Cost Reduction Measures in Payroll

The Next-Level COVID-19 Impact: Cost Reduction Measures in Payroll

Payroll teams around the world have been working incredibly hard over the past few weeks to protect the business continuity of their companies in the face of the global Coronavirus pandemic and to make sure employees are getting paid accurately and on time. The challenges they have been facing are tremendous: Not only did payroll teams have to quickly adapt to the new work-from-home environment and figure out how to effectively coordinate activities and exchange information remotely. They also had to work through a barrage of new legislation and emergency programs to apply new tax, social security, furlough and redundancy rules properly to their employee base.

While payroll departments have heroically kept the ship afloat during these turbulent times, the next storm is already here and is hitting even harder. As many businesses are suffering from the unfolding economic crisis, cost reduction programs have been put in place in many companies. And the cost reductions typically impact all areas of the company, Payroll is no exception. The CFO of the company will look for all departments to contribute to the cost-saving targets, and Payroll as a back-office function will be one of the first departments in line.

Of course, a simple way to try to save cost is by reducing headcount, and we are already witnessing massive layoffs across many companies. But in most organizations, Payroll generally operates on a rather thin headcount. Further headcount reductions would mean cutting into the bone. We recently learned of a company that furloughed their entire payroll department and then was surprised when no one was there to answer the many, many queries from employees about the COVID-19 impact on their pay. In addition, most companies have already outsourced the bulk of the workload to external payroll providers and the biggest part of their payroll cost is actually tied up in the vendor cost. Which then points to where the biggest potential cost savings for Payroll need to come from: vendor costs.

As we have worked in the Payroll industry for the past 15 years, there are a couple of important observations as it relates to vendor costs:

    1. Fees can vary significantly from one vendor to the next. Side-by-side comparisons can be difficult because the scope of what is included in the service of the vendor varies a lot of times. So you have to be careful to not compare just the “normal” base fees. It is important to understand and factor in any add-on fees (e.g. for correction runs, for extra reports, for joiners and leavers, etc.) that you may likely be facing and which can add up quickly (similar to factoring in the excessive baggage fees into the full airline fare). So it is critical to understand the kind of support you will need and what it will cost you under different vendors’ fee models.
    2. If you are working with a global payroll aggregator who offers you a unified payroll service across different countries, you are likely paying excessively high fees compared to the typical domestic payroll service fees. We find in many cases fees charged by the global aggregators are 2-5 times as high as you would normally pay. Why? Global aggregators charge you a margin on top of the margin of the local partner they engage to deliver the service, so the double-margin adds to the bill. Plus, the coordination layer that the aggregators provide is largely manual/human and adds to the cost.

Identifying reliable, yet cost-effective vendor solutions that can help you save money while maintaining a high level of service and giving you the expertise that you need will be more important than ever in times like these.

Just how much can you save? It depends on your starting point, i.e. what you are paying now and what you ultimately need. But to give you a sense, here is a real-life example: We recently worked with a global technology company with 1,500 employees across 7 countries, and we found that we could save them €100,000 annually – so at the equivalent to the cost of 3-4 team members – by transitioning them from a global aggregator contract to best-in-country local providers while giving them strong aggregation with Payzaar’s powerful payroll aggregation platform.

How do you get started? There are a few simple steps to help you maximize your cost savings opportunities from your payroll vendor costs:

    1. Take a look at your current vendor contracts and check when you get out of your contract. When does your contract term end or do you have a break clause in the contract.
    2. Make sure you understand what level of service you really want/need so you don’t overpay for unnecessary stuff and you factor in all the add-on extras. This will be an important basis for your cost benchmarking to ensure an apple-to-apple comparison.
    3. Identify alternative payroll vendors and run some benchmarks and checks on them, both in terms of cost and service.
    4. Negotiate terms and conditions hard. In the current economic situation, most payroll vendors will be very eager to win new clients, so the bargaining power should be in your favor to negotiate a very good deal.

The steps are fairly straightforward, but it takes a bit of time and effort to work through them diligently. If you find yourself short-handed to run a benchmarking / vendor assessment project like this, we can help.

At Payzaar, our team has decades of cumulative experience working in the payroll industry and we know the vendor landscape around the world very well, including service capabilities and fees. If you would like us to help you figure out where and how you can save on your payroll cost, please contact us and we would be happy to support you.

Marc-Oliver Fiedler

Marc-Oliver Fiedler

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