Vistra Insights

Global payroll implementation: What happens after you sign the contract?

Despite lockdowns, political upheavals, supply chain disruptions and other challenges to the global economy, organisations continue to expand across borders, hire local workers and establish local payrolls.

The following scenario is common. A multinational organisation has grown substantially across borders and is now operating in many countries. It uses multiple payroll delivery models, including those that rely on in-house teams and/or local providers. Recognising that this process has become administratively burdensome and costly, the company has undergone a detailed due-diligence process to vet global payroll providers. Finally, it signs a contract with a single provider for services across all its countries of operation.

The due-diligence and contract negotiations have taken place largely at HQ and at the C-suite level, with limited engagement from those who will be most affected by the change — staff in the organisation’s local offices.

Personnel at country offices often won’t recognize or much care about the benefits of the decision to move to a central payroll provider. After the decision, however, they’ll be burdened by the payroll implementation. The process will include the integration of the new payroll platform with other key systems (such as the HR and general ledger systems), winding down existing payrolls, following new deadlines and other challenges.

It’s incumbent on the organization’s decision-makers — including those responsible for signing the contract with the new provider — to identify the appropriate stakeholders at local offices and communicate with them about the coming implementation. They’ll need to manage stakeholder expectations, in part by sending a clear implementation plan with tasks, timelines and information on whom to contact for support.

To effectively manage a global payroll implementation, management must have a realistic idea of what’s involved, which can be difficult. If no one on the team has been through a global payroll implementation, they may not even know the right questions to ask. And probably needless to say, the global payroll provider’s sales team — who will be eager to close the deal — may gloss over some elements of the implementation that are unavoidably onerous.

This article outlines some of the most critical aspects of payroll outsourcing that occur after the contract is signed. It’s intended to help organisations understand the true challenges of the implementation process, many of which are not well-known. The information will help you set realistic budgets and timelines when moving to a global payroll provider, and help you communicate what’s involved in the implementation process to relevant stakeholders. Here, then, is the list of considerations.

Ongoing contract obligations

A global payroll contract will invariably have clauses that protect the provider, some of which may not be immediately obvious to the client. For example, the contract will likely ensure that the full number of countries and employees originally contracted for will remain intact throughout the length of the engagement. This means that if a local office loses headcount or is shut down, you (the client) must continue paying the provider for those employees who are no longer on the payroll.

A client in this situation may recognise this clause, but dismiss it as unlikely to be invoked. The pandemic and other recent events should be enough to remind us that financial and operational assumptions may not hold up over time, and that corporate strategies may have to change abruptly. For that reason, you should insert a grace-period clause in the contract that allows for some adjustment of scope without incurring termination fees or other unforeseen charges.

KYC obligations

Know-your-customer obligations are onerous, and in many jurisdictions they’re becoming more, not less, time-consuming. In recent years KYC regulations have greatly affected the time it takes to implement payrolls. Significant time and effort are required to identify an organisation’s affected legal entities and the business owners of those entities, and then to seek evidence and identification of these individuals to satisfy KYC requirements. The KYC process may be minimised during contract negotiations, but there’s no getting around the many hours involved in fulfilling KYC requirements. Clients should not underestimate this.

Project planning

An initial project plan will be agreed on and placed in the contract. Project planning itself often takes longer than the client anticipates, and the provider will look to protect their own resources and delivery risks during the process. You can lower your risks by working jointly with the provider and ensuring that the plan is provisional and can be adjusted without penalty.

In multi-country payroll deals, project plans often span 12 to 24 months. During that time, many changes may occur — such as turnover of key client personnel, new client-specific obligations such as pay awards, and evolving regulatory obligations — that can affect the plan’s timeline. These changes can be costly if the contract isn’t flexible.

It’s also important to note that the provider may recommend implementing new payrolls by region — that is, taking each region (e.g. Americas, APAC, etc.) in turn. This can be a sound strategy given the considerable efforts involved in getting local payrolls up and running. These efforts include: effective communication of the new payroll initiative to local staff and management; obtaining local support; understanding existing local payroll practices and regulatory obligations; understanding and planning for local internal pressures such as technology shut-down windows and employee lifecycle events such as pay awards.

Payroll integration

Integrating a new payroll platform with related systems — such as human capital management (HCM) systems and finance systems — is extremely complex. There are multiple partners involved and of course different countries of operation, each of which has its own set of payroll obligations. In short, each client’s situation is unique.

Many if not most global payroll providers have platforms that make use of middleware that essentially acts as a bridge between the provider’s payroll platform and an organisation’s existing systems. The middleware also provides (for the first time in the client’s case) global controls and central visibility into processes and data.

Adding this new technology and underlying process changes to what may already be a burdened local workforce will create serious challenges. These can include additional training needs and a reduction in existing payroll-processing schedules, which can lead to local resistance to the implementation.

For these reasons it’s critical for you to: clearly and effectively communicate the reasons for the payroll-provider change to your stakeholders; obtain approval from local management; and understand the resources of local offices and adjust business expectations and goals accordingly. These steps will help ensure that your local workforces more willingly adopt the new payroll platform.

New payroll processes

In many countries, when local payrolls are delivered in-house, payroll deadlines may be relatively flexible, allowing departments to provide data up to the last minute. When outsourcing payroll to a global provider, these deadlines tend to be relatively strict and allow plenty of room to address possible errors. After all, the new provider will be managing payroll in multiple countries for the organisation (not to mention servicing many other clients in various countries). The new, stricter deadlines may be particularly difficult to meet during the complex payroll-integration process, and can be seen by local teams as a backward step.

One of the biggest challenges during the implementation phase is to effectively map or synchronise data from your payroll systems and HCM systems. Remember that prior to implementation, your organisation’s HCM data will not have driven your payroll processes. So, your project plan must include a data-cleansing stage. Most providers will prefer to integrate other systems with their payroll platform after going live with the new payroll platform. This can be a sound strategy, but it may add some duplication of effort, such as data mapping between multiple systems and interface testing.

Data migration/Parallel running

The new payroll provider will expect the client to work exclusively with existing local payroll providers when obtaining the necessary data to migrate to the new platform. The provider may suggest during the sales process that it will support this work, but realistically they will struggle to do so.

It’s also important for the purposes of setting accurate budgets and timelines to understand the exit processes of the existing local providers, including any applicable termination fees.

Again, your existing local and central resources will come under pressure during the transition, as they will be processing payroll under your existing systems while also supporting the parallel run processes and training for the new platform. In addition to these challenges, your staff may feel their own roles are at risk. Retaining key staff during the implementation phase will be a key HR responsibility.

Finally, you should make sure the new provider takes most of the responsibility during the transition process, from making parallel run reviews and comparisons to balancing payrolls for signoff prior to go-live. Your responsibility should be reviewing and approving these outcomes.

The hypercare phase

You should negotiate a robust hypercare phase — that is, a period following the new service introduction with enhanced support to ensure widespread and quick adoption of the new service. During this hypercare phase, the provider’s implementation personnel should stay with the project for a few months, typically one to three.

The hypercare phase is critical, as the provider’s staff will have been part of the knowledge transfer during the implementation process and gained a detailed understanding of the client’s needs and practices. The provider may be anxious to move their staff to the next client, but their continued presence will be essential to the implementation’s success.

Ensuring continued expertise

A global payroll provider should also offer advisory services and alert its clients to any regulatory changes that will affect payroll, for example new withholding laws or social security rates in a client’s country of operation. A global provider that doesn’t offer these services related to all your jurisdictions of operation can leave you at risk of missing compliance-related deadlines, making budgeting errors, and incurring fines and reputational damage.

Ongoing governance and account management

The payroll contract will include service level performance measures, service credits and other service-related language. These controls focus on the day-to-day delivery of services. You should continuously work with your provider not only to ensure that payroll is delivered effectively, but also to ensure your organisation is well-placed to meet coming regulatory, technological and other challenges. It’s best practice to hold regular meetings throughout the engagement to discuss both the day-to-day elements of providing payroll across jurisdictions and also long-term payroll considerations.

As in all areas of finance and operations, forewarned is forearmed. Outsourcing payroll services to a global provider can be enormously beneficial for a multinational organisation, reducing costs and administrative burdens across all countries of operation. To reap the highest level of benefits in the shortest time, it’s critical to understand and effectively communicate and plan for the inevitable short-term challenges of global payroll outsourcing. These efforts will in the long term reduce your financial and compliance risks, promote employee engagement and help ensure a relatively smooth implementation.

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