As companies look to control labor costs, cut operating costs and get a better handle on key data that drives business, nearly every operational process is being scrutinized, including the handling of the payroll system .
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While it might appear straightforward, routine and nonstrategic to nearly everyone outside the finance department, studies have shown that even this critical task can be completed more efficiently and often at a lower cost.
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For example, when it comes to payroll processing, the top 25% of companies tracked by the APQC have a “total cost of payroll processes per employee paid” of $67, while the worst-performing spent $398 per employee paid.
Historically, payroll accounting has been a somewhat isolated, standalone software application housed in human resources or finance and connected to only a few other systems. Companies typically run payroll in-house, outsource it to a company like ADP or Ceridian, or operate a combination of the two.
Upgrading or migrating to new HR payroll software is usually dictated by a vendor upgrade or loss of support for an aging software package or a change in ERP, said Felicia Cheek, global payroll practice leader for The Hackett Group, a Miami-based research and consulting company.
Traditionally, most upgrades have progressed in lockstep with their current vendor, moving on to the next version of the payroll software. But in the past year, companies like Chiquita, Thomson Reuters, and Time Warner, have changed payroll companies.
“What we find in today’s market is there are so many changes in payroll, for globalization and around payroll compliance, that a lot of companies are in the process of upgrading,” Cheek said. “Some are trying to decide whether it is still cost-effective with their ERP package or whether they should outsource payroll.”
Others have recently upgraded and are getting acclimated with a new system or new business processes, she said.
When payroll is part of an ERP package, not upgrading can be costly, she said. Many vendors charge a lot to maintain support for older, highly customized ERP systems. Cheek hasn’t seen companies change their payroll providers unless they are also changing its financial systems.
But she has seen an uptick in customers fleeing incumbent ERP provider PeopleSoft and jumping to a well-heeled startup called Workday -- founded by PeopleSoft’s former top brass -- taking payroll with them.
Payroll systems go end to end
A growing number of companies are looking to integrate payroll system information into their human resources systems rather than keep it -- as well as workforce administration, time and attendance, talent management, related payroll processes and the software that supports it -- in separate silos of information that aren’t integrated.
Hostile takeover spawns disruptive game changer Workday
Why is the birth of a new human resources and ERP provider causing such a change in payroll’s future?
Not many companies wanted to wait six years for incumbent provider to release its next-generation package, and not many wanted to deal with the uncertainty over PeopleSoft’s future, observers say.
Oracle acquired PeopleSoft in a hostile takeover in 2005, and the technology giant spent six years integrating PeopleSoft applications with other acquisitions, including JD Edwards, E-Business Suite and Siebel systems into a new suite called Fusion Applications.
While Oracle was busy with its massive integration, a new player, Workday, founded by PeopleSoft’s co-founder David Duffield, and its chief strategist, Aneel Bhusri, entered the market with a formidable product, growing to $300 million in revenues by 2011.
Delivering its solution -- which includes payroll -- as an on-demand service model alleviates the need for a company to invest in added hardware, integration services or costly customization.
Payroll giant ADP has also offered its services online -- without the fancy SaaS or cloud marketing terms -- for at least a decade. But it took Workday’s success to ignite changes in the marketplace.
Ceridian, SAP and even ADP have gone on a buying spree in the past few years, making acquisitions of various service providers so they could offer end-to-end HR systems and cloud-based or SaaS delivery options.
Business managers want to streamline and share information so the company can operate more efficiently. They also want to lower their total cost of ownership (TCO).
“A broad set (of companies) are migrating to the cloud, where pricing is per headcount versus per transaction and the scope of services are soup to nuts,” said Paul Hamerman, vice president and principal analyst at Forrester Research in Cambridge, Mass.
Newer software like cloud-based Workday incorporate formerly customized features that are now part of a standard package, Cheek said. For example, self-service and the ability to send electronic W2s are standard features now, not additional ones that need customization.
New options, different approach
The evolving marketplace means companies looking to upgrade or migrate their payroll software have new options to consider and may need to reframe their decision-making process.
The complexity of incorporating compliance with state, federal -- and for multinational companies, different country regulations -- is the main reason companies look to outsource their payroll processes. Accuracy is the key to saving money when processing payroll, and lowering error rates while reducing transactions often leads to reduced costs.
After determining the cost of payroll, organizations deciding whether to migrate to a new provider or bring payroll back in-house should focus on process redesign by a review group that includes HR, finance and IT functions, Cheek and Hamerman said.
“Don’t look at payroll in isolation but as part of a total process. Look at opportunities to outsource,” Hamerman said. “It really depends upon what a company’s objectives are in compliance and cost of ownership.”
Typically, HR and finance are very task-oriented, have their own processes and don’t talk to each other, so the processes are not integrated end-to-end, Cheek said. These operational units “now need to work together and understand what each other does.”
Small and midsize companies -- those with 50 employees on up to those with several thousand -- tend to outsource their payroll, especially those with operations in many states and some with business in several countries.
Larger enterprises, those with 5,000 or more employees, take their payroll back in-house as they can achieve larger economies of scale.
Before purchasing a standalone payroll application, make sure it integrates well with the company’s ERP system, Cheek said. This allows a company to avoid costly customization or integration charges.
Hamerman said a company should model the cost of ownership over a five-to-10-year period. That provides insight into the transactional volume, which will dictate whether it is better to own payroll systems or process it in the cloud.
“The good news is that companies have a lot of options to consider if they want to outsource or run it in house and or integrate it within HR,” he said.