Making it all add up

The ‘perfect’ payroll system comes at a price – time and
effort in preparation. Only once a requirement list is drawn up in view of the
wider HR picture, and departmental changes earmarked, can a worthwhile
selection be made. Keith Rodgers reports

Compared to more complex enterprise applications, buying
payroll software should be a relatively straightforward exercise. The processes
are usually well established within organisations, the IT market is mature and
the basic requirements are fairly standard.

The reality, however, is that many companies still fail to
make the best choice when they go through the selection process. This is partly
because payroll options have proliferated in recent years – as well as a
variety of standalone applications and modules, vendors offer a range of
outsourcing services, from management of the entire payroll function to remote
‘hosting’ of the application.

But part of the blame lies with users themselves. Most
purchasers of HR software focus on features and functionality, believing the
key task is to find the most suitable application at the best price. But to get
the maximum return from implementation, users need to tackle a far broader
range of issues, including the total cost of ownership and management of
service and support agreements.

In many ways, the payroll function is being pulled in
different directions. On the one hand, few would argue that these systems are
strategic – they are primarily process-based and add little value in terms of
leveraging an organisation’s human capital asset base.

On the other hand, they play a central role in the smooth
running of any enterprise – salary may not be a positive motivator for most
employees, but when things go wrong it is invariably a negative factor. As
statutory requirements for employers continue to grow, getting the payroll
service right becomes a delicate balance between cost constraints and the need for efficiency
in a highly sensitive HR function.

Simplify the process

The message from software vendors, consultants and industry
analysts alike is that many companies are making the whole process tougher than
it needs to be. Software selection, which on the surface appears an elementary
purchasing task, requires far more preparation than most organisations
typically undertake.

At the same time, purchasing new payroll applications or
outsourced services presents a major opportunity for companies to streamline
their existing activities, cut costs and improve their operational
effectiveness. Not every buyer is grabbing the opportunity, however.

The selection process effectively boils down to four
interconnected elements: l Understanding the organisation’s true payroll needs

● Deciding whether to run an application in-house or
outsource

● Establishing the total costs associated with the
shortlisted options, including ongoing fees and ‘soft’ outgoings such as
draining of resource

● Assessing the suitability of shortlisted suppliers.

A fifth element – building the contractual framework for an
effective business relationship with the application or service provider –
completes the purchasing process.

Surprisingly, it is in the first area that most companies
fall down. David Spencer, manager at Andersen’s human capital practice in the
UK, argues that a common mistake is for users to fail to understand their
current operations – how the payroll system is integrated with other HR and
finance applications, whether the right information is reaching the right
people, and whether the company is complying effectively with statutory payroll
obligations.

Kevin Gordon, strategic sales director at Rebus HR, says:
“It is about understanding what you are trying to achieve by changing the
system. If the company is not clear, there is not a chance in hell that the vendor
can deliver it.” As Gordon points out, all payroll applications should have the
functional capability to handle the gross-to-net process. The key point is to
work out what the unique needs of the business are.

As well as helping define users’ software requirements, this
review process should also provide a platform for internal improvements. One
vendor tells of a payroll site that historically required interfaces to two
different general ledger systems. Even after the financial applications were consolidated,
it continued to build both sets of interfaces in the next two generations of
payroll application, despite the fact that half that work was redundant.

Companies can take the opportunity to clean up these process
anomalies and measure the effectiveness of their existing operations – by
comparing the ratio of payroll clerks to employees, for example, and comparing
that to industry averages. This kind of assessment may go to the heart of the
organisational structure. Are there too many grades of pay, for instance – and
if so, does that reflect a structure that has become overly complex?

It is also important to bear in mind that payroll
implementation can’t be carried out in isolation – while the department itself
may have its own wish list, the broader needs of the HR and finance departments
may ultimately determine what kind of application is selected. Organisations
need to determine where they draw the line between payroll and other
applications such as time-recording systems.

Team effort

To ensure the selection process is inclusive, consultancies
such as Andersen recommend that a working group be formed comprising
representatives from payroll, HR, IT, finance and any other function with a
vested interest in the process, frequently reporting to the finance director.

This group may need to report even further up the management
chain when it comes to determining whether payroll applications should be
purchased outright or outsourced, particularly if an organisation has a
corporate policy to contract out non-strategic functions. That decision will
also have an impact on the third element of the selection equation –
establishing upfront and ongoing costs – and much of the focus in the
outsourcing arena has been on comparing the relative financial models of the
two approaches.

Typically, organisations tend to focus on the cost of
one-off software licence fees when they opt to keep payroll in-house – the true
ongoing cost of ownership, however, is much higher. Depending on the amount of
integration work required between other systems and the degree to which
software is customised, the licence itself may only account for between 30 and
50 per cent of the total lifetime cost of the application. Additional charges
come in the form of consultancy fees, both to adapt business processes and at a
technical level, for implementation and integration services.

The ratio of licence fee to implementation services will
typically be 1:1 to 1:2, depending on the scale and complexity of the project.
Ongoing software maintenance fees also rack up – they are typically charged at
between 15 and 20 per cent of the licence fee per year and cover the cost of
software upgrades and some level of technical support.

Other charges include the cost of training – both for IT
staff and end-users – and if necessary, an allocation for in-house IT support.

The ongoing cost equation is also heavily influenced by the
degree of customisation users carry out on the application itself. While some
level of personalisation is inevitable when a new system is installed, there is
a big difference between superficial changes (such as adjusting screens) and
deeper customisation that alters the system’s hard code. Any major changes
‘under the covers’ are likely to have a significant impact down the line because
they require further customisation work each time a major software upgrade is
released.

Andersen’s Spencer says: “It becomes very expensive if you
buy off-the-shelf and customise too much. The more customisation you do, the
more problems you have.”

These issues are frequently highlighted by outsourcing
service providers as justification for handing payroll to a third party, either
through a fully-fledged functional outsourcing agreement or through an IT-based
services contract. The most comprehensive outsourcing offering – a facilities
management or managed services operation – sees a provider taking control of
the entire payroll operation, including payroll staff.

Application Service Providers, by contrast, ‘host’ only the
payroll application, which is accessed by the user through the internet. Bureau
services fall into the middle, hosting systems remotely but also offering a
range of specialist add-on services such as payslip printing. While there are
significant differences between the offerings, in each case one of the key
benefits is that capital expenditure is removed and ongoing charges are
predictable.

Stephen Fairn, sales and marketing director at outsourcing
provider Ceridian Centrefile, says, the costs are ‘genuinely budgetable’,
rising and falling in line with the evolution of the user’s business as
personnel numbers increase or are cut back.

The other side of the outsourcing equation, however, should
not be overlooked, particularly in the ASP business. When the ASP model first
burst onto the IT scene in the 1990s, many believed it would offer a
high-quality service at a cut price. In reality, the prices are not usually
cheap – the service providers are taking on a large IT administrative burden
and charge a suitable fee for doing so. In addition, industry analysts and
exponents of the traditional licensing model argue that the ASP route can
involve hidden costs for unforeseen services that fall outside the strict
service contract.

Tim Tobin, commercial director at Snowdrop Systems, suggests
that users should clarify how ASP vendors handle payroll variables – from
changes to bonus structures to business reorganisations – to ensure that the
user has the required flexibility.

More significantly, take-up of the ASP model has been far
below the initial hyped projections, and there is some cynicism in the market
about the model. Initial experiences weren’t always good: a number of
specialist providers collapsed, and there has been concern about the poor
quality of support offered by some start-up providers.

However, as the industry matures, most of these issues are
being resolved, and many expect the ASP model to enjoy some level of resurgence
through quality specialist providers and major vendors.

The fourth element of the selection process – supplier
assessment – is a combination of financial due diligence and partner
management. In a field where legislative requirements call for continual
upgrades, vendor viability is critical, and users need to have confidence both
in their supplier’s financial standing and its ability to provide ongoing
support and product development.

Some of these long-term concerns are hard to allay – further
consolidation in the IT industry is inevitable at every level, and the software
sector is littered with examples of product lines that have been dropped in the
aftermath of a takeover.

Purchasers can, however, do more at a practical level to
ensure the levels of service and support they demand from suppliers are
contractually laid out from the outset, particularly in defining a service
level agreement that contains practical metrics for analysing the supplier’s
performance.

Partnership approach

Analysts warn that in many cases, purchasers become so
obsessed with features and functionality that they fail to focus enough on
these ‘softer’ elements of the relationship. The best approach is to treat the
purchase as a partnership – vendors can only deliver results if organisations
spell out their requirements in advance.

As Snowdrop’s Tobin points out, many users, particularly in
the public sector, now host an open day for suppliers where they present their
strategic plans and perceived challenges before inviting proposals. That gives
the vendor an opportunity to understand the organisation’s unique requirements
and make an informed decision as to whether to bid.

Above all, users need to be cautious about information they
receive. Many rely on vendor presentations, but these will clearly be slanted
towards product strengths. Speaking with – and preferably visiting – existing
user reference sites is also recommended. Personal demonstrations – where the
agenda is drawn up by the user, as opposed to a generic presentation from the
supplier – are also a good idea and can cut through much of the hype.

In essence, much of the payroll purchasing process comes
down to common sense. But users frequently come to the table unprepared. As
Rebus HR’s Gordon concludes: “Be very clear about your business, your
priorities. Clarity is important – not the vendors’ bells and whistles.”

The self-service revolution

According to Kevin Gordon, strategic sales director at
RebusHR, about half the enquiries coming in from potential software purchasers
include requests for electronic payslip delivery – one of the most prominent
cost-saving elements of employee self-service systems.

To date, much of the focus in the self-service market has
been on achieving process-based cost savings. By allowing employees to enter
data directly into HR systems over a corporate intranet – be it a change of
home address or enrolment into a new benefits scheme – HR departments can cut
their own administrative burden and also offer a 24/7 service to employees.

Data self-entry has the advantage of reducing the need for
rekeying and therefore decreases the likelihood of errors – employees are
likely to be particularly cautious about entering information correctly when it
directly affects their pay cheque. Moreover, as self-service systems evolve,
they become a platform for collaborative team working and a mechanism for
distributing corporate, industry and sometimes non-vocational information.

Because of the breadth of the potential for self-service HR,
analysts advise that payroll implementations cannot be viewed in isolation.
While distributing payslips electronically to employees’ desktops is a
payroll-specific application, many other elements cross HR boundaries. Payroll
data, for example, can form the basis for more effective distribution of
management reports through the self-service infrastructure in areas such as
overtime or headcount analysis.

Lee Geishecker, research director at consultancy Gartner,
suggests: “Think of payroll as part of the bigger picture in self-service. We
are moving away from a functionality focus – it’s part of broader HR.”

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