Why a decentralized global payroll costs businesses more

There are two different approaches to managing global payroll. Multinationals can either choose to manage all their processes, vendors, and systems centrally, or they can opt for a decentralized approach where payroll for each country is managed individually by a designated payroll team or an in-country partner. While both approaches have their pros and cons, running a centralized global payroll is usually considered to be the better option, one of the reasons being the overall operational cost.

The cost savings of centralizing global payroll operations into a unified platform might not always be obvious, but running a decentralized global payroll typically ends up costing businesses more in the long run. That’s because there are several soft costs to consider that come with managing a multi-country payroll in a decentralized way.

Understanding the real cost of a decentralized global payroll is the first step for businesses to optimize their global payroll operations. But what are the hidden costs of a decentralized global payroll system?

A decentralized global payroll is a payroll set-up where there is no central system through which payroll is managed. There is no central payroll department that oversees the entirety of the business’s global payroll operations.

Instead, payroll responsibilities are divided between an in-house payroll team and external payroll providers. The in-country payroll service providers are responsible for managing local payroll processes, while the in-house payroll function is typically charged with collecting payroll data from the different providers and generating payroll reports. 

Some organizations also run a decentralized global payroll with a designated in-house team for every country where they have entities.

Decentralized global payroll: what is the alternative?

The alternative approach to global payroll management is to connect all vendors, processes, software applications and tools in one unified system which is used by the central payroll department for overseeing and managing all global operations. At the same time, the high–level payroll department is in charge of making payroll decisions that apply to all payroll countries and providers and streamlining processes across locations.

Both the centralized and the decentralized global payroll model have their pros and cons. One of the main downsides of running a decentralized global payroll is that it usually costs more than using a centralized payroll system for the entire global team.

There are different cost drivers that make running a decentralized payroll more expensive. These cost drivers include both hard costs and hidden costs.

Increased compliance risks

Outsourcing payroll to in-country payroll experts is, without a doubt, the best option for ensuring that local payroll rules are respected and that payroll tax withholding and reporting requirements are met. But the lack of standardization and the multitude of payroll providers can pose a genuine risk to global payroll compliance nonetheless.

Without a clear definition of roles and responsibilities, the lack of accountability can lead to payroll processes not being managed as carefully as they should. Alternatively, a streamlined approach to payroll compliance across all geographies provides much more clarity and ensures that compliance is managed in the best possible way.

High risk of errors

Having a decentralized global payroll means working with different in-country partners and different systems for each payroll country. This means that there are multiple data access points and various data streams between systems that must be brought together. Unless data exchanges and processes for standardizing and consolidating global payroll data are automated, there is a high risk that errors can jeopardize the accuracy of the business’s global payroll reporting.

Finding and correcting these errors at a later stage is very time-consuming and wastes valuable resources. Additionally, the business could face financial penalties when payroll errors, such as miscalculations, are not spotted on time and make it into statutory reporting.

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Lower chances of detecting payroll fraud

Payroll fraud can come in many different forms. Time sheet manipulation, payroll advance retention, and false expense claims are just some examples of how employees can try to steal money from a business. What all the different payroll fraud schemes have in common is that they cost businesses a lot of money.

A major problem with a decentralized global payroll is that it is a lot harder for businesses to detect and prevent payroll fraud. Companies are removed from local payroll processes and only have access to siloed information from the different payroll countries.

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Higher payroll outsourcing costs

Payroll outsourcing is a popular option for businesses to manage payroll for teams in overseas locations because it ensures that payroll is processed by experts who are familiar with local payroll regulations. The downside of outsourcing payroll processes, however, is that it can be very expensive, especially when fully managed payroll services are required.

While centralizing payroll doesn’t necessarily eliminate the need for external payroll services, it can usually help lower the cost associated with payroll process outsourcing. For instance, streamlining processes can help reduce the number of off-cycle payments, which often incur an additional charge.

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Cost of managing multiple payroll vendors

On top of the outsourcing costs, businesses need to consider the cost of managing multiple payroll providers. Multi-vendor management might not be a hard cost that is listed on the provider’s monthly service invoice, but businesses pay for it in the wages and salaries of their payroll staff who need to allocate time and resources to overseeing processes, communicating back and forth with vendors and assembling all the data.

The time spent on the different tasks surrounding multi-vendor management can add up to hundreds of hours each month, depending on how many internal employees are involved. Plus, multi-vendor management usually requires additional tools (which, again, cost money) and increases the organization’s IT costs, since the different vendor policies need to be reviewed and processes adapted to ensure payroll data security. 

Manpower and infrastructure needed to manage complexity

A decentralized global payroll is synonymous with complexity. Managing this complexity requires a lot of manpower and hence drives up global payroll costs. After all, employees need to be paid for their time and effort. Multi-vendor management and combining data from different providers are just two examples of the hidden costs of a decentralized global payroll.

There are also organizational costs to consider, such as the infrastructure needed for managing and overseeing payroll operations across different geographies. This can include the use of special tools for payroll analytics in order to better analyze global payroll data or recruiting dedicated payroll managers for certain countries or regions.

Cost of poor payroll performance and efficiency

There are different payroll KPIs organizations can use to measure the performance of their payroll. While this works well for a single-country or a unified multi-country payroll, measuring the efficiency of a decentralized global payroll is very difficult.

The multitude of entities, processes, and people involved makes it near impossible to carry out a proper assessment of the overall efficiency and performance in payroll. Yet, if aspects such as payroll accuracy and reliability cannot be measured, it’s hard to make improvements, which is why businesses with a decentralized global payroll are often stuck with poor performance and efficiency levels.

Given the various hidden costs of a decentralized payroll system, it should come as no surprise that unifying global payroll in one central platform allows businesses to save some real money. Streamlining processes across geographies and leveraging payroll automation to consolidate global payroll data and enhance global payroll compliance are just two examples of how a unified global payroll solution reduces costs.

This is where a global payroll consolidation platform like Lano comes into play. With Lano, businesses can manage all their in-country payrolls under one roof and put an end to disconnected global payroll processes and data flows. Thanks to automated payroll changes and data validation processes, your payroll team can save time on manual tasks and fix payroll errors faster than ever before. Integrated payroll analytics tools deliver real-time data insights and allow you to generate detailed payroll reports in minutes.

Book a demo with one of our Lano payroll experts to learn more.