Companies have struggled to manage their global payroll operations more effectively for many years. Various models have been in use over the past 10-15 years, but the existing models have all been plagued with compromise and challenges. However, a new model is emerging to break the existing compromises and take global payroll to the next stage in the global payroll evolution: an Open Payroll Marketplace.
But let’s first examine some of the traditional models of managing global payroll
The Evolution of Global Payroll
Managing payroll across a number of different countries is highly complex and challenging. Differences in local laws and regulations are so distinct there is not a single global solution that is able to cover the footprint of multinational companies comprehensively without extensive investment in localization. The one-size-fits-all global solution has been elusive and may never be built. Even the largest global payroll vendors like ADP, Ceridian or NorthgateArinso do not have a single global payroll solution that is capable of processing payrolls across countries.
Phase 1: The Decentralized Model
Many companies have historically adopted specific local solutions to ensure that they are paying local employees in a compliant way, often outsourcing that responsibility to a local service provider. And while this decentralized approach has tapped into the local know-how of in-country payroll experts, it comes with a number of key challenges:
- Lack of process standardization – each country follows different processes and uses different tools
- Lack of data aggregation – data sits in local systems and it is virtually impossible to generate aggregated data visibility
- Large number of vendors to manage – have to negotiate and manage relationships with vendors around the world
Phase 2: The Aggregator Model
In response to these shortcomings of the decentralized model, about 10 years ago a number of global players introduced the so-called Aggregator Model. As the name suggests, in this model a central provider offers to aggregate the local solutions on behalf of the customer. They offer both commercial and operational harmonization: single global contract and pricing as well as streamlined processes and data. However, while the Aggregator Model does achieve some level of aggregation and hence simplification, it comes with some major flaws of its own:
- Lack of choice – customers are bound to a closed network of vendors dictated by the global provider, with a huge switching cost to get in and out of the closed network; in order to adopt an Aggregator solution, customers have to rip and replace all their existing local payroll systems which present a tremendous burden in terms of time, operational risk and financial cost
- Inflexible – these solutions tend to be very rigid, not supporting a mix of in-house and outsourced payroll setups (which tends to be the case in large multinational companies) nor accommodating customer-specific service levels or reporting needs
- Expensive – because Aggregators charge a margin on top of the fees of the local providers, the fees for the Aggregator solutions are typically 2-3 times the rates of the domestic payroll solutions
So while the Aggregator Model starts to address the challenges of the fragmented processes and data, it comes with its own set of major drawbacks in terms of lack of choice, flexibility and economics.
So what is the next step in the global payroll evolution?
Phase 3: The Open Marketplace Model
Looking at the broader economic evolution we have seen many industries start off with decentralized solutions, then move to aggregator/franchise models, to finally arrive at open marketplaces, that enabled by the connecting and transparency-providing powers of the internet. Just looked at what has happened over the past decade or so in industries like hotels, taxis, airlines, and even retail. Today, open marketplaces like Booking.com, Uber, Kayak/Priceline, and Amazon have demonstrated to power of open marketplace concepts and disrupted many of the incumbent closed-network models. What all of these marketplaces have in common is the fact that they provide open access to the best possible local providers will standardizing the ways of connecting and transacting with these local vendors.
The time feels ripe for global payroll to go through a similar transformation, to move towards an open payroll marketplace where customers can freely choose their local providers and collaborate with these local providers through a modern, harmonized platform. In many ways, this open payroll marketplace model offers the best of both worlds: free choice and flexibility paired with an ability to standardize and aggregate processes and data across local solutions. The benefits for customers are obvious: achieve simplification and harmonization while staying flexible and having choices. Which specifically means in the open marketplace customers can continue to collaborate with their preferred existing local payroll providers, keeping the disruption and the cost of the integrated solution low for the customers. At the same time, the payroll marketplace provides a standardized and simplified user experience for the customer and its payroll managers.
The Evolution Towards an Open Payroll Marketplace is Happening Now!
While many of the traditional global vendors are naturally married to the Aggregator model that locks in their customers and puts them in control of the client relationship, new innovative startups are starting to push the envelope by building open, easy-to-deploy marketplaces of the future. So, the question to ask yourself is: Are you ready for the next step in the global payroll evolution? Learn more about the difference between the new open marketplace model and the traditional aggregator model here.