’s global payroll sphere. Businesses operating in a global context have more options than ever at their disposal when it comes to managing their global payroll needs. Each model comes with its own specific strengths and challenges, and it is important for the organization to assess what its needs and objectives are relative to degree of harmonization, time to value, level of change palatable, and costs involved.