Pan-European Payroll Outsourcing – An insurmountable challenge? Think again.  

21 March 2010:

Pan-European Payroll Outsourcing – An insurmountable challenge? Think again.

Jill Stabler, Managing Consultant - Alsbridge plc.

How to best manage pan-European payroll continues to challenge even leading organisations. A tangle of rules, varying legislation, process complexity and often non-existent documentation means that it is frequently left alone. After all, even if it doesn’t work ideally, offering the service levels, employee experience consistency, Management Information (MI) quality and employee cost transparency that most would aspire to, it normally does more or less work. People get paid. So maybe it is best left to continue that way, given the effort of change required – right?

Wrong.

The pan-European payroll landscape has been changing rapidly over the last couple of years. You might be surprised at how much things have evolved. Whilst the typical challenges continue to exist, recent developments mean that there are pragmatic, robust, and above all achievable outsourcing solutions to address them.

A reassuringly familiar challenge
The first thing to understand is at a high level, the payroll challenges experienced by organisations operating across diverse European countries are not unique: lack of standardisation; works councils; language requirements; diverse and frequently changing legislation; expatriates; fragmented systems landscape; manual processing; difficulty ensuring compliance and sourcing skilled staff among others. To some extent every organisation experiences at least some of these issues. This is no surprise given the way in which organisations with a wide geographical footprint tend to grow – via entrepreneurial in-country growth or merger and acquisition (M&A) activity, both of which often mean that in terms of support functions such as payroll, a company’s operations resemble a collection of SMEs rather than a true group. A few organisations have chosen to try and address this issue internally via creation of shared service centres, but many leave how to manage payroll to the devices of each individual country which leads to sub-optimal inconsistency and lack of control.

Reassuringly however, there are pan-European payroll outsourcing success stories out there. In fact they are steadily growing in number as mindsets continue to shift and evolve from the “can’t do” to the “maybe we can do” against a backdrop of growing cost, compliance, service and information quality pressures. After all, half of the battle to mobilise for pan-European payroll change is all about establishing and buying into a vision. Once this is agreed, and the thought process has taken place, just how outsourcing could enable that vision starts to become clear.

“Do you need an ERP solution?
Broadly speaking, ERP payroll is desirable to large organisations wishing to reap the benefits of fully integrated systems, or to those with plans for aggressive growth as an enabler for the same. It is however very difficult to make a business case for implementation of new payroll systems in small population countries or markets. This can then undermine the benefits case for an organisation’s HR and payroll transformation efforts by leading to inconsistency in service delivery model and branding between countries. This in turn perpetuates the age-old challenges of poor MI, low process compliance and overly complex and varied processes which logically leads to questions around the viability of either the overall programme, or its true transformational potential.

However, the good news is that typical ERP viability thresholds have been falling. Whilst 700+ is still an optimistic target for traditional ERP implementation, over the last 12 months Software as a Service (SaaS) or ‘on-demand’ ERP solutions have well and truly arrived on the market, rather than being simply aspirational. And what does this mean? Outsourced ERP-enabled solutions are now accessible for populations of 250+, which marks a significant shift in the technology landscape.

..... but what about the really small countries?”
A very good question. Very low population countries or markets are often assumed simply not to have the scale often required to make any kind of centrally managed outsourcing worth the effort or investment. However, for those countries or markets of 5 people here and 25 people there, service delivery and MI consistency can be achieved by using an outsourcer as both processor and service aggregator (meaning the supplier uses its own engine, whether ERP or proprietary, to process payroll for some countries, and partners with smaller local suppliers to process others). These small pockets of employees can thus log on to the same ‘portal’ as their high volume country counterparts, and submit their data in the same way, but on the back end the outsourcer transmits this data to a network of small in-country partners for payroll processing, then the results are uploaded back in consistent format giving a single source of MI. The outsourced supplier manages the network of in country partners, meaning that the benefits to the client of having one relationship to manage and a single point of accountability are still accessible.

Navigating the supplier landscape
The supplier landscape for outsourcing pan-European payroll is by no means saturated. However, careful scrutiny and robust evaluation is still essential to understand the pros and cons of each supplier and their delivery model, avoiding costly mistakes of judgement and ultimately selecting the best solution for your individual organisation. Pan-European service delivery models broadly fall into 3 main categories:

1. Locally sourced payroll – typically the as-is for organisations currently outsourcing on a country by country basis;
2. Enterprise payroll plus locally sourced payroll – can be a good fit for organisations who have critical mass in some countries but not others; and
3. Payroll aggregation – as option 2 but where greater service delivery consistency and a single point of contact across all countries is desired.

Prima fascia, option 3 sounds the most attractive, but the point is that there is no one size fits all answer. The cost and service implications of each option should be properly investigated, understood and evaluated before a decision to adopt a particular service delivery model and provider is made. It is also worthwhile pointing out, in contrast to other Business Process Outsourcing (BPO) models, payroll outsourcing almost always involves a transfer to a supplier owned platform, whether ERP or proprietary. This is because payroll providers gain economies of scale and reduced risk of non-compliance and SLA-infringement. This variable also has an important part to play in the evaluation and selection process.

And what about the business case?
The financial business case for pan-European payroll outsourcing typically demonstrates around 15% run rate savings. This is lower than the typical business
case for an IT or F&A outsourcing deal, primarily due to higher process complexity and varying country legal requirements and language requirements, but can still be a prize worth pursuing. Especially when combined with the non-financial benefits of:

• increased focus on core competence and high value-add activities;
• a variable rather than fixed overhead giving flexibility to respond to volume changes due to M&A or divestment activity;
• consistency;
• a new and better service delivery model,
• a lever for change; and
• quality MI and process and technology innovation

Project payback periods have historically also been challenging, but with the SaaS model lowering upfront systems implementation costs significantly - by an estimated 30-35% on ERP and more on alternate systems – this challenge is easing. In fact, recent evaluation exercises have shown that the cost of having a supplier run a managed payroll service on a client-owned instance of ERP is fast-becoming prohibitive. SaaS, or on-demand, platform solutions are a new way forward, and a real outsourcing enabler in both business case and service terms.

Comment
The pan-European payroll outsourcing landscape has evolved significantly in recent years, and is now well placed to overcome the myriad of challenges faced by organisations operating across a diverse geographical footprint. But contracting for an outsourced solution doesn’t put a tick firmly in the box. As with any outsourcing transaction, whether for IT services, Finance & Accounting, wider HR or just payroll, the caveat remains the same. The right top down support and change management effort must be made to make it work. Developments in the pan-European payroll marketplace mean that the practical tools needed to do the job are now out there, but whilst this removes many of the traditional barriers and arguments used against pan-European payroll outsourcing, these tools alone will not change hearts and minds. Perhaps when questioning the worth of investing effort in the right stakeholder and change management to channel the benefits pan-European payroll outsourcing can now bring to bear, an organisation’s leadership should ask itself a key question. “Five years from now, do we really still want to own the transactional payroll process?” Finding a compelling reason for that answer to be yes in today’s varied, capable and competent supplier landscape might just be the new pan-European payroll challenge.

About the author
Jill Stabler is a Managing Consultant with Alsbridge plc, the award winning advisory firm on outsourcing, shared services and offshoring. Jill can be contacted at jill.stabler@alsbridge.eu or call +44(0)20 7242 0666.

« Back   View List