The practical advantages of taking a global approach to payroll are clear, but only a few organisations are able to do it. Technology editor John Stokdyk investigates the progress that has been made towards this goal over the past year.

Globalisation is a reality for many manufacturing and service organisations, but so far payroll systems have struggled to keep up. As a result, many multinationals are unable to keep tabs on one of their key cost overheads.

Martin Stockton, director of global HR and payroll specialist Patersons, boils this challenge down to what he calls “the Estonian question” – being able to identify what the cost difference would be if an international business closed its Estonian operation and moved it to Vietnam.

“A global payroll system integrated with payroll can work that out for you,” he says. “Or it can tell how much EU social security costs you, and give the answer in pounds, euros or dollars.”

As well as delivering better management information, a single system would cut the requirement for local payroll managers in each location and reduce the need to process pay and headcount figures through different systems and spreadsheets. It’s an attractive prospect; but frustratingly difficult to achieve.

Early in 2007 Yvette Lamidey, of Paris & Parks Consulting, published an article on HR Zone that asked, Can you have a global payroll system? She concluded that while there were practical advantages to a global approach, no one supplier had managed to provide it.

Patersons, which offers a web-driven global outsourcing service, claims to be the leading contender in this field but even Stockton admits that few of his customers have gone through a full roll-out yet.

Practical barriers

Payroll is an anomaly within the globalising economy. Organisations may arrange themselves into pan-national divisions, but employees are based and paid in national and even provincial jurisdictions with different tax rules and treatments.

The need to comply with all the different local regulations is a significant element in the overall payroll overhead for a global organisation. Companies either have to have their own payroll managers in situ or find third party agents who can handle the workload for them. Many do as Alan Wigley of Global Payroll Solution advises and work with a broker who will engage bureaux and agents in each country and manage the relationships for you.

Business software and service suppliers are interested in economies of scale that will help them improve their profit margins, Wigley explains. They will be happy to support the company’s payroll needs in ‘home’ countries with large headcounts, but are much less interested in dealing with territories where there are only a few employees.

“Where a bureau solution is used there is often a minimum charge for up to, say, 50 employees, so the per payslip cost will be much higher unless – or until – the number of employees is at or around the cut off for the minimum charge,” Wigley says.

Paterson’s Stockton adds that payroll is also too much of a niche activity to attract the interest of big application developers (Oracle, SAP) or outsourcing organisations such as IBM and Accenture. “SAP is great if you’ve got 1,000 employees, but it’s the 20-employee territories that cause problems,” he says.

Similarly, he suggests that outsourcers tend to be “greedy” and want multi-process deals where they handle all the finance, procurement and payroll functions. “A lot of companies purport to do global payroll, but can’t respond to a flexible delivery model,” he claims.

Identifying and targeting this gap in the market has been the making of Patersons over the past two years, according to Stockton. “We’re not short of opportunities from customers who want an integrated payroll system that can cope with outsourced services in smaller territories as well as in-house systems in bigger countries.”

Stockton claims that Patersons has closed 12 such deals during 2007 for its web-based Logon2 system, including one with Texas-based Siemens Software that caters for 1,800 employees in 15 countries and integrates with the company’s SAP operational and HR system.

Fluous HR Solutions, an Anglo-Indian software house, is also targeting this sector with a new multi-lingual, web-based suite called PowerApps. It recently won a £60,000 contract from Inchcape Shipping Services to manage a workforce of 2,000 employees across seven continents and 49 countries.

Inchape Shipping HR manager Mandie Ridge explains that having moved to its first web-based HR admin system, the company wanted to get used to running and maintaining it before tackling the payroll challenge. “We’ve still got local systems to handle local payroll requirements – to globalise that would be so complex that we have focused initially on HR requirements,” says Ridge.

The company has experimented with setting up payroll data feeds from North American subsidiaries, but for the moment these have reverted to exports from the HR system into the local payroll programs. “There are still gaps and because everyone has different [payroll] software, it’s not always going to interact,” she says.

Even when it becomes feasible to capture local data into a central system such as Fluous, local managers can be reluctant to comply with what they see as intrusion from ‘big brother’ headquarters managers.

Managing this kind of change is best done by taking small steps and educating people about the benefits they will experience. “This is crucial data and could be lost purely because of a lack of planning,” she notes. “Also, when local managers realised they could go in and look at all the data and reports, they began to warm towards the system,” she adds.

Fluous business & development director Graham Pritchard says that PowerApps has integrated capabilities for several countries, and has the capability to pull in data from multiple local payroll solutions. In time, it intends to incorporate all of Inchape Shipping’s payroll processing needs.

The future of global payroll

It’s no surprise that the companies making headway towards the elusive ideal of an integrated global HR/payroll system are deploying entirely web-based ‘software as a service’ applications. ‘Enterprise’ suites such as Oracle and SAP are notoriously complex and expensive to implement and maintain, in part because of the need to physically install and update computer servers based in different countries and locations.

Web applications are easier to manage remotely. When the central code changes, users logging in from different countries access the same underlying system – but the specific details, codes and calculations they input will be controlled by location and role-based gateways to the program.

Currently, both Patersons and Fluous take a mix and match approach to payroll, supporting net payroll codes and calculation rules for larger customer territories within their systems, or linking into the software used by local managers or third party agents.

As technology makes it easier to cater for organisations that think globally and act locally, corporate governance regulations such as the US Sarbanes-Oxley Act are forcing companies to embrace systems that give them more accurate, up-to-date and reliable management information.

The Estonian question isn’t just a matter of having good data at manager’s fingertips, says Stockton, it’s now a necessity for US-listed corporations. A US corporation, for example, will not be able to satisfy its auditors with a bunch of invoices raised and paid locally by its Estonian subsidiary.

Better corporate compliance is the main driver behind globalising payroll, he adds, but when companies explore what is available, the cost advantages start to creep into the equation.

Global payroll management may still seem to be a mirage hovering just beyond the horizon, but the speed of progress over the past year indicates that more and more international organisations will soon be able to attain that goal.