Outsourcing Payroll

Why it’s time to deal with the payroll skeletons in your closet

Here we catch up with Peter Bouten, Vice President, Global Sales and Peter Martin, Market Manager at NGA Human Resources for a Q&A session. They discuss the skeletons in your closet and why payroll needs to be part of the big conversations.

Can you set the scene for us in terms of the global outsourcing landscape?

Peter Bouten (PB): Around 10-15 years ago, when outsourcing first became popular, the approach was very much “your mess for less”. Companies would outsource their HR processes to offshore vendors and optimize costs by laying people off.

Peter Martin (PM): Initially, the US led the way in outsourcing. The Europeans were slower and more cautious, but nevertheless outsourcing did come to Europe.

Over the last few years, things have changed dramatically. Companies are a lot more selective in what they outsource to providers.

They have experience of building shared service centers, and they know what to look for in an outsourcing partner. They now want providers who can help them with technology enhancements, as they know they don’t have the right skills internally.

How has multi-country payroll outsourcing become such a hot topic?

PB: Previously, the focus was on how companies optimized their HR processes and operations. Companies were talking to advisers to decide which processes they should outsource and which they should do themselves.

Generally, payroll was not a big part of those discussions: It was handled predominantly as a country process. If there was a driver to change payroll, it usually came from somewhere else, not as part of optimizing HR processes.

PM: I agree 100%. Payroll was a very isolated process before, but nowadays, to get the most out of the Cloud and standardized HR technology, you really need the core data i.e. the payroll.

Many processes which were historically done manually are now 100% automated. Therefore, you need the right data and the right Cloud connection.

Companies were caught out when they didn’t have the right data or connection, and they realized they needed to organize their machine rooms differently. This is when they really touched payroll for the first time.

What kind of company is typically comfortable with outsourcing their global payroll?

PB: Companies which are very strong centrally are the ones leading the pack when it comes to outsourcing payroll.

Even today you see some very large global companies that are still organized in a local way, including their HR and payroll.

But the companies which have strong central processes are the ones which are typically ready to see the benefits of multi-country payroll outsourcing. A good example is the pharma industry as it’s generally very centralized.

PM: I agree, pharma is ahead of the curve, they tend to be early adopters.

What are the main drivers for outsourcing payroll?

PB: Change in the organisation is often the primary driver for moving to a more global setup with shared services. Companies then see that a more centralized payroll approach is needed.

The second driver is often companies moving to the Cloud. So, if you move to Workday, SuccessFactors or Oracle Cloud, for example, from there on all your integration with your payroll is gone.

These platforms are great, they have all kinds of capabilities and added value, but what they don’t have is local data. Suddenly a lot of payroll processes are broken.

Around five years ago, companies were only finding this out when they were in the middle of the rollout. Today we see more companies preparing themselves for rollout, often combining the HR system replacement with the payroll implementation.

Many big companies are discovering that they can’t handle the skeletons in the closet anymore. The backbone of their HR software has become very complex, which is difficult to manage. Companies are continuing to invest money in their old world when they should be thinking about moving to something new.

PM: Many companies think that when they move to new technologies, they can keep their old processes. They are quickly realising that they actually need to rebuild their house internally. Process follows technology, not the other way around.

A decade ago, every company was following the advice of consultants to build a global shared service environment. They all followed that path, moving their processes – including HR – into one house.

They are now finding that these structures they built are hindering their ability to be agile following their company strategies – e.g. M&A. They need a more flexible approach.

I would say this trend has come about in the last 1-2 years. Companies are looking for a partner like us who can help them move technology and processes in and out very quickly and easily.

What are some typical barriers that might be holding business leaders back from outsourcing their payroll in multiple countries?

PB: The biggest barrier in my view is that generally payroll is a process that business leaders prefer not to touch. If it is working okay-ish, why would you touch it? If it goes wrong, the implications are huge, so there’s fear of change.

Secondly, if you compare a local payroll with a global or international payroll, and you only surfaced the initial savings potential, you might think there was no business case.

PM: Agreed. Because outsourcing can often be a very costly exercise, I’m always telling companies, if you are only focused on the business case, let’s stop now.

If you start off thinking you want to see 2%, 5% or 10% cost reduction when you move a process from A to B, for example, that’s not the right approach. You will struggle.

PB: We try to show the client there is much more to gain financially in the long term. If a client is already moving into the Cloud, they quickly realize they have to invest money in making all this integration work.

A provider like NGA can take care of the integration to a centralized payroll and, to a certain extent, maintain it.

We get all your local data flowing in, and we add the compliance layer, including challenges like GDPR and international data requirements. That’s why it’s about so much more than the pure business case.

Integration is another common challenge. Many clients are really underestimating how much integration work needs to be done.

Cloud vendors often paint a picture where you have one HR platform, seamless processes and no maintenance. But they’re not talking about how you make sure that the whole setup within your organisation keeps working.

So, we have seen customers who have started a rollout for an HR platform and then put it on hold because they couldn’t get the integration working towards the local payroll platforms.

How important will AI and machine learning be for HR, and specifically payroll, in the coming months and years?

PB: AI and machine learning is a big trend that will continue to grow in the future. What we typically see is that in large organisations the annual spend on HR administration has to go down 2-3% or more. So, HR feels the pressure to invest in machine learning to save money.

However, while AI and machine learning can support the answers you give to your employees and managers. It’s something that takes time and investment; it’s not just buying a tool.

We find that even large organisations are nervous about investing in AI and machine learning. Because it’s an early adopters’ market, they’re concerned they may have to switch provider in six months’ time when someone new comes along. NGA are a safe pair of hands because we are doing machine learning on a global scale.

PM: Yes, we are investing heavily in end-to-end automation. With us, you don’t just get a chat bot at the front end, for example, you get the full experience. We put AI into the core.

Would you recommend sharing best practice with industry peers when choosing an outsourcing partner?

PM: It’s very important. We are fortunate that HR is a well-connected sector which shares a lot. HR leaders are very open with one another and happy to compare providers, even with their competitors.

When prospective clients ask us for references and case studies, it’s more of a box-ticking exercise. This due to them already asking their peers how they feel about us.

What advice would you give to an HR leader reading this?

PB: In the HR sector, we are having the big conversations about talent, Cloud, analytics, automation, recruitment, data – we need to start having them about payroll which holds the core and accurate data of all your employees.

I would advise companies to do their homework; listen to others and investigate their successes and failures.

We look forward to meeting our HR and payroll peers this November at the Shared Services and Outsourcing Week, Berlin.

For more information, download the NGA HR global payroll complexity index report