Multi-vendor management in payroll: how to balance compliance and efficiency

Multi-vendor management is one of the top payroll challenges faced by global enterprises and businesses with globally distributed teams. As shown by the Deloitte Global Payroll Benchmarking Survey, organizations that rely on managed payroll services work with an average of six payroll providers.

The problem: While working with different payroll providers gives businesses access to local expertise and enhances global payroll compliance, it also creates numerous challenges, such as reduced efficiency, data consolidation issues, and lack of visibility.

Read on as we dive deep into the challenges of multi-vendor management in payroll and share some best practices for effectively managing multiple payroll providers.

Multi-vendor management is the set of processes that are needed to manage and coordinate the relationships with different service providers. It encompasses different aspects, such as finding suitable service providers, negotiating service contract terms, monitoring provider performance, communicating with different vendors, and mitigating risks.

One business function where multi-vendor management plays an important role in multinational organizations is payroll. Businesses with globally distributed teams typically opt for outsourcing payroll for employee populations in different target markets to local payroll vendors. While this ensures better compliance, it also requires a strategic approach to managing different vendors.

Working with multiple payroll vendors is very common for expanding businesses and multinational organizations that have to process payroll for employees in different countries.

For high-growth companies, working with local payroll providers is the easiest and fastest way to set up payroll in a new target market. Local payroll vendors already have the necessary infrastructure in place and can therefore quickly add new employees to their system.

Also, in-country partners for payroll can assist with local compliance, cultural adjustment, and employment regulations. Since expanding businesses often lack the necessary knowledge of local regulations, they need local expertise to ensure payroll compliance.

A multi-vendor set-up in global payroll is hence often the result of a business’s expansion activities, with more and more vendors being added over time. As the number of payroll vendors increases, this often leads to several challenges in payroll management.

While working with in-country payroll providers gives businesses access to local expertise, it also poses new challenges. The enhanced compliance advantage often comes at the cost of low efficiency and a general lack of visibility in global payroll operations.

According to findings from a global payroll survey conducted by Ernst & Young, organizations that work with six or more payroll vendors are more than twice as likely to experience difficulties in payroll management, global payroll reporting, and data management.

Here is an overview of the different challenges that can arise from working with multiple payroll providers.

• Non-standardized payroll data: Payroll vendors typically use their own payroll software that delivers payroll results in different data formats. Lack of data standardization is an issue for global organizations with payroll operations in different countries.

• Reduced operational oversight: The more payroll vendors a business has, the more difficult it is for the global payroll manager to maintain control and oversight of global operations. With a fragmented global payroll infrastructure, keeping track of what is going on in payroll across locations is time-consuming and difficult.

• Difficult cost control: Working with several payroll providers makes it hard to control global payroll costs. Payroll data for each jurisdiction is delivered in a different format due to the fact that each provider works with a separate payroll software. This makes it near impossible to get a global view of incurred labor costs.

• Lack of data insights: Another issue that is connected to fragmented payroll data for different jurisdictions is that comparing payroll expenses for different countries is near impossible. This means that the data cannot be leveraged to make informed business decisions regarding strategic workforce planning or verify the business’s operational profitability in a certain market.

• Low efficiency: Managing several different payroll vendors and systems is very inefficient. For one thing, collecting data from different providers for global payroll reporting is very time-consuming. For another thing, monitoring different systems requires far more work than managing global payroll via one central platform.

• Different time zones, language barriers, and cultural differences: Language barriers and different time zones are two additional issues that can make multi-vendor management more difficult in day-to-day business. Not only might it take longer to solve urgent payroll issues, but misunderstandings might also lead to costly payroll errors. Then there are cultural differences that can further complicate collaboration and communication.

• Data security concerns: Traditional multi-vendor set-ups in payroll pose problems regarding payroll security. Data transfers in multi-vendor infrastructures often happen through unsecured channels, such as emails or spreadsheets, which poses severe data security risks.

• Different payroll service standards: Payroll SLAs are a great way of securing payroll service delivery standards that match the business’s requirements. When working with multiple payroll providers in different countries, however, it can be hard to define common standards for all payroll vendors. This can be due to cultural differences, restricting local regulations, or simply reluctance on the provider side to agree to the proposed SLAs.

• No standardized global reporting: The inability to get consolidated reports across multiple payrolls is another challenge that businesses need to solve when they decide to work with multiple payroll vendors. Multinational organizations that work with a global network of payroll partners need to invest a lot of time into manually consolidating different country data if they want to get insightful global payroll reporting.

• No integration with the rest of the company’s tech stack: A fragmented international payroll infrastructure is impossible to integrate with other tools and systems used by the organization to manage its international workforce. Yet an integrated HR and payroll tech stack is essential for increasing process efficiency and eliminating manual processes.

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Working with multiple payroll providers doesn’t have to be a problem. Businesses need to develop an effective multi-vendor management strategy that allows them to benefit from in-country expertise while eliminating the problems that typically arise with a multi-vendor set-up.

• Use a multi-vendor management platform: Businesses can simplify their multi-vendor management by using technology platforms that are designed for this purpose. For managing multiple payroll providers, companies should look into unified global payroll solutions that allow them to connect their different vendors to a centralized platform to simplify vendor and data management.

• Leverage automation: Smart technologies and automation can help businesses overcome several challenges linked to having multiple payroll vendors. Examples of how payroll automation can be leveraged in this context include automating data flows between different providers and the central payroll system and implementing automated error detection functions for payroll validation.

• Standardize data formats: Standardizing data formats across different countries can help increase payroll efficiency. Other than leveraging smart technologies, this can be achieved by implementing special data format requirements that payroll vendors need to adhere to when delivering payroll results.

• Carefully select your payroll providers: Choosing payroll providers for your business requires careful consideration. An important business function like payroll should only be outsourced to a service provider who has a proven track record and the necessary expertise and experience to ensure accurate and timely payroll processing.

• Keep an eye on vendor performance: Monitoring vendor performance is an effective way of ensuring payroll efficiency in a multi-vendor approach to global payroll. By keeping an eye on performance and comparing agreed service standards with actual payroll delivery, businesses can ensure that payroll KPIs are met and that vendors deliver on what has been agreed.

• Establish clear payroll SLAs: Before contracting the services of a payroll provider, make time to define expected service levels. If payroll vendors know exactly what is expected, it’s much easier for them to deliver on this.

• Define responsibilities and ownership: Roles and responsibilities need to be clearly defined to enable smooth processes and workflows. It needs to be clear who is responsible for which parts of the process, including the internal team, the external payroll team, and other involved stakeholders.

• Foster a culture of transparency: Transparency in payroll vendor relationships is key for efficient problem solving and preventing errors from going unnoticed. Encourage open communication and information sharing between the in-house team and in-country payroll partners.

• Think about the long term: Internationally expanding businesses are in it for the long run. Therefore, they need a long-term global payroll strategy that also includes strategic considerations for managing a growing number of local payroll vendors. Scalability is key to ensuring that the global payroll system will keep operational in years to come.

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Global expansion paired with mergers and acquisitions typically lead to complex multi-country payroll infrastructures that involve multiple local payroll providers and systems. Multi-vendor management in payroll comes with numerous problems, including non-standardized payroll data, reduced operational oversight, and difficult cost control.

The challenge for global organizations is to balance the need for local expertise to ensure compliance and the need for a global view of their payroll operations. This can be achieved through a global payroll solution like Lano.

Lano’s global payroll solution combines a powerful global payroll consolidation platform with global payroll services provided through a network of pre-vetted payroll partners. Choose a payroll provider from our partner network to quickly set up payroll in new target markets and connect your existing providers to the Lano platform to get detailed insights into your global payroll data and costs. Book a demo with one of our global payroll experts to learn more.