New report reveals the cost of inefficiency in organisations
Organisations across the world are losing millions due to "payroll leakage," according to a new report, which highlights the impact of inefficient payroll systems and processes.
Payroll leakage is defined in a new UKG and KPMG report as the "consistent, unintended financial losses within an organisation's payroll spend" due to a variety of factors.
These factors may include inefficient processes, system limitations, fraud, policy deviation and exceptions, timekeeping issues, payroll transaction errors, and compliance failures, according to the report.
"Leakage is the signal that systems and processes aren't aligned; it's where inefficiency hides yet never seen as it is a distributed cost across the entire enterprise," the report added.
It found in its survey of more than 300 senior global leaders that 38% of organisations have experienced $1 million to $5 million in annual leakage.
Reasons behind this include overpayments, duplicate payments, authorised (contra-policy) and unauthorised payments, as well as operational inefficiencies.
According to the findings, a small one per cent leakage for an organisation with 50,000 employees could result in $10 million to $15 million in preventable losses.
Beyond financial impact, the report said payroll leakage can also erode trust and job satisfaction among employees.
Public compliance failures can also impact stock prices and business continuity, as well as reduce partner confidence and trust in the organisation's operational excellence.
Addressing payroll leakage
Payroll leakage is a result of a bigger problem in systems and manpower, according to the report.
Nearly half of organisations (46%) reported that their payroll function manages 10,500 to 50,000 employees, while a quarter said they manage 50,000 to 200,000.
Despite this, only 33% of firms said they have 50 or more full-time employees dedicated to payroll, while 23% said payroll for tens of thousands of employees is handled by only 15 to 24 full-time employees.
"The survey results indicate a trade-off between cost efficiency and operational effectiveness," the report reads.
"This often results in blurred segregation of duties and underutilised preventive controls, which can lead to financial, operational, and reputational consequences."
The same report also found that 33% of firms operate a truly global and standardised model, with a vendor and incident management frameworks in place.
According to the findings, while 74% of firms are using multiple vendors, management is often inefficient, with only 25% rating their framework as "effective."
"To bridge this gap, organisations need to standardise processes, automate smartly, and elevate the payroll function," the report reads.
Focus should be on enhancing data accuracy, compliance, and integration, and leveraging AI, automation, and analytics to improve accuracy and workforce insights, according to the report.
"A phased strategy that emphasises foundational groundwork and quick wins is essential for successful transformation."
AI in payroll
Meanwhile, AI also presents an opportunity to support the growth and scalability of payroll teams, but it is held back by persistent challenges.
Nearly half of organisations (48%) noted that data accuracy and integrity are their top challenge in implementing AI in payroll.
More than a third (34%) also reported system integration difficulties.
Six in 10 (60%) organisations said they are very comfortable with next-gen tech. However, just 47% of firms use AI or automation in production, and only 10% are planning to implement it in the next 12 months.
A significant 38% said they are still evaluating AI.
Richard Limpkin, general manager of global payroll solutions at UKG, underscored the importance of modernising payroll systems with new technologies, stressing that it could also provide organisations with valuable workforce data.
"Employee pay is one of the most powerful levers multi-national organisations have to strengthen their financial health, elevate the employee experience, and operate with confidence on a global scale," Limpkin said in a statement.
"Payroll teams sit on a wealth of actionable insight that leaders can use to guide smarter, faster decision making. The opportunity ahead is immense: global payroll is a rich source of workforce intelligence for organisations that make the bold decision to modernise and empower their teams with new technologies."
