4 Major Hidden Costs of a Decentralized Global Payroll
Erez Greenberg| Feb 18, 2021
Here’s a question we get asked all the time. Will unification of our global payroll save me money each month? The simple answer is yes, and not just because of the reduced costs of hiring a single vendor for your end-to-end payroll management.
The truth is, it’s about a lot more than any ‘hard costs’, whether that’s multiple vendors, systems, or licenses, (although those certainly don’t help.) When your payroll is decentralized, you’re missing the big picture. Here are the financial consequences of a decentralized model for payroll, as we see them.
Adding to your Compliance Risk
In a global enterprise, the realities of organizational payroll are extremely dynamic, and laws will vary from country to country. The support of local in-country partners is invaluable. In China, for example, a foreign employee needs to register with national and local tax authorities, and the requirements will vary depending on how much they are making and where the income is sourced from. In the UAE, there are no withholding or registration requirements for ex-pat workers, which makes it a lot easier to stay compliant locally.
The IRS estimates that even within the US, 40% of SMBs pay an average payroll penalty of $845 through failing to deposit withholdings, or incorrect filing. This is locally in the US, where the laws and regulations are familiar. As a global enterprise, you may not know the minutiae of staying compliant in different regions, or the changes to granular processes and laws, so you have to hand over control to the local providers.
By working with a global payroll provider, your local, in-country compliance requirements relating to payroll will be managed by in-country experts and centralized through your global provider. Not only will a global provider ensure you meet current requirements, but they will keep you up-to-date on the changing landscape in each location on a routine basis and in a standardized format for your global organisation.
Errors and Miscalculations
Multiple systems cause more errors, that should come as no surprise. To gain visibility, many organizations add third-party tools and processes, such as auditing software, aggregation technology, and more. However, this quickly adds to your bottom line. In contrast, a single dashboard that provides a full view of your global costs can help you to guarantee that you’re not miscalculating or making mistakes.
A decentralized model for payroll will also incur hidden costs. One example is out of cycle payments because you’ve paid staff too much or too little. Another is overpayments, where you’ve incorrectly paid employees on salary, holiday days, expenses, commission or bonuses.
Overpayments can be particularly difficult to fix, especially if you don’t get immediate insight into the error. Often, companies do not realize they have been overpaying employees for months, by which time an employee could have left the company, forcing you to go through the courts to recoup lost funds.
Adding Visibility and Eliminating Fraud
The more steps removed you are from your international payroll processes, the more likely you are to miss instances of fraud. This could be anything from workers padding hours or timesheet fraud, to deliberate worker misclassifications, pay-rate alterations, or outstanding advances that are never repaid to the company.
Many of the checks and balances you can put in place to combat fraud are much harder or even impossible without a unified management system for your payroll. These include advice such as checking employee data for duplicate addresses or bank accounts, looking for gaps in payroll processes, closely monitoring payroll reports and documentation, and auditing payroll.
Of course, even without deliberate wrongdoing, this lack of visibility over employee information leads to costs and poor practices. If your company has 50 employees in the Product team, split over three countries, how can you look at the siloed information from each region and accurately ascertain if they are being paid fairly, performing well for their salary, or that you’re handling pensions, insurance, benefits, and deductions with consistency? Spoiler alert: You can’t.
Behind the scenes, there are IT costs involved with managing multiple vendors, too. For every new payroll relationship, an organization will need to check IT policies for data security, processing, compliance, and communication, and discuss whether these align with its own.
With a centralized provider, this only happens once. In addition, the risk of a data breach or a cyber-incident is multiplied by the number of vendor relationships you have, whereas with a single platform for global payroll, this is reduced down to a single vendor that handles your sensitive information.
Understanding the Organizational Costs
One of the biggest added expenses of a decentralized payroll is the sheer number of people that it takes to manage the complexity. Of course, you have the initial set up costs of a new provider in each area, what call ‘hard costs’ that are easy to calculate. These could be licenses, administration, payroll managers in each region, and their accompanying infrastructure.
But there are also hidden, or softer costs to take into account. Consider the communication between teams, just to align every payment cycle or any organization-wide change. Then there’s the auditing of any data, which may need to be done 8 times for 8 different countries, or even 16, if each country has multiple entities for different brands or teams.
If you want to get insight out of your data, you’ll then need additional tools and resources for aggregating information, normalizing and labelling, and then reading the output. Manually handling this process is time-consuming, and can also lead to mistakes, both of which add unnecessary costs.
In contrast, you can think about a single provider for a unified payroll as a way to benefit from economies of scale. Doing everything through a single provider not only adds more features to your solution, (auditing and business intelligence for example are both features we include at Papaya Global within our platform) but it also means you’re driving costs down with a single vendor relationship.
Ready to Consolidate? Make Sure You Get the Benefits of Automation
Consolidating your payroll into a single unified process is a smart move, and your bottom line will thank you for it. However, not all payroll providers are created equally. Often, enterprises will look for a big name in accounting or payroll, thinking that they will have the most advanced systems and processes in place – only to find they offer little more than a legacy spreadsheet solution.
Opting for a niche provider that is known for global payroll is a more intelligent decision, providing all the benefits of automation and a robust platform to handle your international payroll from end-to-end.
At Papaya Global, we offer a single unified platform that provides one clear view of your entire operation, anywhere in the world. Payroll is automated and centralized into a single dashboard, integrated with advanced analytics and BI reporting, and utilizes best practices for compliance and anti-fraud, throughout.
See how it works for yourself. Schedule a demo.