Is this the end of payroll aggregators?
There is a famous saying: ‘The foundation of a company’s success, lays on the structure of its payroll’
Companies are built on the strength of their employees, and happy, productive employees are vital for company growth and development. But how do we get this?
Employee satisfaction is driven by many factors, one of the most important being the payroll system (i.e. salaries and remuneration). Being paid on time and in full, every time is an expectation for all employees which means that payroll and human resources are two of the most important functions of a running company. A good payroll system can directly impact the smooth running of a company’s operations.
A global village
As the world has become more interconnected, international companies have expanded their operations beyond the boundaries of local regions. Though an exciting development, it presents a number of complexities. Global payroll management across multiple countries is a challenging task for HR managers. Complying with fast-changing local laws and regulations is not only exhausting, but can also demands huge investments.
In the past, companies would enter into multiple payroll contracts with local vendors for every country in which they operate. This was highly complicated for teams to handle, requiring huge time and resource commitment. As a solution, the HR/Payroll industry came up with the payroll aggregator model.
Payroll aggregator model
The payroll aggregator model was perceived as a step forward from the local vendor model. It is a type of payroll outsourcing for companies who have employees across the globe. This model worked on the foundation that a payroll aggregator (the vendor), acts as a payroll manager taking all the data from the company (the customer), then, by using multiple local payroll partners in collaboration with an aggregation platform, they could provide uniform data in one central interface.
This gave companies the payroll coverage they needed across multiple geographies, and the peace of mind that their payroll was being effectively managed. However, there are risks associated with this model that can impact a company’s success. So what are some of the cracks in the payroll aggregator model?
Common pitfalls with the aggregator model
By looking at the matter in detail, one can easily visualize the cracks in the payroll aggregator model. Let us dig-in to some of the factors responsible for the collapse of this famous version of payroll management (we would rather say payroll mismanagement):
Payroll managers often believe that the single contract model enables greater data security, data privacy and confidentiality. The reality is that most aggregators have further sub-contracted or outsourced the company’s payroll to their own network of local vendors. So, to think of it as a chain, where the company previously worked directly with local vendors, the third-party aggregator now does the same. The multi-contract system still affects the company, though indirectly.
What are some of the other pitfalls associated with the payroll aggregator model?
- It’s an expensive solution: Payroll aggregators often charge double commissions – a margin on top of local provider fees and significant overheads. This means fees can be 2-3x more costly than the original domestic payroll system. Some aggregators charge up to a 40% margin, a significant amount for the client, just for the service of managing contracts.
- Little flexibility: The payroll aggregator model can be rigid and inflexible, where in some cases they do not manage outsourced payroll or in-house payroll setups. They are indifferent for any customer specific reporting needs or service levels, resulting as a complete failure for many multinational companies.
- Lack of options: On adopting the aggregator model, companies have to tear and replace their previous local salary systems. This has follow-on impacts for operational risk, financial cost, resources and time.
- Inefficient global service: The payroll aggregator system has a ‘central service centre’. This means that global payroll queries are all submitted to this helpline leading to slow response rates. Why? In order to cover a large number of countries (and their specific regulations), queries are pushed to the local vendors. What follows is often a game of cat & mouse as the service representatives chase the local vendors for answers. This process results in delays and inefficiencies.
- Limitations around new services: Many companies find that the aggregator model limits their ability to quickly change the services or the service terms. Such changes would mean a change of individual contracts between the aggregator and the vendor, which is a time-consuming and costly exercise.
- Potential for breach of confidential data: Due to the additional layers of third-parties involved, company data can become compromised, risking loss of proprietary and confidential information.
- Conflicting data formats: Where the client and aggregator use different systems, the format of data requirement request from the aggregator (and ultimately their underlying local vendors) can be inconsistent with the norms of the client’s business. Having to structure the data to meet the specific requirements of the aggregator is an extremely manual process requiring additional time, cost and even extra employee resource.
Is the model really broken?
Whilst beneficial for companies looking to easily manage their payroll across multiple countries, the aggregator model has several flaws. The need for a good payroll management system is not only high, but is critical to business success. The best payroll management solution should be an all-in-one solution that enables efficient global payroll processing, delivery, reporting and workforce management. Such a solution should:
- Centralize global data processing
- Have built-in compliance and control
- Drive operational efficiency and cost-savings
- Help businesses reap the benefits of global outsourcing
As they say: ‘Winning the workforce will lead to winning the market’.
