The 7 Hidden Costs of Decentralized Global Payroll
Mar 9, 2016 | Tag: Optimization
The million-dollar question for many companies considering integrated global payroll is whether this strategy will create clear savings. In some cases, organizations have reduced costs by as much as 30%; for others, the business case has proved far more underwhelming.
Upon closer consideration, however, the economics of utilizing a single global payroll software application are typically more compelling than most stakeholders realize. The reason they don’t always seem so has more to do with comparison –specifically, the way the costs of operating a decentralized, (i.e., non-global) approach have traditionally been calculated.
When looking at the costs of a decentralized payroll management process, stakeholders often view only an ‘as is’ figure. That figure is typically derived exclusively from the costs that are readily available and accessible, such as headcount, software licenses, and the general cost of global payroll outsourcing.
At times, a company may account for the mitigating impact of ‘soft savings,’ – such as more streamlined global payroll compliance, and thus reduced risk – only to fail to factor in many of the hidden costs that may exist. (For example, by omitting the cost of ‘shadow labor,’ which is the time of those individuals who are working on payroll activities but whose time is not allocated to the payroll function.)
There are a large number of potential hidden costs areas to consider when assessing the overall cost of a non-global approach to payroll, but the seven below are the most common. Given that the magnitude of these costs tends to vary depending on the size of an organization, we’ve explored the potential costs through the lens of a company that is running payroll in 10 countries, has 2,000 employees, and outsources to multiple vendors.
- Communication costs: In this scenario, the organization could be relying on as many as 10 local vendors to manage its payroll – and of course, those vendors can’t magically deliver payroll each month without a number of people in the organization interfacing with them regularly. Often this will be different people in each country who will be in continuous communication to check the vendors’ work and manage various tax requirements, bonus payments, and so on. This communication time can add up to hundreds of hours per month – creating costs that are often absent from an as-is analysis.
- Overpayments: There is tremendous hidden cost to not doing things properly, yet frequent payroll errors remain a common affliction among even the most sophisticated multinational organizations. Unfortunately, mistakes are an occupational hazard for payroll; when they happen, it’s usually due to human error – but human errors are most common in environments where there is a lack of centralized governance and automation. Overpayment errors, in particular, can be especially costly and easily go unnoticed (made in a variety of ways such as incorrectly recorded salary, holiday, notice monies, expenses, or bonuses). Employers have to be very wary of regulations relating to the recovery of overpayments, as the process can be a major challenge. If, for example, an overpayment is discovered after an employee has left the company, the employer may even have to go through the courts. When you factor all of the combined hidden costs associated with rectifying inaccuracy, the figure can be very significant.
- Cost of poor performance: Further to the previous point, clarity over how well the payroll operation is performing globally in terms of accuracy and reliability is another factor to consider. There could be a whole range of underlying issues that aren’t easily detectable without an effective global payroll analytics mechanism. For example, if our hypothetical organization pays $120 million in wages per year but lacks access to performance data to ensure the accuracy of gross-to-net deductions, taxes, liabilities, insurance, and pensions, the company could be making consistent miscalculations that are leading them to over-pay for payroll on a per-person basis.
- Manual reporting overhead: With a fragmented approach that relies on multiple systems, the cost of manually producing employee data for reporting purposes can be excessive. Yet since so many decentralized payroll technologies lack holistic reporting features, manual reporting remains one of the most prevalent (and unnecessary) issues driving up the cost of payroll and costing staff time to be wasted on efforts that drive no return. More advanced cloud-based solutions can deliver self-service reporting functionality through a unified global payroll solution with the click of a button.
- Overstaffing: Very often, a decentralized model relies on a small number of key people in each country who possess all the knowledge of how their local payroll operations work. Were one of these key people to leave, or be absent during a critical period, the business would likely need to overstaff the function to avoid a potential payroll disaster. That’s not only another added cost, it is also a potential single point of failure – a failure that could lead to expensive penalties should anything go wrong. For example, in countries like Spain, if payroll is not processed accurately in just one month, the non-paying company can be fined by its local authority.
- IT security compliance: In our hypothetical 2,000-headcount scenario, it’s likely that the organization will have up to 10 different vendors all managing activity relating to data protection, security, and disaster recovery. To ensure payroll compliance, an audit must be performed on an annual basis, which could mean doing 10 audits – one for each vendor – and using the procurement team’s time and effort to negotiate contracts with each vendor. It is not uncommon for vendors to be out-of-contract or go dark during an audit to reduce costs, but the risk of that approach far outweighs the savings.
- Payroll Fraud: Despite a company’s best intentions to avoid it, it is possible for payroll fraud to go undetected – especially if it occurs in smaller payroll-office locations that have limited contact with central headquarters. For instance, an office manager in such an operation could be paying salaries to 30 people, when only 25 real people exist on the payroll. Without a system to reliably control a global payroll of 2,000 people and monitor for discrepancies of this kind, fraud can easily go unnoticed.
Ultimately, not every business is ripe for a global payroll change program – but lower as-is costs alone should never be reason to rule it out. By looking at decentralized payroll costs without digging deeper into hidden expenses, companies can think it’s smarter to stick with what they’ve got without realizing how inefficient and mismanaged their efforts actually are.
Once the true costs of the current operation are fully identified fully and compared with the costs of moving to a more integrated, unified global approach, many organizations see – and choose to realize – cost reductions as great as 30 percent. Learn more about whether your organization can benefit by clicking here.