Payroll software: the bigger picture

How
much does a payroll system really cost? Keith Rodgers reports.

Compared
to more complex enterprise applications, purchasing 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 that the key task is to find the
most suitable application at the best price. But to get the maximum return from
an implementation, users need to tackle a far broader range of issues,
including the total cost of ownership and the management of service and support
agreements.

A
vast range of factors impact the total outlay on a payroll application –
ultimately, the software licence itself may account for as little as a third of
the total project outlay.

So
what are the major components of the cost model?

Licence
fee
Most vendors still charge for a payroll licence using traditional models,
based on a combination of the number of users and servers. Given the economic
climate, vendors are likely to be ‘creative’ with their pricing – particularly
if the payroll purchase is likely to open the door to further sales of other HR
applications. Given that the annual maintenance contract is usually charged as
a percentage of the licence fee – typically 15 to 20 per cent – the initial
outlay has long-term repercussions.

Customisation
The degree of customisation carried out on the application doesn’t just affect the
initial implementation costs: repeat customisation will need to take place each
time the standard package is upgraded, so there’s an ongoing cost to consider.
It’s therefore important to ensure that each customisation ‘project’ is
essential – project managers should look favourably on changes that add
business value, and reject requests that are simply ‘nice-to-have’. Many
requests for customisation come from users seeking to replicate the features
they already have – these may not, however, be business critical.

Integration

Although payroll applications can be run as standalone, some level of
integration will be required with other HR and financial systems. Since most
organisations run a variety of systems, the level of integration work required
can be high – a factor often underestimated in IT projects.

Training

One advantage of payroll over many other applications is that the number of
users requiring training is relatively limited. However, once self-service
systems are introduced – allowing, for example, employees to view their
payslips online – training needs will extend across the organisation. While
browser-based self-service systems will be familiar to most PC users,
non-computer-literate staff may require training.

Hardware/infrastructure

Users need to consider whether the payroll systems require more investment in
hardware, databases or network bandwidth. If self-service applications are
being installed, these costs will frequently be absorbed as part of a wider HR
initiative.

Management/project
team/employee time

The true cost of ownership includes an assessment of the cost of devoting
in-house resource to the implementation project – not just the project leaders,
but also managers and end-users.

Maintenance
and support

The maintenance contract will typically include upgrades, fixes, software
enhancements and some degree of support, perhaps through a hotline. Users need
to establish precisely what’s covered, and estimate how much additional support
will be charged through vendor or third-party hourly consulting fees. For a
major implementation, it’s worth hearing the experiences of existing users, and
finding out how vendor support staff are incentivised and assessed.

Service
level agreement

A comprehensive service level agreement is essential where the payroll service
is outsourced to a specialist bureau or facilities management provider, or
where the software is ‘rented’ through an application service provider.

Agreeing
a contract is a difficult balancing act between tightly defining requirements
and leaving room for manoeuvre as business needs change. The advantage of
payroll is that the requirements are limited – fundamentally, employees need to
be paid on time and accurately each period. The key performance indicators can
therefore be kept relatively simple and easy to manage, and an accuracy
threshold of 98-99 per cent is a reasonable demand. It’s important to note that
providers will not offer cover for consequential loss if the payroll doesn’t
run.

Organisations
also need to ensure that both the service contracts and the software itself are
flexible enough to cater for new requirements, from small-scale changes in
bonus structures to major corporate reorganisations.

Managing
the service provider predominantly comes down to forging an effective business
partnership. Just as account managers take responsibility for customer
relationships, so a business manager needs to be appointed to run the
relationship with a payroll service provider.

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