Multi-Country Payroll Outsourcing to LatAm Heats Up Despite Challenges

As increasing attention has been drawn to the need for Multi-Country Payroll Outsourcing (MCPO), Latin American companies have started to adapt their offerings to meet the often-complex needs …

Deborah Williams of the TMF Group highlighted the complex and shifting nature of the MCPO environment in Latin America.

As increasing attention has been drawn to the need for Multi-Country Payroll Outsourcing (MCPO), Latin American companies have started to adapt their offerings to meet the often-complex needs of this niche.

A recent report by the Everest Group noted that the MCPO market experienced rapid growth of approximately 20 percent compound annual growth rate between 2012 and 2014, and is now worth more than US$1 billion annually. The report also noted that Latin America – along with Asia – is growing fast in this market.

Geographical differences in compliance and regulatory systems have posed their own problems, however, and Latin American providers wanting to broaden their service offerings must be aware of these potential pitfalls.

Peaking Interest

Julie Fernandez, ISG’s Global Payroll Process Lead, told Nearshore Americas that MCPO in Latin America is a hot topic of interest, drawing the attention of regional payroll owners as well as corporate payroll, risk and procurement folks in U.S. headquarters.

“Interest is peaking in early assessment and feasibility studies, which outnumber studies commissioned by other regions 3:1 at this time. Brazil, Mexico, and Argentina currently lead the list of Latin American countries that are of peak interest for payroll solutions,” she said.

In a recent blog post, Fernandez cited several exempts that illustrate the growing interest in MCPO in the region: “Big-name payroll provider ADP has redoubled its efforts in the [Latin American] region by adding its Streamline-brand payroll-only offering with regional support from a Miami contact center. SafeGuard World International, a niche payroll aggregator, has established a regional home base in Mexico City. LATAM-based service providers in Brazil and other countries are rushing to consolidate and expand their services to offer end-to-end payroll.”

Mandatory Versus Customary Practices

According to Deborah Williams, Head of Global Business Services at TMF Group, the MCPO environment in Latin America is a complex and constantly shifting one. “Requirements such as the need to keep paper records, rules around hiring and firing, and the administration of a large number of mandatory and customary benefits all create a high administrative workload,” she said.

ISG's Julie Fernandez said that MCPO in Latin America is a hot topic of interest. ISG’s Julie Fernandez said that MCPO in Latin America is a hot topic of interest.

Williams cautioned that not only must payroll managers navigate their way through the layers of complexity to get to grips with how strict labor laws, tax rules and other statutory legislation apply to their operations, but they also need to differentiate between a statutory requirement and a commonly accepted practice – and for the latter, understand the potential impact on employee relations if a common practice were not observed.

“While the state of MCPO varies geographically across Latin America, there are no obvious leaders, rather different aspects of payroll are more, or less, challenging in different geographies,” she said, explaining that Colombia and Brazil, for example, have onerous levels of paper-based bureaucracy for record-keeping requirements.

Argentina, Williams noted, has the most complex system of processing and recording time and leave processing, while in Mexico, separation processing can be costly and drawn-out as several organizations choose to make final payments in front of a judge to avoid the risk of future claims.

A Slow Evolution

Fernandez warned that MCPO in Latin America has evolved slowly in the past due to immature service provider offerings. “Few in-country payroll systems have truly evolved to serve multiple countries in the region and the cost to expand payroll modules in a large Enterprise Resource Planning (ERP) system like SAP or PeopleSoft is burdensome compared the cost to retain payroll employees locally,” she said.

Fernandez added: “Outsourced payroll providers have developed slowly in the region, as the business case for savings typically wanes outside of North America. Today, an onslaught of regulations has shifted concerns from the economics of the business case to the financial and compliance risk of keeping up with ever-changing employment law and tax policies.”

Fernandez noted, though, that Latin America payroll suppliers have begun to expand their offering beyond a simple payroll system to include payroll processing services and downstream regulatory reporting and tax filings.

“There are more frequent touch points with Human Resources, Compensation, and Finance & Accounting which have led providers in the region to extend services to include critical payroll-touching activities that will relieve employers of burdensome administration that continues to evolve with each new wave of government policy-makers,” she said.

She added that there is evidence that the service provider markets are consolidating to foster this broader payroll support both in-country and across like countries in the region.

Administrative Challenges

For Willams, the key challenges facing MCPO in Latin America are compliance requirements, workplace management and HR administrative requirements.

“Compliance requirements can be complex and difficult to interpret. They are subject to frequent alteration and carry onerous, paper-based reporting requirements,” she said.

Payroll managers in Latin America also have to manage payroll in line with company-specific collective labor agreements (CLAs), which, according to Williams, can specify everything from rates of pay to shift patterns and vacations, all of which can be changed or imposed at extremely short notice.

Williams added: “Whilst HR administrative requirements are normally beyond the scope of payroll, we are increasingly seeing these – for example separation, or time and leave processing – impacting payroll operations.”

She noted that these challenges are becoming increasingly complex and the traditional role of the regional payroll manager is changing markedly.

Arkadev Basak, practice director at the Everest Group, listed on of the major pitfalls of MCPO as customer satisfaction. “In a multi-country payroll deal, providers may be providing exceptional services in the head countries (countries with large or significant employee population), while they might be lacking in terms of service quality in the tail countries (countries with lesser employee population). This may cause major dissatisfaction with the buyers and preemptive measures should be taken to avoid this,” he said.

A recent research report commissioned by TMF Group and conducted by Webster Buchanan showed that most vendors are increasingly recognizing the importance of having an advocate on the ground who speaks the local language and who is used to working with the cultural idiosyncrasies.

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Emerging Opportunities

For smaller country populations where resource may be limited, an alternative is to use an advisory service to discuss ideas and help implement programmes, Williams advised.

Ranjan noted that there is a lack of service provider capability in the region. “There are no providers that cover all Latin American countries and have end-to-end offerings across all of them,” he said.

Fernandez advised that payroll providers serving Latin America can benefit from the focus on MCPO by seeking ways to expand their business beyond the scope of a single country payroll. “There is less buying pressure to demonstrate a lower cost of operations in order for multi-national employers to find value in a regional offering,” she said.

However, she cautioned, simply adding more payroll business in the single country model does not drive sufficient visibility in today’s market. “Employers are looking to a regional payroll provider for consolidated interfaces to and from their global HR system, to a rationalized environment for data entry and corrections made locally or by shared services, and to leverage a single payroll provider contract, service levels, and pricing model,” Fernandez said.

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