To outsource or not to outsource, that is the question

To outsource or not outsource,
that is the question

The question faced by many companies around the globe is whether to outsource their payroll.

Our survey found that the greater the number of countries a company employs people in, the more likely they are to outsource their payroll as well as increasing the number the payroll vendors they use.

Number of payroll vendors versus the number of countries a company (>1k employees) employees people in

Outsourcing model versus the number of countries a company operates in

Irrespective of the number of countries a company operates in, most companies in our survey do not plan to outsource if they haven’t done so already.

Only 2% of companies with an employee count of over 1,000 currently has an outsourcing project in flight. However, all companies that are in the outsourcing planning stage within this study, operate in 6+ countries.

This is important as it shows that companies who operate in multiple countries are dealing with a more complex landscape where an outsourcing model should be considered.

Propensity to outsource payroll based on the number of countries a company operates in

As the number of countries a company operates in increases, so too does the payroll complexity and the need for greater knowledge to effectively manage it.

Payroll complexity varies radically between countries so ensuring you can manage it effectively is vital.

Our study has found that when a company operates in 2-3 countries, the propensity to outsource grows considerably.

This ‘Outsourcing Transition Zone’ is depicted in the associated diagram which highlights the tipping point when most companies either outsource their payroll or should at least consider doing so.

Why aren’t companies outsourcing payroll?

Aside from the number of countries a company operates in, nearly 1 in 5 (18%) say the reason to outsource payroll was partially or fully due to outsourcing being a part of their corporate strategy to contract non-strategic activities.

When respondents were questioned on why they haven’t outsourced their payroll or aren’t considering it, two-thirds (66%) of companies with over 1,000 employees said they are satisfied with their current payroll delivery model.

Of those who are satisfied with their current delivery model, the majority operate either fully or mostly in-house.

If it ain’t broke,
don’t fix it

If the existing payroll processing system is working, even if it is inefficient, many people often ask themselves why bother taking the risk of things going awry by outsourcing payroll.

As for other reasons not to outsource payroll, 12% cited it would be too much work and 10% said they were unable to build a compelling business case.

This highlights perceptions within the market that the risks, however small, often outweigh the potential benefits organisations can glean from outsourcing their payroll operations.

This is probably backed up by the fact that 29% who hadn’t outsourced, had incurred a penalty for non-compliant payroll in the past 5 years.

This compares favourably to the overall figures for penalties related to payroll non-compliance. 53% of respondents in our study cited that their company had received a penalty in the last 5 years for payroll related compliance issues.

Top 10 most complex countries for payroll in 2023

Source: 2023 Global Payroll Complexity Index Report

Penalties for non-compliant payroll

It’s a striking fact that just over 1 in 2 (53%) of those who participated in the study have received a penalty for non-compliant payroll in one form or another over the last 5 years. It also appears that if a company operates in any of the top 10 most complex countries, there is an increased likelihood of receiving a penalty.

It is logical to deduce that if you manage payroll in more countries the chance of incurring a penalty increases as there are more rules to adhere to.

However, this is not as clear cut as it seems. While it is true that you have a higher chance of incurring a penalty the more countries you operate in.

Our data shows that those operating in over 20 countries had fewer penalties than those operating in 2 to 5 countries, but more than those operating in 6-10.

So, what´s the root cause of this? It may be that there have been small oversights or human errors in the payroll processes that have happened over the past few years, which have resulted in penalties.

However, what this figure clearly demonstrates is that there is room for improvement in payroll processes to prevent penalties occurring in the future.

Have you received a penalty in the last
5 years for payroll non-compliance?

Have you received a penalty in the last 5 years for payroll non-compliance?
(Segmented by number of countries managing payroll in)

Opportunity to be proactive versus reactive

The fact that many companies have received penalties for non-compliant payroll is largely attributable to changing rules and regulations. This factor is magnified when managing payroll in multiple countries as exemplified in our previously released 2023 Global Payroll Complexity Index.

However, companies have an opportunity to be proactive and address payroll complexity by looking to outsourcing partners who have knowledge of multi-country payroll. That way some of the burden of managing payroll can be offloaded.