Guide to successful payroll outsourcing

With several payroll outsourcing models available, how do you choose one that best fits your business needs? One size does not fit all, so it is essential to understand how the differences in approach can affect the smooth running of your payroll operations.

Here are some key considerations:

Individual payroll needs – no two businesses are the same. An outsourced payroll solution needs to provide a good fit with the total number of employees, the number of locations being served, the complexity of the local regulations in these locations, the business’s expansion plans, the availability of in-house payroll expertise and technology integration needs, among others.

Compliance is key – when partnering with a payroll provider, you are putting your trust in their ability to remain compliant with local regulations. While responsibility for tax compliance and other filings may shift to your provider, the penalties for non-compliance stay with you.

System compatibility – payroll outsourcing service providers typically use a technology tool known as middleware to deliver services, and this needs to be compatible and integrate seamlessly with your company’s human capital management (HCM) system. Finding a payroll provider that uses a flexible system to work seamlessly with your time and attendance (T&A) system or provide outbound integration with your general ledger (GL) can save both time and money in the long run.

In-country provider – choosing an in-country provider can be a good option for businesses to outsource payroll if they have no plans to expand their operations abroad. In this model, the provider is based in the country where the employees work and have knowledge about the local payroll rules, but don’t have offices elsewhere or provide multi-language solutions. These factors could prove to be limitations, however, if the business expands internationally.

Aggregator model – for businesses looking for a single process globally, using an aggregator payroll provider may seem like the perfect fit. However, aggregators usually contract with third-party, in-country providers to execute payroll for global companies, which can result in inconsistent service levels and lack of control and potential risk for non-compliance penalties.

Global providers with local knowledge – using a global provider with local knowledge ensures payroll is processed and delivered in-country by local experts located in the jurisdiction where employees work. Many are able to integrate seamlessly with your HCM, as mentioned above, allowing visibility and control over global operations, with local ticket raising capability for local employees. Sensitive employee data does not cross borders.

Once you have decided on the payroll outsourcing model that best fits your needs, it’s a question of choosing an individual provider that can deliver your payroll requirements most effectively. Based on our experience of managing outsourced payroll operations for many companies around the world, here are our top six selection criteria:

Service Level Agreements (SLAs) with service providers are advisable across all business functions, and especially so with payroll outsourcing providers. Poor performance in payroll delivery not only has a detrimental impact on employees and potentially company reputation, it can also lead to non-compliance with local employment laws, fines, penalties and even jail time for company executives. Ideally, organisations should have global SLAs in place to set expectations across all services, wherever they are delivered.

An SLA sets out the baseline levels of service a business should expect from a payroll vendor, and what remedies are expected if the service falls short of these levels. Ideally an SLA should be part of the contract with the vendor, with a standard of service clearly defined. However, according to our experts, very few companies focus on the required levels or standards for those agreed services: only one in 20 companies broach the topic of an SLA, and these tend to be larger corporates with sophisticated procurement procedures.

The impact of payroll provider under-performance should not be underestimated; it can affect an organisation’s reputation and employee morale significantly. For example, a provider missing salary payments may constitute a breach of employment terms. Similarly, employees not being provided with timely responses to their queries can also adversely affect employee experience and engagement. Statutory payments not being made on time can result in fines or penalties from regulators.

Companies considering outsourcing their payroll should consider asking the potential provider for their position on SLAs. Not every provider agrees to provide SLAs, especially agreements that include a penalty clause for service failures.

In addition to governing the client-provider relationship with a clear and measurable approach, a robust SLA provides insights on performance indicators, demonstrating opportunities for your company to pursue improvements with the provider and within your own organisation as a whole, to help drive it forward. 

Technology has a key role to play in managing outsourced payroll operations. Payroll technology solutions provide analytics to effectively report on payroll performance, to support better-informed business decisions and ensure greater control and consistency in global operations. A comprehensive service and technology solution is essential to providing a global payroll service that also supports accurate and timely global reporting, analytics, visibility and control of core data.

Here is some of the key functionality that technology solutions can bring to payroll management:

Process status – visibility of processing status on an individual payroll basis, across the globe, with easy access to data through a standard global reporting tool that eases everyday workloads. Comprehensive dashboards – charts, heat maps and metric statistics – enable you to fully visualise your payroll results.

Accessibility – the solution should allow management to access the right payroll information at the right time and from anywhere in the world.

Consolidation and integration – being able to consolidate and integrate payroll data from disparate systems into single format, global reports will help produce meaningful insights that can drive better-informed business decisions.

Efficiency – a selection of standard reports, or the ability to download core data into your own data warehouse for internal reporting helps improve efficiency. It also reduces frustrations, enhances employee engagement and so provides an improved payroll service.

Control – KPIs are common in the payroll industry. KPI and SLA monitoring dashboards help keep track of both supplier and in-house service deliverables.

Audit – solutions should have a comprehensive audit facility and reporting tool, to give your auditors peace of mind.

Payroll technology platforms are beginning to adopt artificial intelligence (AI) and machine learning (ML) technologies become better at helping companies automate ever more complex processes. We are starting to see the adoption of more sophisticated AI and ML systems capable of handling multi-step payroll processes – even helping to drive their simplification. 

Another key area of development in payroll technology is improved integration with enterprise management platforms, such as human capital management (HCM) solutions, including time and attendance (T&A) systems. The benefits of using a payroll outsourcing vendor that has integration partnerships with enterprise management vendors like Workday include:

• automated, repeatable and standardised integrations between in-house systems and the payroll outsourcing vendor – enabling the vendor to generate and update data for companies to use in their local offices to process payroll, for example.
• reduced risk through certified, tried and tested integration build and maintenance
• faster payroll deployments and reduced in-house resource requirements.
  
   

A successful relationship with a payroll outsourcing vendor can last for many years. But there are some common pitfalls when outsourcing payroll, some serious enough to warrant switching providers. 

These are some of the top causes of things going wrong:

Accuracy – if an outsourcing payroll vendor gets an employee’s pay wrong once, you will hear about it. If it gets it wrong again, there is a serious issue somewhere in the chain. The reason you engage a third party to take care of your payroll is to ensure someone is there putting time and effort into ensuring accuracy. If that accuracy is absent, chances are you’ll be combing the contract looking for an escape clause.

Keeping up with legislation – payroll-related legislation is a movable feast, especially as jurisdictions move to electronic reporting for tax, social security and labour information, and gradually withdraw pandemic support measures. Your payroll solution must be flexible enough to react at the right time in the right way. Companies often do not have the in-house resources to keep on top of legislation themselves, so rely on external providers to stay up to speed… and compliant. Lack of performance in this area is a very common cause for vendor change.

Systems – even the best software solutions become obsolete, replaced by newer, faster, more capable solutions. Vendors and developers are constantly moving on. If you have a multi-year payroll outsourcing contract, what clauses are in place to ensure the software used to pay your staff remains up to date and can access service support when necessary?

Organisational change – company strategy changes; what worked for you last year might not necessarily be right for next year. The company could be subject to a merger or acquisition, there could be changes in senior management, there might be a group-wide roll-out of a new IT system that renders existing payroll software useless. Payroll vendors need to be able to roll with these punches.

Contact accessibility – one of the most common issues in payroll outsourcing vendor management is account managers not being as accessible as they should be. It can take too long to get hold of the right person to answer a query or resolve an issue, with repeated calls and unanswered emails. Sometimes, there are many layers of personnel or administration to navigate before a satisfactory response to a payroll query is received.

Escalation efficiency – another pain point is the difficulty faced in escalating an issue to higher levels in the payroll outsourcing vendor. Escalation procedures in the vendor company can be slow and inefficient, and the issue may become a crisis before help can be engaged.

Coordination issues – coordinating a multi-country payroll outsourcing vendor relationship is always challenging. But it is made especially risky and arduous when an aggregator model is used. Sourcing a local vendor for each country makes sharing knowledge and coordinating tasks across geographies complex and time-consuming. Different suppliers will deliver different levels of service and output, with no common key performance indicators (KPIs). This causes problems from a central reporting perspective, and means there is no single view of global payroll processing. A lack of coordination for deliverables negotiated in multiple contracts is another common challenge.

Relationship issues – any one of the above might be the cause of friction when it comes to managing the payroll outsourcing vendor relationship, or it may have been a bad fit from the start.

Ideally, you need to be working with an outsourcing payroll partner you can trust to get on with the job and get it done right; someone you can call on for help when it’s needed. You need a partner that provides a responsive single point of contact, wherever you are in the world. Direct access to the country subject matter experts and management is a huge positive.

If you’re looking to outsource your payroll operations, check out our global payroll services. With capability in over 140 countries, we can help you handle your local payroll and compliance – globally.