The value proposition of multi-country payroll outsourcing (MCPO) is beginning to resonate with global buyers.
By Rajesh Ranjan, Everest Group
The current economic climate has put cost reduction at the forefront for most organizations. They are forced to examine all their functions critically to identify ways to eliminate cost and bring more efficiency. Forward looking organizations also see this as an opportunity to set their houses in order—to scale up when the economy starts rebounding.
Outsourcing, in quite a few cases, provides organizations the means to achieve some of these objectives. Multi-country payroll outsourcing (MCPO) is one area that is high on the HR agenda of many multi-national companies (MNCs). No wonder, then, that the MCPO market continues to show double-digit growth, far outpacing the performance of the broader global HRO market (involving three or more HR processes).
Value Proposition of MCPO
So, what are the key value propositions of MCPO that are resonating well with MNCs? Let us look at the value proposition of MCPO using Everest’s Total Value Equation (TVESM) framework (Click here for figure 1).
Given the increased importance of cost reduction criteria in the outsourcing decision making process in the current environment, it is vital to understand in detail how MCPO helps in lowering the overall payroll cost. However, it is also important to keep in mind that MCPO value proposition goes beyond just the cost impact.
Cost impact. Though not the single most important key driver traditionally, reducing cost in a fairly short time has become a critical requirement. As buyers evaluate MCPO, it is important to look at the Total Cost of Ownership (TCO) of payroll function.
There are two key cost components of multi-country payroll: direct cost and indirect cost. MCPO helps in reducing both these costs, which in turn lowers the TCO of the overall payroll function.
Direct cost. These can be one-time or ongoing costs. The one-time cost primarily includes:
• Initial multi-country payroll system implementation cost; and
• Cost of major future upgrades of the payroll system.
Majority of MCPO suppliers bring their own technology solution to the table. This eliminates the technology related capital requirements and frees up the buyer from any upgrade cost in the future. While one may argue that suppliers build this cost in their pricing, the fact that these suppliers are able to leverage their investment across multiple buyers ensure that buyer ends up incurring lower technology cost.
It is also possible for MNC buyers that have already made significant investment in payroll technology in certain countries to leverage that investment than relinquish it. Current MCPO solutions can “tie-and-run” with existing in-country payroll technology while providing technology solution for those countries that are not yet covered.
The ongoing cost of payroll function primarily includes:
Labor cost, including the cost of both payroll processing FTEs as well as the IT professional supporting payroll system in terms of their salaries and benefits; and
Non-labor cost, including the cost associated with corporate overhead, facilities, and other administrative costs associated with the payroll department.
The MCPO value proposition is built on the principle of bringing standardization in payroll process across multiple countries that helps in centralizing payroll processing. Technology is again the key enabler here. On one hand, the standardization and centralization creates economies of scale benefits. On the other hand, it reduces manual interventions through automation, thus resulting in lower labor costs.
Further, MNCs with in-country payroll outsourcing have to manage multiple suppliers, which increases management overhead costs. MCPO enables buyers to have a single contract and standard SLAs with a single supplier, thereby optimizing vendor management and reducing the non-labor cost.
Indirect cost. This includes the cost of risk as it relates to non-compliance and payroll disruption. As buyers make outsourcing decisions, typically the focus is on direct cost reduction. However, it is critical to understand that cost related to non-compliance within payroll can be prohibitively high. It becomes more complex in a multi-country payroll environment as organizations need to remain up to date and comply with the ever-changing inter- as well as intra-country legislations and regulations.
MCPO helps buyers reduce this risk and the associated costs substantially by shifting regulatory compliance requirements to the supplier. Further, they also save on any payroll disruption cost that may result due to system failure and/or departure of key payroll personnel (especially in small employee population countries).
Buyers typically achieve 15-to-20 percent direct cost savings through MCPO; in some cases, they achieve greater than 30 percent cost savings. In addition, it enables them to move from a fixed-cost structure to a variable cost structure that provides greater flexibility to respond to volatile business environment that we are living in currently.
Business impact. MCPO facilitates better management control and insight. Historically, MNCs managed their payroll at the individual country level, either keeping it in-house or outsourcing locally. It resulted in disparate processes and systems across different countries, which made even the basic consolidation of payroll data at the corporate level often a time consuming effort requiring lot of manual interventions.
MCPO enables consistent data capture across international subsidiaries, which helps in easy and quick consolidation of payroll data. It also provides greater control and insight into international operations by allowing comparison of relative costs and deployment levels across countries through enhanced reporting and analytics. As an example, a transportation and tourist company achieved greater visibility of data and management information by standardizing reporting capabilities across several countries in Europe as part of an MCPO arrangement.
Strategic impact. Given the increased globalization, an increasing number of organizations are entering and expanding into new regions, either organic or inorganic. These organizations look for solutions that help integrate acquisitions and add locations through swift deployment of the requisite payroll infrastructure and capabilities consistent with overall organizational policy. MCPO provides that option.
MCPO suppliers continue to make significant investment to increase their country coverage and create solutions that can be rolled out rapidly in new countries. For example, the MCPO approach enabled a Canadian headquartered electronics manufacturing services company to relocate manufacturing from geographic high cost areas to low cost areas by quickly deploying the payroll infrastructure in regions such as China, India, S.E. Asia, and Eastern Europe.
Importance of Right Technology
Technology underpins any MCPO solution. In addition to direct technology cost impact, it plays a central role in process standardization and optimization that in turn impacts overall payroll cost and service quality. Availability of business intelligence tools further expands the value by providing the ability to slice and dice data to compare relative costs and deployment levels across regions. Also, the ability to integrate payroll data with the ERP, especially broader HR and financials, is becoming a key consideration behind technology choices.
Everest research shows that there are primarily three types of solutions available that differentiate the ability to handle gross-to-net calculation for multiple countries. These are:
• Single platform solution. This is essentially a single system on one database that handles core payroll processing (gross-to-net) for all countries.
• Aggregated solution. In this solution, separate in-country software systems process payroll at the country level. The country payroll data is then aggregated to provide a consolidated view at the company level.
• Integrated hybrid solution. This solution is essentially a mix of single platform solution and aggregated solution.
The applicability of a solution depends on many factors, with the distribution of buyers’ employee population across countries and their existing technology investments being the most prominent. A single platform ERP-based solution might be an appropriate solution for an organization that has a sizeable number of employees in each country of operation and is looking to replace their existing systems. An aggregated solution might be better for an organization that has small employee populations spread across multiple countries but wants to leverage their existing technology investment, especially for large employee base countries.
With the increased maturity of suppliers, availability of innovative technology solutions, and new service delivery options in terms of onshore-offshore mix, the value proposition of MCPO is clearly resonating well with buyers.
Payroll Across Continents
