Sending payroll out the door

by 07 Aug 2007

Despite its longstanding central role in many HR departments, payroll functions are increasingly being outsourced as human resources managers seek to focus on value-adding rather than administrative tasks. Angus Kidman identifies key trends in this area and talks to two companies that have moved to the outsourcing model

Payroll is frequently the most visible part of any HR operation, since every single employee will carefully monitor their payslip and complain as soon as there’s even a minor discrepancy. As a largely administrative task, and one controlled by complex laws, it also remains a prime candidate for outsourcing.

While outsourcing is often used for a variety of business processes, payroll remains the most popular. Research by Gartner suggests that HR business processing outsourcing (BPO) will be worth more than US$1.3 billion ($1.5 billion) in the region this year, with payroll as a dominant component.

“Australian and New Zealand customers are second or third generation HR BPO users who are more likely to move towards more comprehensive HR BPO engagements,” says Gartner analyst TJ Singh in a 2006 analysis. “We will witness a gradual shift from discrete HR BPO engagements to more comprehensive HR BPO engagements as companies begin to appreciate the benefits of a comprehensive HR BPO engagement and as relationships between end-users and service providers mature.”

Payroll brings good news

While organisations operating in multiple countries may have outsourcing policies designed for global implementation, the details will often vary between different regions. That was the case with financial markets information provider and news agency Reuters, with its Australian operation leading the way in payroll outsourcing.

“The decision was made to outsource it in Australia about two-and-a-half years ago, just on cost efficiencies and recognition that payroll wasn’t necessarily a core activity for the business,” says John Taylor, head of human resources for Reuters Pacific. “We’re undergoing a bigger regional outsource now, but this local work was done in advance.”

In Australia, the organisation employs about 420 people, mainly in Sydney with a small contingent in Melbourne and a handful of people in Canberra and Perth.

Prior to outsourcing the payroll system, an internal headcount of around 1.5 had been used to manage the process. “Now the resources that I’ve got in the HR team are dedicated to value-add activities rather than just payroll.”

For Taylor, one measure of the success of the process is that it has had minimal impact on staff. “They wouldn’t really notice the difference.

They get a payslip with the provider’s logo on it. Their communication is handled internally. They deal with someone internal who then forwards the information to the bureau externally. I can’t imagine the difference in service is that obvious.”

Reuters recently outsourced more processes involved in payroll, shifting its own input of data from Australia to Singapore. As a result, Taylor has been consulting more closely with the provider to ensure the payroll system is continuing to work efficiently, but the process has been running smoothly so far.

Having a relatively straightforward payment structure helps in that area. “A lot of our employees work pretty regular hours – there’s occasional overtime, but there’s not a lot of variety like you might get in manufacturing, for instance.”

Careful advance planning is essential to making such projects successful.

“The advice I’d give is to be clear on the processes from an organisation’s perspective,”Taylor says. “Be prepared to make a decision about how involved you want to be, and make sure you have well established processes internally.”

That hard work should pay off with a more efficient system, but recognition may be slow in coming. “Payroll’s the classic case: if you do a good job, you don’t get noticed, but people are quick to complain if you don’t,”Taylor says.

Outsourcing converts

Even when an organisation is already committed to an outsourcing model, it pays to regularly re-examine that approach to see if it still makes fiscal and organisational sense. That doesn’t necessarily mean that radical changes will be needed, however.

When Warren Atlas joined invoice discount finance specialist Cash Resources Australia two years ago as CFO, his earlier employment experiences had predisposed him to running payroll services internally rather than using an outsourcing model. Cash Resources was using an outsourced provider to manage payroll for its approximately 40 employees, having previously used its accountants for that function.

Cash Resources has a general policy of using external resources as required. “If we can’t find the expertise in-house and it makes economic sense we outsource that function,” Atlas says. “What we do is provide money and service to clients. To ensure we do that the best; we don’t get distracted.”

Atlas was initially somewhat sceptical, however Robyn Best, Cash Resources’administration and legal services manager, was a huge fan. “When I came on board I looked at it long and hard to decide if it was worthwhile,” Atlas says. “I agreed to watch it for three or four months.”

That ‘watch’ process convinced Atlas that outsourcing was the most sensible model for the company. “I’m not a huge fan of outsourcing but I’ve been turned around in this case,” he says. “After a year-and-a-half I really become a fan of it.”

One major influence on that decision was the difficulty of matching the job to a suitable employee. “If you are an employer of less than 100 employees, you can’t afford to have payroll running internally. With 40 people, it’s extremely difficult to hire the required expertise with the current complexity of laws.”

Staff motivation is also a factor. “Even if we found the right person, they’d be bored in five seconds flat. It’s a very mundane job a lot of the time. If you can’t provide the challenges to ensure that someone is motivated, you may as well outsource it to someone who can spread the costs over many clients.”

The other major motivation for Cash Resources was to ensure ongoing access to expertise. “As payroll laws and law in general get more complicated, you either need to get a specialist organisation to do it for you or spend big dollars and bring the function in-house.”

The ongoing process is managed by Best. For the most part, that requires monthly checking to ensure the process is running correctly and incorporate any policy changes or new employees.

“They present issues to us as they arise,” Atlas says. “Their major role with us is transactional.”

One other benefit of outsourcing is the data summaries produced covering payroll issues. “The quality of the reports is of a much higher standard than you could produce yourself,” Atlas says.