Lack of control over in-country providers, long deployment times, and elevated costs are part of the traditional aggregator service model, which for long has been the only option for large multinational companies to manage their global payroll.
However, in the last few years, an alternative has appeared in the market to challenge the aggregators’ offering through a radically different value proposition: the open platform model. This new way of managing global payroll is modular, fast to deploy, and highly flexible, as opposed to aggregators’ one-size-fits-all approach.
Payzaar CEO Marc-Oliver Fiedler and COO Trevor Townsend sat together recently to discuss the evolution of global payroll and take a look at the different payroll service delivery models available on the market nowadays, weighing their pros and cons to help organizations make the best possible decision for their business.
The main drivers for global change in payroll
In the words of Trevor Townsend, “global payroll services are a response to some of the organization’s needs and drivers”. There are a few reasons why a company would decide to choose a global payroll approach, that Trevor categorizes into 4 main driver groups:
- Organization growth and strategic moves: “Organic growth, moving to different countries, acquisitions, mergers… All these cause quite some complexity in the global payroll landscape and are a key organizational driver”.
- Cost and efficiency drivers: “Businesses try to reduce costs and obtain synergistic effects that boost efficiency, making the most out of their resources”, a search for higher efficiency that affects all areas of the business, including the payroll department and its processes.
- Risk and compliance drivers: As Trevor explains, “payroll represents around 70% of the cost base of most businesses today, and it is an area of the business that can be subject to fraud, so companies are very attuned to managing this risk, making sure that the right controls are in place to ensure the necessary rigor around those processes”. And then, he adds, comes the compliance aspect, “ensuring that the company is not only aware of all its obligations in all territories, but that it continues to be on top of them. In most countries, we have seen an increase in regulation in this area in the last few years”.
- Agility drivers: “More and more, business leaders are positioning their organizations for agility. Technology and globalization are driving it, Covid has boosted it and, without a doubt, it’s a need that will continue to increase in the coming years. Agility is needed to make the most out of all investments a company makes, and as part of that, payroll also has to be agile and be able to support those moves”.
The key challenges of global payroll
Marc-Oliver Fiedler explains that, besides these current trends, there are also quite a few challenges specific to the payroll area of any multinational organization that increase the need for new solutions when it comes to managing global payroll.
“When you’re managing payroll in a multicountry environment -begins Marc-Oliver- and because at the end of the day, payroll is hyper-local, you soon realize that you need local experts and systems on the ground. But that means that you end up with many disgruntled systems, each of them operating in their specific country, but not connected to each other. Communications become, then, fragmented, and data ends up sitting in lots of different silos”.
In that environment “many of the organizations we’re talking to report that their processes are still very manual. Even today, in 2022, a lot of the day-to-day activities of payroll professionals are still governed by emails and spreadsheets, with data being copied and pasted manually from one document to another. This is not only extremely time-consuming, but it also opens up the door to errors and, in the worst case, also fraud”.
Finally, this fragmentation across lots of different environments and lots of different systems also hinders the establishment of strong oversight and governance, processes that in payroll are absolutely essential.
“With all the changes we have experienced in the last years with new mergers and acquisitions, the pandemic, the rise of remote work… these complexities and challenges have just increased -concludes Marc-Oliver- and the need for more agile solutions that can address these obstacles in flexible, adaptable manners has become even more apparent”.
The evolution of global payroll
Over the years, multinational organizations have applied a variety of solutions for payroll management in order to better address these challenges and ensure, to the best of their abilities, accuracy, compliance, and a streamlined workflow. These approaches can be split into three main categories:
The decentralized model:
When companies start growing organically, their main goal is increasing their business and, obviously, other aspects such as those related to HR and Payroll are just not a priority. Once growth has taken place for a while and organizations start facing the difficulty of having to manage payroll in several new countries, many of them start setting up local entities, working with local providers that can help them handle payroll in all those different geographies.
But, as Trevor explains, “the problem of that model is that, as they keep growing, organizations find themselves in a position where they are working with a high number of local payroll providers, all disconnected from each other, and they cannot easily get control of all those entities, aggregate their data, or have a good overview of their evolution”.
The aggregator model:
At that point, organizations may realize that what they need is to, indeed, have local expertise in all regions where they are present, but, in Trevor’s words, “with a more holistic perspective to serve both the local needs of each entity and the global needs of the organization, facilitating a better overview of all regions and payrolls”.
The aggregator model then offers a way of stitching a wide variety of local providers through one central service. “The aggregator -explains Marc-Oliver Fiedler- takes care of the local environment, fundamentally helping multinational organizations to simplify their payroll operations by having a single contractual relationship with a global partner who is your unique point of contact and selects and manages all the local payroll partners”.
Working with an aggregator “helps standardize your inputs and outputs, and establish some consistent templates across all countries, which also contributes to an easier integration with most of the major HR platforms”.
While this is, in theory, a very good model for global payroll management, some organizations have realized that there are also some compromises involved. As Marc-Oliver explains, “first of all, this model is based on a proprietary network of local payroll operators, where there is no possibility for the client to choose any third-party provider”.
Because of this approach, starting to work with an aggregator is a long and disruptive process that forces the customer to remove all its previous solutions and local partners and roll out the aggregator’s from scratch. This process can take up to two years to be fully completed, causing tremendous disruptions to the organization’s payroll process.
Second to this, once the system has been rolled out and everything is in place, the aggregator’s closed partner network generates a lock-in effect: “Your partner network is as strong as its weakest link, and if in certain countries you’re experiencing difficulties or receiving a service that doesn’t reach your quality standards, you’re stuck. If you want to choose a different local partner, that will force you to get out of the aggregator’s closed network, which will cause that entity to be locked out and separate from the rest of your system”, asserts Marc-Oliver.
In this model, the aggregator is the organization’s unique point of contact, which effectively means that all communications have to go through them, “this creates some delay to get issues resolved, to the point where getting a simple answer to a question from a local partner can take days or even weeks. Communication becomes quite challenging”.
“This model only works -continues Marc-Oliver- if you are willing to fully outsource all your payrolls. Having a hybrid setup, where some countries are run through an in-house payroll team and others through local service partners, is out of the question”.
Finally, while there’s no doubt that the traditional aggregator model brings about some level of process standardization and harmonization, “we’re hearing from many people working with this model that a lot of their day-to-day activities are still quite manual. The reality is that a lot of the payroll data will not come from your central system, you will still have different local data services and sources, and incorporating that into your payroll process in many cases still requires a lot of manual effort”.
The open platform model:
This model, the newest to arrive in the payroll industry, represents a more flexible alternative to the traditional aggregator model, “pulling together the ample choice available from the decentralized model, in combination with central control, transparency, process standardization, and data visibility”, explains Trevor Townsend. “The open platform model has been conceived to meet the demands of those global organizations in need of a more dynamic, faster-paced type of work”.
One of the key differences between the traditional aggregator model and this new open approach is that, instead of the “rip and replace” method from the aggregators, this new solution offers a layer of technology that sits on top of the organization’s existing global payroll network.
“You can connect your in-house payroll systems, your regional payroll vendors, and local in-country partners very quickly and with low disruption to your payroll landscape. Through a surprisingly rapid implementation, you achieve higher awareness and better process control within weeks”.
Besides the speed of the process, another key benefit of this approach is that if the organization is happy with its current payroll landscape, whether it is a hybrid model or it relies fully on third-party providers, it can be kept just as it is. As Trevor puts it: “If you’re satisfied with some or all of your local vendors, you can just keep them, there’s no need for an open-heart surgery”.
By pulling out that middle layer of communication which is the aggregator, continues Trevor, “you can be much more agile, which helps you better meet the demands of the growing business. You have a direct connection with all of your local providers, allowing you to operate to later payroll cut-off dates, be more flexible, and quickly get any answer you need from them”.
Contacting local service providers directly also drastically reduces the costs for the business, as it is possible to search for better rates and negotiate prices with the providers, rather than being stuck with the cost set by the only local service chosen by the aggregator.
Of course, it must be mentioned that this model requires a more hands-on approach from the organization, as it entails a multitude of contact points, one per service provider, which requires closer attention than when working through an aggregator.
However, this increase in work is generally made up for by a much more tailored payroll delivery. Under the open model, ICPs are selected individually and their workflows and processes can be customized to match the exact requirements of the business.
Similar evolutions everywhere
As Marc-Oliver Fiedler explains, this evolution is not unique to payroll: “In the last decades, we have been observing similar trends in other industries such as restaurants, accommodation or entertainment. They also evolved from decentralized ways of offering certain services, to becoming more centralized with the arrival of franchise models and global chains, which offered continuity and helped customers set expectations accurately, independently of their location. However, over the last few years, the internet catalyzed that trend, favoring the emergence of open platforms”.
“These open platforms facilitate access to a variety of different providers, products, and services through one central marketplace, offering lots of choice and flexibility into what’s available, enabling transactions with different vendors in a standardized and reliable way. Now you can just find the solution that best fits your needs”.
What we’re seeing now in the payroll world, assesses Marc-Oliver, is “a catch-up with this trend that has already transformed most other industries”.
What are the benefits of having a centralized global payroll model?
“In any case, independently of the type of service chosen, there are some common benefits that come simply by having a centralized global payroll model”, states Trevor Townsend.
“The first one is simply knowing what’s going on in the business from a payroll perspective, understanding what your process looks like, and ensuring that both your in-house team and your local vendors are operating in a documented and standardized way”.
“When we spend time with our customers, they tell us that they spend countless hours just putting together reports. In this day and age, people should have the data they need at their fingertips”. “Every employee has a vested interest in making sure that their data is accurate and right and having a global model that helps to report across that data is essential”, asserts Trevor. Having a single platform also helps to control the data flows across the organization, “it will help you have better data standards, clearer data flows, automate as much of it as possible, and eliminate a lot of needless data-checking”.
But this is not all. Having a centralized global model in place can help to “switch some of the focus away from transactional payroll and processing and into things like governance, working contract, and local regulation changes. This would help the local business units consume a lot of this information in benefit of the whole organization”, states Trevor.
In-house, externalized, or hybrid? Agile and flexible or centralized and rigid? Preserving the status quo or evolving? When looking into global payroll management possibilities, these are just some of the questions an organization needs to answer to make an informed decision on which model is the best for its specific needs.
As this text has made apparent, the payroll industry offers a variety of solutions that guarantee for each organization more than enough choice to find the global payroll management service that can best address their needs and demands.
Find here more information on the different solutions available and how they compare to Payzaar’s.