This article on global payroll was originally written for GPMI.
Multinational organizations are beginning to revise strategies for their evolving global activities.
Globalization is one of the top growth strategies for many multinational organizations. As operations expand beyond borders, U.S.-based executives are revising business plans and strategies to respond to the evolving global scope of their activities. That’s why, across functions such as business development, human resources, and finance, many U.S.-based multinational companies have centralized strategies and service models to support evolving global needs.
Unfortunately, the same can seldom be said of the payroll function at multinational organizations—an area of the enterprise that is reluctant to embrace change. Even multinational organizations that have consolidated their fragmented payroll operations persist with a two-pronged approach to global payroll, in which U.S. and international payroll are siloed, resulting in disconnected systems, teams, and processes.
Explained below, reliance on a bifurcated payroll model can lead to negative implications for the enterprise. It’s time organizations think of “global payroll” as a harmony between their U.S. and international payroll operations.
Why the Bifurcated Payroll Model Persists
Among multinational organizations, the status quo involves using internal team embers to process domestic payroll (or to provide administrative support to a single service provider) while outsourcing international operations to a selection of regional or country-specific payroll vendors. This bifurcated model is the combined outcome of several factors:
1. Business Growth, Economic Trends
In 2016, 87% of U.S. companies agreed that international expansion is needed for long-term growth. Even amid political and economic volatility in much of the world, many U.S.-based companies can only thrive if they maintain business opportunities overseas.
2. Payroll-Industry Dynamics, Gaps
The payroll servicing market has long maintained geographic biases. For decades, U.S.-based companies worked seamlessly and inexpensively with U.S.-based payroll providers. These same providers have shied away from tackling the complexities of global payroll, choosing instead to develop their core solutions for domestic payroll and catering to either big enterprises or small businesses. The reluctance of U.S. payroll solution providers to build a unified model that can scale as organizations expand overseas is a key contributor to the state of today's payroll strategies.
3. Piecemeal, Need-Based Selection Efforts
By the time a given organization has matured enough to engage in international expansion, it tends to be firmly rooted in its existing U.S. payroll model and software solution. So, when opening new offices abroad, enterprise stakeholders are reluctant to re-evaluate the existing payroll approach and focus instead on addressing immediate payroll needs for each new country.
Consequently, they contract out the international portions of their payroll in a piecemeal manner as new country-specific payroll needs arise. As organizations expand to new countries, they continue to add payroll vendors that can satisfy local needs, creating further complexity in their payroll data and processes.
On a short-term, case-by-case basis, that “patchwork” approach can work out just fine, with overseas employees paid, compliance obligations met, and legal penalties kept to a minimum. Eventually, however, this fragmented approach to global payroll can grow into a massive liability.
Impact on Domestic Payroll
Over time, the fundamental flaws of a piecemeal approach to international payroll inject unnecessary risk into a multinational organization. The first cracks often appear through the shifting responsibilities of a company’s internal payroll team.
When a company operates exclusively in the United States, the payroll staff typically relies on a single payroll system or vendor that integrates with the organization’s core HR and finance solutions. Though the features of domestic payroll solutions vary across the market, most include reporting and audit-trail functionalities and can automate key payroll processes. Since their scope is limited to the United States, those systems can often execute payroll in a standardized way.
As a result, the payroll teams of many U.S. companies are capable prior to international expansion of operating efficiently and effectively. With the right controls and oversight in place, a U.S. only organization can achieve high levels of accuracy and productivity in its in-house payroll operation.
Once expansion begins, that starts to change. With every new office may come a new local payroll vendor with its own payroll system, country-specific processes, and contractual standards. Incorporating those systems, processes, and standards into the existing payroll function can demand a very high level of manual effort from the in-house team.
Monitoring international payroll cycles, coordinating vendor activities, correcting data issues, and merging data from multiple disparate systems places an administrative burden on a company’s U.S. payroll staff. As the U.S. team’s vendor-related responsibilities grow ever greater, companies have two options: 1) hire additional personnel, or, 2) watch the productivity, accuracy, and efficiency of their domestic payroll function decrease.
How It Hurts the Enterprise
As an organization’s global expansion continues, the lack of standardization in its international operations often leads companies to hold their U.S. payroll operations to different standards than their international payroll. Over time, that creates problems in several different areas.
- Cost-Benefit Can’t Be Analyzed: With so many vendors providing services under different contracts and service level agreements, hidden costs abound—making it difficult to accurately assess costs against value. The problem is exacerbated by the dearth of real-time transparency and cost data from most international payroll vendors.
- Compliance Risks Expand: In the event of regulatory and statutory changes in international geographies, changes may not be applied to vendor solutions in a timely manner—putting organizations at greater risk of incurring noncompliance penalties. The associated liability issues and compliance coordination procedures can also vary widely across the various vendor contracts.
- Data Integrity Goes Down: Due to the need for manual data transfers and data mergers, the accuracy of organizations’ global headcount data, employee information, and reports becomes compromised with a two-pronged approach to global payroll. The lack of data integrity can enable small geographies to become cost centers (due to frequent errors, compliance issues, reprocessing needs, and so on).
- Status Quo Doesn’t Scale: As expansion (and piecemeal vendor selection) continues, an organization roots deeper and deeper into the bifurcated model. So as more and more overseas employees are added to the international payrolls, the company’s short-term vendor decisions transform into an entrenched status quo that fails to align with the business’ global future.
Global Business Demands a Global Solution
Ultimately, shifting from “domestic” to “multinational” can be one of the most important milestones in a U.S. company’s history. Yet by neglecting to place a scalable global foundation underneath their payroll processes, organizations inadvertently arrive in circumstances that make continued global expansion more complex and challenging than necessary.
To make it easier, growing companies should prioritize longterm decision-making in payroll the same way they prioritize it elsewhere in the enterprise. That means avoiding the kind of short-term, cost- and need-based decision-making that can lessen data quality and payroll productivity down the line.
Though the U.S. payroll industry has long lagged in servicing the expanding enterprise, its international counterparts are beginning to catch up to the reality of globalization. A small number of international payroll vendors are now providing competitive solutions for U.S. payroll, making it possible for U.S. organizations to prevent the “two-pronged” payroll phenomenon from happening.
By engaging a global payroll solutions provider during an early phase of expansion—and by incorporating U.S. payroll operations into the same global platform used to service payroll internationally—organizations can achieve a unified data warehouse that supports global business growth, minimizes risk across the payroll function, and drives a higher standard of accuracy and transparency across the administration.