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The Next Step in Global Payroll Evolution

By Marc-Oliver Fiedler

Managing global payroll, particularly across a large number of countries, is complex and challenging. The differences in local laws and regulations are so distinct that a single global solution is unable to cover the footprint of a multinational company without extensive investment in localizations. The one-size-fits-all global solution is elusive and may never be realized. Even the largest global payroll vendors do not have one single global payroll solution that is capable of processing payrolls across countries. Instead, they have many different payroll engines processing payroll in different countries. For customers who need to process payroll for employees across many countries, this has long meant that they end up with a hodgepodge of local payroll solutions that are fragmented and disconnected. 

Inside_Feature_NxtStep_Nov17_v2In the consumer world, we have seen new marketplace models pop up that have brought together consumers and providers in traditionally highly localized, fragmented markets. The digital marketplaces of Amazon and eBay have allowed consumers to readily and with confidence buy goods from providers halfway around the world with whom they would have never been able to transact before. Marketplaces like Booking.com, Kayak, and TripAdvisor have allowed travelers to identify and procure services from the best local service provider (in this case hotels or restaurants) without having set foot in the country. In addition, these marketplaces have helped to dramatically simplify and standardize the involved business processes across countries and vendors: it doesn’t matter whether you book a hotel room in New York, Beijing, or Kinshasa, you use the same interface and follow the same simple clicks to complete your transaction. 

Finally, the self-regulating mechanisms of the marketplace (i.e., consumer reviews of products and vendors and marketplace control mechanisms) ensure a high degree of trust and confidence is established between remote customers and vendors. And all of this has been possible with the advent of modern internet technology that connects local buyers and sellers through standardized interfaces. So, in summary, the digital marketplaces have given consumers increased reach and choice, better transparency, simplified processes, and trust and confidence in the provider.

The global payroll industry is ripe for a transformation similar to what other industries have undergone with the emergence of open, digital marketplaces. Global payroll marketplaces will allow multinational businesses to confidently select the best local payroll solutions anywhere in the world and connect to and transact with these solutions in a highly standardized manner, driving unparalleled process efficiency and transparency across their entire global payroll operations. As a result, companies can overcome the historical challenges of fragmented local payroll environments and tap into the same benefits provided by the consumer marketplaces outlined above: increased reach and choice, better transparency, simplified processes, and trust and confidence in the provider.

In the consumer world, the marketplaces did not appear overnight but were the result of an ongoing evolution in the respective industries. Similarly, there is an evolution in the payroll industry toward an open marketplace model. This evolution and the characteristics of the different evolution stages are described here.

Phase 1: The Decentralized Model

Historically, companies have adopted specific local solutions to ensure they are paying employees in a compliant way, often outsourcing their payroll to a local service provider. This tends to be the way most businesses start their foray into international payroll, opportunistically setting up decentralized payroll operations using local solutions from local or regional service providers. While this decentralized approach is a pragmatic way to quickly get started and taps into the local know-how of in-country payroll experts, it comes with a number of drawbacks:

1) Lack of process standardization
Each country follows different processes and uses different tools, driven by the local vendor and local systems. It is very difficult to standardize processes, making it virtually impossible to generate operational efficiencies through shared services models or central automation tools.

2) Lack of data aggregation
Payroll and employee data sits in local systems and it is very difficult to generate aggregated data visibility. Even simple data consolidation exercises like “How many employees do we have across the organization?” require prohibitive manual effort.

3) Large number of vendors to manage
Multiple vendor relationships must be negotiated and managed around the world, often without a clear sense for how the selected local partner stacks up in comparison to its local peers.

Phase 2: The Aggregator Model

In response to shortcomings of the decentralized model, about 10 years ago a number of global players introduced the so-called aggregator model. As the name suggests, a central provider offers to aggregate the local solutions on behalf of the customer. It offers both commercial and operational harmonization: single global contract and pricing, as well as streamlined processes and data. However, while the aggregator model does achieve some level of aggregation and hence simplification, it comes with some major flaws of its own:

1) Lack of choice 
Customers are bound to a closed network of vendors dictated by the global provider, with a huge switching cost to get in and out of the closed network. To adopt an aggregator solution, customers have to rip and replace all their existing local payroll systems. This presents a tremendous burden in terms of time, operational risk, and financial cost.

2) Inflexible 
These solutions tend to be rigid. They do not support a mix of in-house and outsourced payroll setups (which tends to be the case in large multinational companies) and lack accommodation of customer-specific service levels or reporting needs.

3) Expensive 
Because aggregators charge a margin on top of the fees of the local providers and add their own significant overhead into the calculation, the fees for the aggregator solutions are typically two to three times the rates of domestic payroll solutions.

So, while the aggregator model starts to address the challenges of the fragmented processes and data, it comes with its own set of drawbacks typified by a lack of choice, decreased flexibility, and economics.

Chart_NextStep_Nov17Phase 3: The Open Marketplace Model

The next logical step in the evolution of global payroll is the creation of open marketplaces for global payroll that allow multinational customers to readily select and collaborate with any local payroll expert around the globe in an open, transparent, and secure environment. 

While the marketplace model has some of the same characteristics as the aggregator model—i.e., providing access to local solutions through one central platform and aggregating and harmonizing data and processes—it is fundamentally different in how it delivers these value elements. In the aggregator model, customers are locked into a specific set of local vendors and solutions that are dictated by the aggregator, dramatically limiting their choice and flexibility. The marketplace model is inherently open and vendor-agnostic, meaning any local vendor can provide its services to the customer via the marketplace as long as it abides by basic policies and norms. This means that customers can bring their existing set of preferred local vendors into the marketplace, benefiting from the aggregation and harmonization provided by the marketplace without having to replace their local vendors, which of course would be very disruptive and costly (which is precisely what they would have to do in the aggregator model). And of course, in the marketplace model the customer can switch local vendors at any point in time, which naturally fosters healthy competition, and we know that competition is vital to ensure innovation and best value for the customer.

So, in many ways, this open marketplace model offers the best of both worlds: free choice and flexibility paired with an ability to standardize and aggregate processes and data across local solutions. Customers can choose their preferred local vendor, indeed selecting the vendor based on first-hand reviews provided by other customers (similar to the reviews in marketplaces like Amazon or TripAdvisor). At the same time, by collaborating with the local vendors through the marketplace platform that provides central tools such as workflow management, compliance tracking, consolidated reporting, and KPI monitoring, the customer can simplify and standardize the day-to-day payroll operations across different countries. 

The move toward an open marketplace model for payroll involves a few important implications for both customers and vendors. Vendors must adhere to the principles and norms of the marketplace. This may mean some level of adjustment to how the local provider is used to operating and conducting business. And the same is true for the local payroll administrators on the customer side. They, too, will need to adapt to the processes and norms that come with the open marketplace (e.g., workflows, tools used). However, in most cases these adjustments will be fairly minor and transitional, and the benefits for both customers and vendors to participate in the marketplace will far outweigh the costs to adjust. 

Ultimately, the same benefits emerge from the open marketplace model for payroll that have transpired in the pioneering marketplaces of the consumer world: increased reach and choice, better transparency, simplified processes, and trust and confidence in the provider. 
 
Modern technology is irreversibly driving new business models that bring unparalleled connectivity, transparency, and efficiency. Marketplace models have taken many industries by storm by providing clear benefits to customers and vendors: more choice and better price points for customers, extended reach and access to a global client base for vendors. The payroll industry is ripe to undergo a major transformation and to reap the tremendous benefits of the marketplace model: freeing up thousands of labor hours through more efficient processes, creating rich business insights through better consolidated data views, and, most importantly, driving unparalleled value and innovation through more choice and flexibility. 



Marc-OliverFiedler

Marc-Oliver Fiedler is the founder and CEO of Payzaar, a new startup transforming the global payroll marketplace with an innovative open market platform. He has more than 15 years of international experience with leading technology and software providers, building innovative cloud-based solutions for enterprise clients. Prior to launching Payzaar, Mr. Fiedler was Head of Strategy, Marketing & Product Management at ADP International. He previously held global leadership roles at Oracle and Hewlett-Packard, and worked as a management consultant with The Boston Consulting Group. He holds an MBA, MS in Industrial Engineering, and a BS in Electrical Engineering from Stanford University.