Switching payroll providers? Here’s why you shouldn’t delay

Mixed signals abound, even from the highest authorities. The International Monetary Fund’s recent World Economic Outlook update, for instance, highlights the global economy’s “near-term resilience,” while warning of persistent challenges such as inflation, banking turbulence, the war in Ukraine and extreme weather-related events.

Our own data indicates that many expenditures on international expansion and operations have remained largely unchanged this year, while some spending — such as on legal entity rationalisations and tax-efficiency reviews — has increased.

One change we have witnessed is a rise in the number of our corporate clients and prospects that are pausing their plans to switch payroll providers. This is a shift from recent years, when multinational organisations were more likely to proceed with switching payroll providers or drop their plans altogether.

The current thinking to pause, or delay, switching payroll providers is understandable. Many organisations are taking a wait-and-see approach amid high interest rates, lingering fears of a post-pandemic “hard landing” and other uncertainties.

Though understandable, delaying a move from an unreliable payroll provider can have serious negative consequences. This article provides a summary of some of the ramifications that may come from a multinational organisation delaying a move to a new global payroll provider. We’ll start by looking at some of the reasons for switching providers.

The decision to switch payroll providers

Running a multinational organisation is complex, even apart from engaging in an organisation’s core activities. The list of administrative burdens is long and growing. It includes hiring and retaining employees in an era of cross-border remote work and aging workers, completing indirect and corporate tax filings, ensuring that all legal entities are compliant and fit for purpose, understanding and preparing for proliferating ESG requirements, and much more.

The point is, with the many challenges that come with running a cross-border business, no multinational organisation ever seriously considered vetting and hiring a new multinational payroll provider unless it was experiencing significant problems with its current provider or providers.

In short, the stakes are high for global payroll delivery, and problems must be addressed sooner or later. Payroll-related risks include missed or incorrect withholdings and payslips, compliance fines, reputational damage, employee disengagement, and administrative inefficiencies, to name a few.

In our experience, here are the most common reasons we’ve seen for switching to a new global payroll provider:

• The burdens of managing multiple local payroll providers are too great. Vetting and managing local payroll providers in each country of operation can at first seem like a good solution, in part because it tends to appear cheaper than hiring a global payroll provider. However, as a multinational organisation grows, managing multiple providers becomes administratively burdensome, with different contracts (often executed in different languages), multiple invoices in different currencies, different and sometimes incompatible platforms, and other challenges.
• The compliance costs and risks are too high with our current provider(s). Managing multiple local providers is often riskier from a compliance perspective as well, as it’s nearly impossible to keep track of the myriad, evolving country-specific regulations affecting payroll without a central platform and point of contact. Many organisations in this situation are hit with fines in some or all of their countries of operation due to missed filing deadlines, a failure to adjust withholding amounts following new or changed regulations, or for other missteps. Unacceptable compliance risk levels occur not only when managing multiple local providers, but also when an organisation has engaged a global payroll provider that consistently fails to meet its ongoing obligations.
• We’re experiencing too many payroll errors. Missing payslips, incorrect withholdings and other payroll errors lead to significant costs over time. A 2 percent payroll-provider error rate on a gross salary bill of USD20 million, for example, can cost an organisation about $480,000 — we’ve seen this happen. Payroll tax recovery — that is, recovering taxes from employees that have had insufficient withholdings due to errors on the part of the provider — is a common, costly challenge. Withholding and other errors are especially prevalent at year-end or whenever bonuses are distributed.
• Our provider(s) enable bad payroll policy management. Developing, implementing and enforcing effective, compliant payroll policies is a crucial element of risk management for a multinational organisation. As we’ve seen, non-compliance with local payroll-related obligations can lead to significant fines and other costs. A provider and/or a provider platform that enables poor policy management can cost an organisation dearly. To give a few examples, a provider that allows too much leave per local regulations or company policy, or that does not verify bonuses or flag deposits sent to multiple accounts, greatly increases an organisation’s risks.

Pausing the move to a new payroll provider: The true consequences of delay

The common payroll-management risks described above represent costs incurred over time, and no organisation can fully appreciate their significance without first-hand knowledge. Collectively, the risks represent one of the reasons it’s so difficult to compare the true costs of different payroll providers. Not only must an organisation consider one-time and per-payslip fees when performing due diligence, it must also try to calculate the administrative burdens, compliance risks and other costs associated with each respective provider.

One thing is certain: The longer an organisation sticks with an unreliable payroll provider or providers, the more costs will mount. Those costs may be difficult to catalogue. It’s not easy to quantify fines across different jurisdictions and currencies, tax-recovery costs, administrative burdens that come from missed payslips, and some of the other factors we’ve discussed.

That said, those responsible for performing due diligence on a new provider well know the frustrations that come with maintaining a bad payroll relationship. We hear about those frustrations with virtually each new proposal.

As we’ve mentioned, however, many of those same frustrated business leaders are increasingly choosing to pause their payroll due-diligence processes in light of global economic uncertainties, most prominently interest rates and inflation. These concerns are understandable in the short term, but given the risks involved may be shortsighted in the long run.

In addition to the ongoing administrative burdens, compliance risks and other costs an organisation will incur by sticking with a bad payroll provider or providers, here are three critical additional factors to consider before delaying the process of switching:

• A planned four-month delay may mean an 18-month delay. The due-diligence process for vetting and hiring a global payroll provider takes time, typically at least four months. In addition to obtaining financial and other approvals, an organisation must develop, receive and review requests for proposal and thoroughly vet the best candidates, often with research, rounds of calls, emails and sometimes in-person visits. Due to these demands, performing due diligence is often off limits during certain times of the year, most especially at tax year-end. Any four-month pause is likely to conflict with either year-end or other responsibilities such as quarter-end sales pushes or client deliverables. In addition, payroll suppliers are unlikely to honour previous contract proposals and may be too busy with onboarding new clients and managing current ones to quickly address a resubmitted RFP. Finally, any significant delay switching will almost certainly necessitate reengaging with your internal leadership, obtaining more approvals, drafting a new RFP, and beginning the vetting process all over again. As a result, a planned four-month delay in the payroll-switching process will likely be four or five times that long.
• Your problems will extend beyond missed payslips. We’ve discussed some of the ongoing risks associated with an unreliable payroll provider or providers, from incorrect withholdings to poor policy management. A bad relationship with your provider extends beyond these considerations into areas such corporate tax and reporting obligations. Depending on the time of year you decide to delay switching providers, these challenges may put you at the mercy of both your payroll provider and various tax authorities. For example, if your current payroll provider processes your December payroll, you will be relying on them to provide tax information for the next five to six months. Poor response times or inaccurate data from an unreliable provider can lead to filing delays and significant penalties.
• There is no such thing as global economic certainty. There is no doubt we’re facing global economic challenges, but it’s worth remembering that economies are naturally cyclical and unpredictable. Delaying switching providers may seem a prudent decision given a downturn or predicted downturn. But as we’ve seen, retaining an unreliable payroll provider adds significant risk to an organisation, and that risk won’t go away, whether a downturn materialises or not. Making the difficult decision to proceed in this environment can not only lower risk, but also provide an edge over reluctant competitors that may be experiencing similar problems. As Warren Buffet observed in 2018, “The best chance to deploy capital is when things are going down.”