The hidden costs in global payroll management

Payroll is a major cost center for businesses. But payroll costs are not only down to wages and salaries. The administrative and operational aspects of running payroll create additional expenses, especially when managing a global payroll.

Depending on their global payroll model, businesses might incur unexpected additional expenses that are not obvious at first. Hidden or unforeseen costs can blow budgets and cause financial bottlenecks that can threaten the success of the international operation.

Are you spending more money on your global payroll than you should? Read on as we dive deep into the hidden costs of global payroll management.

When organizations budget for their global payroll expenses, they typically consider the following cost factors in their calculations:

• Employee salaries and wages,

• Additional compensation (e.g. bonuses and commissions),

• Payroll taxes,

• Statutory and non-statutory benefits,

• License for payroll software and other tools connected to payroll,

• Payroll outsourcing costs,

• Costs for processing cross-border salary payments,

• Wages and salaries of the payroll team, and

• Other administrative costs.

In addition to these obvious payroll-related expenses, there are other cost factors that can add to a business’s global payroll costs.

Global payroll management can be incredibly complex. There are many different data flows, providers, and processes to manage and coordinate. The more complex the global payroll infrastructure, the higher the costs.

Complex payroll systems are error-prone in more than one regard. For one thing, a high level of complexity increases the risk of payroll errors which result in additional time, effort, and resources being used for correcting said errors. Plus, payroll errors can quickly result in compliance fines which can lead to additional unforeseen expenses further down the line.

In the end, hidden costs in global payroll management are often a by-product of decentralization. In other words, they often result from decentralized payroll systems, an uncoordinated mix of external payroll vendors and in-house payroll teams, and non-standardized processes and workflows.

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Now, what are the hidden or unexpected costs in payroll management that most often lead to payroll budgets going through the roof? Here is a breakdown of the different cost factors that most businesses don’t have on their radar when it comes to their payroll expenses.

Compliance expenses

Payroll compliance is a top priority for businesses. But complying with all the statutory regulations surrounding payroll comes at a high cost, especially when managing a multi-country payroll. Compliance-related processes and services that drive costs include payroll software updates to adapt the software to legal changes affecting payroll and expenses for external expertise and compliance advice.

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Payroll errors

Mistakes in payroll not only put businesses at risk of non-compliance with statutory regulations, but they can also be a major cost driver. Undiscovered overpayments can cost businesses a lot of money in the long run, which are direct costs. Payroll errors that are the result of a system misconfiguration, on the other hand, result in indirect costs which are hard to estimate, but take lots of resources and time to rectify.

Lack of consolidation

Having access to consolidated global payroll data simplifies many processes and workflows, such as creating detailed global payroll reports for financial planning or workforce scheduling. However, the reality in many organizations is a different one. Instead of having all their payroll data for all geographies stored in one single system, many businesses work with disparate systems and have no access to a consolidated view of their global data.

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Legacy payroll systems and fragmented infrastructures

Many organizations work with a global payroll set-up which has grown from years and years of expansion activity and going through various mergers and acquisitions. The result often is a fragmented global payroll system which consists of different legacy systems with complete lack of integration.

Maintaining different payroll systems is very time-consuming and therefore also very costly. Plus, managing different systems eats into a global payroll manager’s time. Time spent on multi-system management is time that cannot be dedicated to developing revenue-improving payroll initiatives.

Multi-vendor management

Another hidden cost factor in global payroll is managing different payroll vendors. Surveys show that multinational organizations work with an average of six payroll providers. The more payroll providers an organization uses, the more time-consuming it becomes to manage them. Time-consuming processes always mean elevated spendings because they tie up resources that could be spent on more important business activities.

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Lack of coordination between external and in-house payroll

Managing multiple payroll vendors is not the only aspect that can lead to hidden costs in global payroll management. Many organizations not only struggle to manage several providers, but also face problems when coordinating and distributing tasks and responsibilities between their external providers and their in-house teams.

Payroll fraud

Another downside of a decentralized global payroll is that it makes it harder for businesses to detect payroll fraud. Payroll fraud can come in many different forms and shapes. From seemingly harmless overpayments to ingenious embezzlement schemes that can cost the company thousands of dollars in the long run. Payroll fraud is another hidden payroll expense businesses should keep an eye on to prevent fraudsters from increasing payroll costs even further.

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Fluctuations in exchange rates

One of the global payroll challenges that are faced by many organizations is having to pay employees in different locations and, above all, in different currencies. The problem is not only that cross-border payments can be slow and expensive, but that multi-currency payments are also affected by exchange rate fluctuations. Depending on the size of their global workforce and the existing payment infrastructure, organizations might face significant unplanned expenses from one month to the next.

System maintenance and support

Every corporate system needs to be maintained, including the payroll system(s). Only systems that are up to date can help ensure compliance and keep sensitive payroll data safe. However, system maintenance entails additional costs, such as the wages of the employees who are in charge of maintaining the system or additional fees for software updates.

Also, depending on the complexity of the payroll system, it might be necessary to provide support for employees who struggle to use the system. Qualification and training for the payroll team are yet additional cost factors to consider.

Data security costs

Payroll data is highly sensitive. Organizations therefore need to make sure to safeguard their employees’ personal data according to the highest security standards. The catch: Establishing strong security measures is not cheap. Sure, payroll security measures such as restricting access to the payroll system to employees who really need it don’t require a big investment. Strengthening the overall IT security, on the other hand, does come at a much higher cost.

Organizations should strive to uncover and (ideally) eliminate hidden costs in global payroll. Payroll costs make up a significant share of a company’s overall expenses, which is why taking cost optimization measures is especially important. But how can businesses detect hidden costs that increase their total global payroll expenses? Here is an overview of the different steps:

• Identifying fixed, measurable payroll costs,

• Identifying underlying costs linked to payroll management,

• Implementing accurate cost tracking for both direct and indirect payroll costs,

• Tracking and monitoring costs over a predefined period of time,

• Analyzing payroll expenses based on the different cost factors,

• Using the data insights to identify costs that can be reduced or avoided, and

• Taking measures to cut out unnecessary spendings.

Ultimately, the best way to avoid hidden costs in global payroll is to streamline processes as much as possible and leverage payroll automation to replace manual tasks. This can be achieved by investing in a global payroll solution that combines payroll outsourcing services with an innovative tech platform to centralize global payroll data and processes.

With Lano’s global payroll solution, organizations get access to global payroll services provided through a network of top-tier payroll vendors and a global payroll consolidation platform that collects and consolidates payroll data from all locations into a single source of truth, complete with payroll analytics functions, global payroll reporting, and more. Book a demo with one of our experts to learn more.