Partnering for more effective payroll

by 27 Nov 2007

While administering payroll is a core function of the HR department, the latest technological advances mean that its easier than ever to shift the administrative burden of payroll to an external provider. Angus Kidman shares six key strategies to make company payroll more efficient and reduce workload through appropriate outsourcing

The notion of outsourcing payroll management is as old as the payroll bureau, but in an era where information technology plays a much more critical role in delivering all kinds of HR functions, it poses a new set of challenges. The complexity of tracking changing taxation laws and award conditions means that few large employers want to completely manage their payroll in-house, but at the same time ensuring a consistent experience is vital in retention strategies and enabling efficient data collection.

That creates a conflict for the ambitious HR manager: shifting away from transaction-focused activity such as payroll enables better delivery of higher-level strategic advice, and achieving that via outsourcing often looks like a cost-effective strategy. At the same time, the raw data needed for analysis of current employee performance often resides within payroll information, and mining that information can be trickier if its processing is entirely external.

Balancing these two demands can be tricky, but if achieved successfully, they can radically improve HR’s performance and its perceived value to the business. What key lessons have businesses learned from the experience of outsourcing payroll?

Lesson 1: Take advantage of online technologies

One of the most notable changes in the use of IT across the board has been the rise of internet technologies as a means of delivering services. Portal-based delivery services are now commonly used for both inputting payroll information and for making payslips accessible to employees. (one recent US survey suggested that more than half of all employees prefer to access payslips in this way). If payroll is integrated into the main company intranet, then staff may well not be aware that the service is managed by an external provider rather than in-house, but managers can reap the benefits of drawing on a larger-scale service than they could create on their own.

Queensland-based funds manager QIC made such a shift when it moved from its existing in-house HR system to a new online service provider by Empower earlier this year. A key motivation for that shift was to reduce its internal expenditure on IT staff while maintaining an efficient payroll service for 500 or more staff. “We wanted something out of the box that did not require a lot of IT resources to exploit the application,” QIC HR head Peter Howells said at the time of the upgrade. Offering online delivery also minimises the learning curve for staff, since it doesn’t require mastering a complex new interface.

Lesson 2: Look at shared services as an asset

While traditional bureau-based payroll systems aim at using an entirely external provider for cost and administrative efficiencies, other models of outsourcing services have also emerged. One of the most discussed in recent years has been that of the shared service organisation (SSO), in which common business practices such as payroll and HR are split into an entirely separate business division. From the point of view of other operational departments, they act in much the same way as an external service provider, but they remain a core part of the business. In some cases, such SSOs may be set up in countries where labour costs are considerably cheaper such as Indiaor the Philippines, although this has been more common within IT and call centres than with country-specific tasks such as payroll.

The main benefit of the SSO approach, according to its proponents, is that companies continue to treat such services as an asset and leverage them more effectively than if they were entirely external. Some recent research bears this out. A Deloitte survey of 131 organisations which had adopted the SSO model confirms that there can be major benefits from this approach, allowing something of a ‘best of both worlds’ approach that combines the virtues of outsourcing with the tight control possible internally.

“Organisations who view their SSOs as strategic business assets are deriving the most value from their investment,” said Deloitte Consulting principle Susan Hogan. According to the study, 53 per cent of companies found that costs for compliance were reduced by using SSO, and 20 per cent saw reductions in headcounts and associated savings through SSO.

Shared services can also work effectively across separate but related businesses, such as government departments. The Victorian Government has been particularly keen on this approach, implementing a Department of Shared Services (DSS) which helps provide key IT systems to four major state government departments (infrastructure, planning and community development, sustainability and environment and primary industries). “Many of those departments are mega-departments in their own right and have undertaken quite a degree of consolidation,” explained Gordon Caris, manager of stakeholder engagement within the shared services centre at the department.

The DSS shared service system is wide in scope, covering 40 business systems and handling 2,000 service desk requests a month, and 2,000 self-service users a day. A key element of the DSS’ success has been identifying appropriate services which can sensibly be shared, and payroll has proved to be a prime candidate. “It’s a system shop, but it also provides stuff that logically goes with system provision,” Caris said. Thus payroll makes sense because of its high degree of dependence on IT and procedural nature, but other HR related systems and management practices (such as talent management or recruitment) remain in the individual departments because the common elements don’t provide a broad enough base for efficiencies and cost savings.

That same approach can benefit any organisation, Caris suggested. “It becomes a perimeter question: what are the perimeters of your organisation?” he said in a recent presentation at the Government Technology World conference in Canberra.

Working out those parameters can take some time. “The simple construct that many of us were going into was that we’d treat it like a vendor relationship. It’s not. Two years ago we didn’t have our heads around that. We do now.”

Lesson 3: Dont customise more than you need to

In order to maximise their own profitability, external payroll providers will typically try and offer as standardised as possible a service to all clients. That doesn’t mean that changes aren’t going to be necessary, particularly in complex areas such as interpreting awards and assessing superannuation, but customisation of this sort will invariably cost money, and can make it much trickier to upgrade or alter other systems connected to the main payroll engine.

Minimising customisation should thus be the goal. “We tried to make the system as vanilla as we could, but we did need some customisation as our superannuation had some complications to it,” QIC’s Howells noted. “We were nervous about it, but it worked from the word go.” While customising systems to deliver business value can make sense in many contexts, diversity within payroll is rarely likely to be beneficial, so try and minimise it as much as possible.

Lesson 4: Weigh the pros and cons of multi-country

An appealing target for HR directors within global organisations is to look at whether payroll systems can be integrated, moving away from the traditional “one country, one provider” approach and allowing easier compilation of global performance data. In this scenario, working with an outsourcing provider is a highly likely outcome, since few companies could afford to maintain in-depth knowledge of the relevant taxation and payroll laws in each of their operating environments.

However, this shift may not always make sense. “The benefits of an integrated payroll – providing standardisation, harmonisation, and simplification – provide an antidote to problems such as failed compliance, payroll leakage, and inconsistent cross-border management information,” Forrester Research analyst Euan Davis argues in a recent paper. “Adopting multi-country payroll undoubtedly makes sense in theory but many firms lack the scale to execute, find the economies of scale wanting, and fear resistance from local offices.”

In order to make a sensible assessment, he suggests, companies first of all have to accurately audit current payroll costs, and then assess whether the benefits from transitioning all those individual systems can be justified in overall business terms. “This will equip the procurement group to assist in deciding whether multi-country payroll makes sense and, if it does, when to outsource and when to use shared services to get there,”Davis wrote.

Lesson 5: Plan an appropriate timeframe for migration

Any payroll project will involve a large amount of highly sensitive date, and moving this to an external provider can be a complex and time-consuming task. Setting a suitable timeframe to make that move is one of the most important elements.

For St Leonards College, shifting to a new external service provided by Empower for its 400 staff took some time. College accountant Brad Sims said the migration process had gone well. “We took it slowly because we wanted to make sure it went right,” Sims said at the time of the move.

Other changeovers may happen more quickly. At QIC, the decision to make the shift to an external provider, which happened in June 2007, required careful assessment of available options. In particular, QIC wanted to plan carefully to ensure continuity of payroll services. That required some late hours to reach the goal, Howells said in a press statement about the upgrade, but that was one advantage of using an external provider, since additional resources could be brought in as required.

Migration strategies are complex enough when working within a single organisation, but can become considerably more difficult if multiple entities merge. Under such circumstances, shifting to a single provider can make much more sense than trying to maintain multiple systems.

That was the approach taken by British Polythene Industries, a manufacturer of plastic bags and films which found itself with eight operational sites, six separate divisions each running their own books and three separate legacy payroll systems. Part of the rationalisation strategy put in place to run more efficiently saw the company replace those payroll systems with Frontier Software’s chris21 package, standardising the payroll days and other elements at the same time.

Lesson 6: Payroll is a good place to start

While payroll might be an obvious target for outsourcing, evidence suggests that many companies still haven’t considered making the switch. A survey of 168 United Kingdom HR directors found that while payroll was the most common HR-related function to be fully outsourced, that status has still only been achieved by 20 per cent of companies. The remainder either had partial outsourcing for processing functions or kept the entire payroll process in-house.

In a similar vein, a study by Watson Wyatt found that less than 20 per cent of major payroll changes were conveyed to employees using internet technologies, even if the basics of payroll management were handled online, while research by Hewitt Associates found that a failure to convey precise company goals and strategies was a major reason why variable pay strategies, increasingly common as a means of attracting and retaining senior executives, often failed to fully deliver on their promise.

All this suggests that there’s plenty of scope for further payroll technology improvements – a theory borne out by IDC’s assessment of the business process outsourcing (BPO) market for HR services in 2007, which it says will continue to be driven by basic payroll and staffing requirements, especially in markets where competition for talent is tight. While outsourcing payroll won’t make sense for every business, its well-tested status in this field still makes it a logical starting point for companies looking to streamline internal operations for either HR or IT.

National Payroll Week winners

National Payroll Week (NPW) celebrates the vital role payroll plays in the everyday lives of Australia's workforce, in businesses and across the wider economy.

The highlight of National Payroll Week is the NPW Award Ceremony which recognises the accomplishments of payroll specialists across four categories.

What sets out one payroll specialist from another? Generally speaking there are those attributes that are inherent in all payroll specialists - a dogged determination to ensure that people are paid accurately and on time, every time, a belief that every employee's pay is important, an understanding that payroll is an integral and pivotal part of the organisation and the ability to empathise and communicate with all employees.

Payroll Specialist of the Year: Julie White, payroll manager, St Vincents & Holy Spirit Health

Julie White's outstanding commitment to payroll is widely recognised at St Vincents & Holy Spirit Health. She was nominated by her team members, the financial accounting manager and the group HR manager. For the past seven years, Julie has been responsible for paying 2,500 employees in three hospitals and seven sites. She is always there to help, totally reliable, committed beyond expectation and is always willing to 'get her hands dirty' to ensure the job gets done. In addition to her exceptional payroll knowledge, she is flexible in her approach which ensures that the payroll is run in an efficient and cost effective way.

Payroll Team of the Year: Catholic Education Office - Parramatta

It's been a busy two-and-a-half years for the Catholic Education Office in Parramatta. The existing payroll system did not accommodate the needs of HR, so they were pressured to introduce a new system that would accommodate HR's needs. Unfortunately, the new system did not cater for the extensive payroll conditions, so the payroll process that was once very efficient was turned into manual process. The pay office staff were suddenly required to work additional hours and weekends to ensure the employees continued to be paid correctly and on time. Eventually management decided to go back to the original payroll system. TAPS congratulate the Catholic Education Office - Parramatta for their endurance in moving between two systems and always ensuring that 5,000 employees each fortnight were paid, irrespective of the payroll system they were operating.

Payroll Consultant of the Year: Darren Staggard, MyWorkplace Solutions

Darren has all the qualities you want in a good consultant. He is technically savy, while at the same time being upfront about the limits of his own knowledge. He is able to draw on his own strengths as well as the strengths of his colleagues for find solutions to problems in a timely manner. Most importantly, he has a pleasant manner, is always personable and easy to relate to. He shows genuine care for customers and shares the stress his customers experience when problems are encountered, and works tirelessly to relieve this for them. Crucially, as a consultant his work ethic is reflective of a unique sensitivity to what the client is trying to achieve, the costs involved and the trust that is being put in him as an individual.

The Workplace Law Annual Training Fellowship: Zenobia Butler, Century Yuasa Batteries

The Workplace Law Annual Training Fellowship is awarded to an outstanding payroll professional who shows, through study, they are committed to developing their payroll management career. Zenobia Butler certainly meets all the criteria for winning this award. She completed the Payroll Management Certificate with a credit pass in 2006; Workplace Review in 2006 and 2007; Compact Conference in 2006 and 2007; regularly attends the Brisbane breakfast meetings to network and stay up-to-date; recently did the terminations workshop as a refresher to ensure compliance with the new rules; and is currently studying for her CPS exam which she plans to complete in the next few months.