Palming off payroll

Payroll and accounts have long been the darlings of Business Process Outsourcing (BPO).Upsetting your employees by botching their payroll is not only bad for morale and staff relations, it also makes you look unprofessional, and can wind up costing you time and money rectifying silly mistakes.
Written by Lisa Simmons, Contributor

Payroll and accounts have long been the darlings of Business Process Outsourcing (BPO).

Upsetting your employees by botching their payroll is not only bad for morale and staff relations, it also makes you look unprofessional, and can wind up costing you time and money rectifying silly mistakes. Not paying your suppliers isn't a particularly good look either. This is why internal and external money matter -- payroll and accounts -- have always been first out the door when it comes to business process outsourcing (BPO).

And it's easy to see why. Traditional company payroll models are generally costly, inefficient, and rarely a core competency of an organisation. Payroll is a tricky business and companies are generally keen to get help wherever they can. IDC estimates that the global market for HR management and payroll processing software will grow at 5.6 percent each year through to 2007. That will see a rise in overall market value from US$4.3 billion (AU$5.5 billion) in 2002 to US$5.7 billion (AU$7.2 billion) in 2007.

Rolf Jester, chief analyst for IT services at Gartner, says outsourcing payroll and accounts is one of the oldest outsourcing businesses of all. "From small one person businesses to huge companies, outsourcing finances and payroll to a third party has been happening for many years," says Jester.

Handing over the headache
If you choose the right supplier you can effectively wave goodbye to a lot of headaches. You can forget all about leave management (annual, sick, long service, time in lieu, and so on), electronic funds transfers to employee accounts, payment summaries, superannuation guarantee reporting, employee declarations to the Australian Tax Office (ATO), end-of-year reports, and general ledger reports. PAYG tax can be remitted electronically to the ATO, payroll tax reports can be calculated for you, superannuation reports calculated in accordance with SGC guidelines, and termination calculations taxed as per ATO requirements.

IBM offers outsourced accounts, payroll, HR services, CRM, and procurement outsourcing within a service offering called Business Transformation Outsourcing, and last year signed a global deal with consumer packaged goods giant Procter and Gamble.

According to Bill Farrell, IBM's Asia-Pacific partner for human capital management, the company's customers typically have in excess of 20,000 employees, but he points to smaller pure-play providers such as ADP which cater to smaller companies. Farrell says that some companies outsource accounts separately from payroll and some bundle them together.

"It depends where payroll sits within the organisation," says Farrell. "If it sits within finance and accounts then it tends to be outsourced as a package. However, increasingly we are seeing it sit within the HR department alongside recruitment, enquiry management, and administration, so it is more often being outsourced alone or with those functions," he adds.

Farrell says that to outsource both HR and accounts is a huge task and they both have different challenges in terms of data reporting and technology, and a different customer set. "Finance and accounts customers tend to be internal chief financial officers, whereas HR counts the entire staff as its customer, so it's difficult to keep these two functions together," he says.

Making it pay
Farrell says outsourcing business processes such as payroll and accounts can seem like a big investment but overall proves cash positive in the first couple of years. "The cost is initially carried by the outsource provider, and funded through the cost reductions," he says.
According to Stuart Dickinson, marketing and communications manager at SAP solutions company Oxygen, there are a couple of prerequisites when it comes to outsourcing your payroll or accounts function. Dickinson says it is predominantly organisations with relatively large volume invoices coming in each month that outsource their accounts.

"Firstly, there are those organisations with huge requirements, we are talking about hundreds of thousands of invoices," says Dickinson. "Secondly, there are organisations that have already made the decision to centralise their financial and banking operations. It's hard to outsource the accounts function if it is done individually by each business unit," adds.

For it to work, says Dickinson, it is important for a company to have its core financial systems running across a company rather than "55 different finance applications".
Companies looking to outsource these functions do it because they cannot do it efficiently or cost effectively in-house and want to get process improvements. A company like Oxygen, says Dickinson, also offers what he calls an "enhancement contract," which means it not only takes over the accounts payable system of a company but also, overtime, it reengineers it and implements its own solution over the top of it.
"With our system the analysis function, the data scraping and the punching of data happens automatically, leaving the customer to focus on resolving issues, ensuring accuracy and auditing," he says.

Carter Holt Harvey, a forest product company which employs 10,400 people in 150 different offices across New Zealand, Australia, Fiji, Asia, and South America, claims to have saved seven percent on costs year on year since April 2001 when it first automated its accounts payable system using Oxygen's systems.

Retain control
Dickinson says that organisations are often quite nervous about outsourcing their accounts and payroll, worrying that they are handing over their signed cheque book to a third party, but, he claims, they have no need.
"We basically prepare a file for the payment of invoices and it is up to the organisation to retain cash and treasury management, and to approve the payment," says Dickinson.
"It's about control and auditing. Traditionally outsourcing in this area has just been focused on the imaging of invoice data but not the workflow, but that is where the real value is. Yes we need to scrape data for the customer, but we also can process the invoice through the system as well," he says.

Many organisations know that in terms of their accounts payable processes they need to do some process improvement but that costs money and time and it's hard to justify that when it is not the core competency, says Dickinson.

"A retailer, for example, would much rather spend that money on opening new stores and hand over their accounts within an enhancement-style outsourcing contract, without the capital expenditure and upfront costs of doing it themselves. It normally costs less than doing it manually and there is no risk," he says.

According to Wendy Blanch, director of payroll specialist PayLogic, payroll has become an increasingly complex and time- consuming area as legislation is constantly changing. "With new tax laws coming in, payroll is becoming increasingly complex, and outsourcing the function means you don't have to hire a trained payroll person," says Blanch. "Some clients come to us and in addition to doing their payroll, which is our area of specialisation, we also do their accounts."

PayLogic has customers with four employees up to 120, each using its Internet-based service. Time consuming tasks such as printing, back-ups, system upgrades, and employee declaration reporting are included, alongside reports which are couriered to customers' door each day, or viewed online via a secure login. Customers can also view up to a whole financials year of reports online, and at the end of the year these reports are archived onto a CD so the customer doesn't have to load any addition software onto their PCs.

"From electronic remittance, to end of year payment summaries going straight to the ATO, we take away all of the time consuming paperwork," says Blanch. "We also offer add ons such as employee self service, which means that if your organisation is PC-based your employees can log in with a secure name and see their pay slips, earnings, and change their banking details, for example. Other features include end of month ledger files, which can be customised for each client," she adds.

Read the small print

Blanch warns of hidden costs in the marketplace. "Large providers can charge you for space on their system for terminated employees. If a company has 40 employees and five leave, and another five are hired, some suppliers still charge you for the five employees who have left to sit on their system," says Blanch. "Also, make sure the supplier is specialised in this area. Some people employ data entry staff to handle your payroll, and you are not getting what you are paying for," she says.
The benefits, according to Blanch, far outweigh any risks. "Organisations can ensure their staff are getting the right pay, are paying superannuation correctly, and be better equipped to report to management, which is not offered in small accounting packages," she says.

Debbie Mills store manager at online pharmacy OZePharmacy, which has 70 staff, has found the outsourcing of the payroll function to PayLogic a boon.

Matthew Franceschini, Entity Solutions
"Customers don't have to invest in software, office space or bank fees and it gives them more time to focus on executive business issues." -- Matthew Franceschini, Entity Solutions

"Prior to working with PayLogic we had an individual person running our payroll using software package MYOB but she made a total hash of it," says Mills. "Our superannuation and annual leave were not calculated properly, so if staff deviated from normal hours, or took holidays, their pay was incorrect," she adds.

At the beginning of the last financial year PayLogic took over the OZePharmacy account, on a pay-per-employee basis. "Pay slips are now easy to read, more securely sealed, and the reporting system is far superior to any other we have seen," says Mills. "It's more cost effective because we are portraying a more professional image and the reporting system is right," she adds.

Entity Solutions is another company offering outsourced payroll services alongside management services such as contractor management. You can either outsource, or self manage your payroll, using Entity's own software which is called Profit Enhancer. According to Entity's CEO Matthew Franceschini, the range of customers is quite broad, from five to 10 employees right up to those that have 300 staff. Customers choose the level of outsourcing they require.

"We offer a variety of services which means customers might access a database we have set up, or put in their own information, and in the meantime save buying the software themselves," says Franceschini. The service, like most on the market, work on a "per person per pay" model.

Private matters
In addition to saving time on pernickety, and yet crucial details, additional benefits include increased confidentiality. By outsourcing payroll remuneration, details remain confidential from your internal employees. Security is another benefit, because when payroll information and documentation is stored off site, there is less risk of it being lost or destroyed.
Franceschini believes increased privacy is a major advantage of outsourcing. "Some companies, for a host of reasons, don't want the salary information of their staff in the hands of internal employees," he says. "If a company's main reason for outsourcing is the privacy issue, we find it is quite often the managing director or CEO of that company we work with, but not much of his or her time is taken up, maybe 10 minutes a week. Customers don't have to invest in software, office space, bank fees, and so on, and it gives them more time to concentrate on executive business issues," he adds.
Cost benefits are also significant, he says. "If you've got a staff member looking after payroll three days a week, and then consider that 60 percent of that person's salary is being spent on payroll, and add to that administration, legislative costs, systems costs, hardware and software costs, and you can see that outsourcing is cheaper," he says.

Patricia Hopkins, CITEC
"Service providers are taking over the functions of renumeration, payroll processing, and that includes people as well as IT." -- Patricia Hopkins, CITEC

CITEC is a commercialised Government-business that includes business process outsourcing, and hosted payroll amongst its service offerings. The company manages over 130, 000 payees under 250 awards, and liaises with over 400 deduction authorities, over a variety IT platforms including IBM, HP, Sun in a hosted environment, as well as payroll and disbursement payment services over SAP.
The company offers two kind of payroll services. The first is in conjunction with HR software firm Aurion. The Department of Public works, responsible for the delivery of capital works initiatives, facilities maintenance, procurement, development and administrative services for government and industry clients, is one of its customers.
Payments for the organisation are made across eight different enterprise agreements, reflecting varying pay rates for white and blue collar employees. CITEC manages IT systems support and payroll disbursement for the department's 4200 employees located in more than 20 regional and metropolitan sites.

The second payroll service offered by CITEC is called PAY Solutions and it handles payment of funds to your employees and approved deductions to other third parties, such as the ATO. Services include funds management and distribution to payroll reporting, printing, and reconciliation. These services also allow employees to have automatic deductions taken from their pay for purposes such as health insurance and child support. CITEC can liaise with the ATO, health insurance groups, and other financial organisations -- all the running around, basically.

"We provide services to all sizes and kinds of companies, including local and national government and across a variety of verticals including federal government, finance, legal, utilities, and resources," says Patricia Hopkins, director of professional services and BPO at CITEC.

Hopkins says it tends to be the more mature companies who tackle payroll as a kind of selective outsourcing, or what Hopkins calls "IT intensive business functions. "We have a number of arrangements depending on how the client wants to structure it, and these range from a fixed monthly payment to a per-employee-per-pay basis," says Hopkins. "Some clients want to own their own applications and some want a provider who can provide the IT infrastructure, which we do," she adds.

Possible pitfalls
Hopkins warns that it is important for a supplier to be able to provide proper performance metrics linked to business values, from service level agreements through to business improvements. "The provider must sit down with the customer and define business values, discuss particulars, requirements and whether the service will be 24x7, or whether the customer wants a certain amount of pay runs in a certain time frame, and so on," says Hopkins.
Problems occur if you don't define clearly the important measures, warns Hopkins. "Even if you outsource something like payroll, you still have to manage it and ensure your service provider continues to deliver," says Hopkins.

Payroll and accounts, like any other business process, shouldn't be outsourced just to get rid of a mess, warns Jester. If it doesn't work well internally, don't outsource it, he warns. "You'll just end up with an outsourced mess and a smart service provider wouldn't take it on, unless part of the agreement was to transform the process into a better ordered one," he says. "In the same bucket are those who outsource to save money -- If you are considering this, don't do it. You might save money but it's not a reason to do it. A smarter reason is to think about the internal processes and what works and working out some business processes that work and those that don't," he says.

Hopkins says she is seeing a general raising of outsourcing focus towards business processes such as accounts and ;payroll. "Service providers are not just handling the applications but also taking over the functions of remuneration, payroll processing, and so on, and that includes people as well as IT.

"Customers are pushing the barrier beyond just seeking subject matter experts, for example in the payroll market, and are raising the bar and allowing us to come in and understand their business in a more strategic way, identify exactly what they are looking for, and getting the full potential from a partnership with their business."

Case study: P&G hands over payroll to IBM
Last year global consumer packaged goods giant Procter and Gamble signed a 10-year, US$400 million business transformation outsourcing (BTO) deal with IBM which saw it outsource its HR function, including payroll, to IBM.

IBM now supports nearly 98,000 P&G employees in about 80 countries, providing services such as payroll processing, benefits administration, compensation planning, expatriate and relocation services, and human resources data management.

"P&G wanted to get the benefit of the competition that is out in the marketplace, and get more bang for the buck," says IBM's Asia-Pacific partner for human capital management Bill Farrell.

"They treated each function as a separate business case and judged suppliers on their individual competency in that area," he says. "For instance, the key players in outsourced payroll might be able to provide more than a one-type-fits-all company," he adds.

According to Farrell, organisations are increasingly making their outsourcing decisions based on market capability for each separate function.

"The main reason for outsourcing business processes is cost reduction and the improvement of services, and the realisation that for organisations like P&G, HR, payroll, accounts, and so on, are not core sources of expertise," he says.

"By working with one organisation, P&G gets better information and compliance-based reporting from one source, from around the world, on global trends," says Farrell.

"Doing it this way means organisations also don't have to invest in new technology, but ask us to bake it into the business case -- they get outsourced services and new technology out of the deal," he says.

Under the deal, IBM is also providing application development and management of P&G's HR systems with P&G's existing SAP software. About 800 P&G employees were offered employment with IBM.

This article was first published in Technology & Business magazine.
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