Compared to last year, 2006 has been relatively quiet in the world of HR & payroll systems, where many suppliers are struggling to generate double-digit growth.

The painful experiences of those who had to or chose to go online in the first wave of PAYE filing by internet will still remember the chaos and frustration of last summer. Strangely, HM Revenue & Customs learned from the experience and did its utmost to ensure the second year ran smoothly.

Lord Carter’s £250 a year incentive scheme also worked spectacularly. So many companies (60%) went online in 2005 that most midsize firms (50-250 employees) had already taken the plunge by the time their FBI deadline fell this year.

The 2005 stampede meant that this year would be quieter for payroll software suppliers and service providers, as the move online stimulated a lot of activity in 2004/05 that was not repeated this year.

Like their payroll colleagues, HR specialists also find themselves in a regulatory lull. Denise Kingsmill’s 2004 ‘Accounting for People’ report for the Department of Trade and Industry aroused a lot of interest in the measure and management of human capital and there was a period when it looked like some of these HR reporting requirements might have been incorporated within a mandatory operating and financial review (OFR) to accompany listed companies’ annual reports.

Following Gordon Brown’s direct intervention, the OFR is history, and the company law boffins at the DTI are tinkering away on a new type of annual performance summary currently referred to as a business review. As usual, the fine detail and specific HR requirements will remain nebulous and ill-defined by the legislation that emerges.

Technology purchases are usually triggered by a specific pain point – be it regulatory or forced on the organisation through managerial or technological change. A company might grow through acquisition and want to standardise its HR policies and systems. Or it might have to consider new software because the previous application is no longer supported on the latest version of Windows.

These kinds of triggers have receded at the moment, but the business review, Windows Vista and other regulatory changes look like they will boost demand in 2007.

Northgate’s HR strategy manager Steve Foster confirms that the buzz has gone from previously fashionable trends such as HR outsourcing, share services and human capital management (HCM).

“You don’t see as many conferences about these issues,” says Foster, who adds, “That’s not a bad thing – some companies may well be going away to look at how to implement such systems. But HCM, for example, is still in the brewing phase and has yet to materialise into something substantial.”

HCM and the strategic dimension
In spite of Kingsmill’s efforts, HR and payroll continue to be viewed in many boardrooms as secondary, administrative issues.

HCM proponents want to change that state of affairs by recognising the value of human capital to organisations, measuring it and managing it to align individual employees and their skills with the organisation’s strategic objectives.

The problem is nobody can agree on the measures. A CIPD working party on HCM ran into a cul de sac of frustration because of the difficulty in deciding between something comparable across companies or measures that really mattered to a specific business, but were not comparable.

Randal Tajer of Pearson Tajer Associates is a consultant in this area, who laments: “HR and HCM are about where financial measures were in 1935. The transformation that occurred in financial reporting is what enabled the bean counters to take over the boardroom.”

Big Four accountant PricewaterhouseCoopers knows a thing or two about measurement. The firms’ 2006 Human Capital Trends report identifies a range of measures that it promotes among client firms, including the human capital return on investment (ROI), which compares the pre-tax profit generated to the investment in compensation and benefit costs.

“Lots of people who have come up with employee value contribution measures,” says Tajer. “But they haven’t gained traction. By the time you get through the complexity of the model, so much has changed that it’s like looking at last year’s holiday snaps.” His own human capital model does not put a value on people as assets, but measures them in terms of the organisation’s liabilities.

“One element of control is an objective, which represents a liability of work needed to be done. The job of managers is to match assets in the job market to the liability in the organisation to get work done to achieve that objective. The metrics fall out of the structure of the objective,” argues Tajer.

Back to reality: users speak
There may be no single factor to fuel an HR/payroll software boom, but developers report healthy levels of enquiries from companies who want to cut their HR costs or improve their administrative processes.

“There may not be hard, technical drivers like PAYE online, but there are soft drivers lying around regulatory requirements,” said Midland HR’s managing director Lawrence Knowles. “Compliance consulting is faster growing than HR & payroll. SMEs want to buy their way out of red tape, and even protect themselves against tribunals.”

Many of the users and case studies consulted for this article identified the need for change, but mainly to achieve cost or process savings rather than to transform HR into a strategic function.

Anglian Windows, for example, was forced into an upgrade because Northgate was ending support for its PS 2000 payroll application. If the system wasn’t replaced, no one would have been paid.

“The supplier was pulling the plug on our old system, so had no choice,” says group payroll manager Irene Stannard, who now oversees an integrated Elite HR and payroll supplied by Safe Computing. “Since we were going through all the hard work and expense of migrating, we looked at it as an opportunity to maximise the benefits.”

Annington, the property management company that took on ownership and management of the Ministry of Defence’s estate, is a classic case of outsourcing as red-tape avoidance. Its operation grew rapidly after it took on the MoD’s properties in 1996. Initially it had one payroll manager looking after 50 employees and HR issues were handled in an ad hoc way. But TUPE regulations and other complexities of employment law meant that Annington was frequently seeking legal advice.

Following an internal review, the company outsourced its payroll function to Moorepay, a division of Northgate. “Essentially we wanted security of information and access to professional advice without employing a specialist,” says Annington finance director Barry Chambers. “The move saved two posts the cost of which far outweighed the cost of outsourcing.”

But there are businesses out there willing to embrace strategic HR transformation. To support growth and profitability by attracting and retaining high quality staff, the textile rental and laundry group Sunlight Services made a strategic decision to replace separate HR and payroll systems and implement an integrated Trent HR system from Midland that offered web-based recruitment, management data on staff turnover and absenteeism, and training management capabilities.

“The improved management reporting has made a significant impact on the business,” says Sunlight Services HR manager and team leader Andrea Richardson.

“Most notably, absence has come down from 4.1% to 0.97% in a year, and this can be directly linked to the absence data that we send to line managers every month. We’ve also reduced staff turnover by producing reports that highlight problem areas. For example, the company identified a high turnover of drivers, and as a result has been working on a strategy to improve training and change rates of pay, terms and conditions and job title in order to retain them.

“The reports give us a better picture of current HR issues and provide a tangible way to show the Board how process improvements in the HR department have had an impact on the bottom line.”

The HR/IT issues to watch in the next six months
Enjoy the calm while you can. There are enough issues looming on the horizon to keep HR and payroll managers on their toes in the coming months. These include:

New Construction Industry Scheme By tightening up the rules and registration requirements for subcontractors in a wide range of industries, the CIS is likely to present a major organisational challenge to many payroll departments, who may find they have to take on responsibilities for subcontractors who are deemed to be employees, or cede payment duties and record-keeping to accounts payable and their systems. There is no single technical solution that will apply across the board, but it is clear that there will need to be a realignment of payroll, HR and supplier records and accounts payable. In this context, the need for good data exchange to support the new processes will be important.

Public sector reform Some of the most advanced thinking and system implementations are taking place in the public sector, where organisations need to come up with performance measures to convince the government they are delivering value. The Gershon review, which demands 17,000 job cuts and a 2.5% increase in efficiency has added to this trend, encouraging a move to shared HR services in Whitehall and beyond, for example Capita’s £400 million-plus deal with Birmingham City Council earlier this year.

Technology upgrades Microsoft has already announced the end of support for Windows 2000 and Service Pack 1 of Windows XP from October 2005. By the turn of the year, it will be heavily promoting the advantages of Windows Vista. The extra processing demands may require new hardware. Like Anglian Windows, some organisations who try to hold back the technological tide may find that their HR and systems are no longer supported and be forced to upgrade. The relentless march of software upgrades may encourage more users to consider outsourcing options, where the supplier looks after the infrastructure and charges a monthly operational cost. Midland HR’s Lawrence Knowles comments: “We’re seeing substantial growth, particularly since the requirements to support self-service systems adds to companies’ infrastructure requirements. A lot of people want vendors to take the problem away.”

Talent management Skills shortages and escalating recruitment costs can hurt. So called “talent management” systems are designed to help organisations keep track of their people and their skills, leading to a better return on human capital and lower staff turnover as employees benefit from better focused training. If you can spot and recruit good candidates more quickly, the company can make considerable savings on recruitment. Web-based e-recruitment portals promise to alter the balance of power between companies and recruitment industry – as easyJet has proved with a Bond Adept e-recruitment system that helps it deal with 20,000 applicants a year.

Human capital reporting – The OFR may be a side issue for the moment, but non-financial performance indicators, balanced scorecards and other aspects of the human capital management movement will not go away. Reporting is a weakness in many HR & payroll applications where non-standard queries may demand a visit to the IT department for help, or recourse to the dreaded Crystal Reports. More user-friendly reporting tools are reaching the market and will filter through to HR analytics, particularly as European and UK company legislation pushes corporate governance up the policy agenda.