How much does an organisation value payroll? You may as well ask, how much does the organisation value employees? The service sector dominates the UK economy, contributing around 78% of GDP¹ – and that means staff costs are without doubt the most significant annual expense. Yet for many organisations, the decision to outsource payroll is simply about cutting costs and never having to think about payroll again. Neither of these assumptions is strictly true.

Payroll is complex – increasingly so. It is also business critical. Poor payroll processes can result in late payment of employees; the use of incorrect tax codes; missed overtime payments; failure to reflect long term absence. It affects staff morale. Increasingly, payroll information is required for essential regulatory demands such as pension auto-enrolment. In any service industry, payroll information supports the effective management of what is the biggest asset and the biggest cost base. There is far more to payroll processing than hitting a button once a week or month.

Two Camps
So why the misconception surrounding pure payroll processing? In the vast majority of cases organisations fall into two camps: those who perceive payroll is the most simple process in the business; a basic calculation that could and should be performed at rock bottom prices by pretty much anyone – and those who are pushing the Payroll provider to take on ever more complex tasks, many of which do not fall under the payroll remit. Providing Bradford Factor reporting or delivering a self-service portal for employees to log holiday hours and time is clearly an HR task; yet as organisations reduce internal staff and outsource there is a tendency to expect the provider to manage more than pure payroll.

The reality is that payroll is complex and getting ever more complex as a result of new legislation such as RTI and auto-enrolment. Without doubt a Payroll Services provider should have the skills to manage payroll: make sure employees are on the correct National Insurance number; ensure bonuses and overtime are paid; to manage employee changes in tax code, and so on. These are core payroll functions – and there are some straightforward processes that can be batched up and run together in a streamlined efficient manner to deliver economies of scale.

There are also, always, elements outside that standard payroll function that require input from the Service provider – to check inputs and understand the company’s policy regarding payments, such as when dealing with PILON (payment in lieu of notice), expenses or compromise agreements.

Blurred Lines
Recent developments around auto-enrolment and RTI also mean that businesses are coming to rely upon the Payroll Services provider to manage information which should fall within HR. Will a payroll provider have the in depth knowledge required to successfully implement auto-enrolment? While much of the information required for auto-enrolment is held within the payroll system, and payroll staff can undertake a number of tasks to support the calculation and administration, they should not be solely responsible for the entire auto-enrolment strategy. The core of auto-enrolment is an HR function; it is about instructing, educating and communicating with staff in the right way and at the right time.

It seems that organisations are forgetting that payroll is a process for calculating employee payments rather than storing employee data and providing headcount reports and personnel information. A Payroll provider is not responsible for plugging the gaps in a client’s HR skill set and, to be frank; blurring the lines between payroll and HR in this way is a recipe for disaster.

Furthermore, an organisation needs to recognise that outsourcing payroll does not mean removing all internal understanding of the payroll function: it is essential to provide a point of contact for the Service provider – critically, someone who has the authority to take responsibility for the relationship and has a basic understanding of payroll. Without doubt this lack of understanding regarding the extent of the payroll processing responsibility puts the provider in an awkward position. While the customer demands need to be met; this over-reliance continually pushes the boundaries, sometimes creating work for the provider which is outside of the set remit and can cause problems in expectation. When done well, with clear understanding on both side, the relationship between client and provider can be extremely positive and ensures outsourcing delivers measurable value.

In contrast, judging the provider on the quality of non-payroll processing activity, which sits outside the service level agreement, is counterproductive to the entire relationship.

Payroll Services provide a vital support to the most important asset a company has; the employees; but it must be remembered that a payroll service is just that – a process for calculating employee payments. The moment payroll services are judged on their peripheral HR capabilities is the moment business relationships can get out of hand and become overly complex.

¹ ^ “Index of Services, April 2013”. Office for National Statistics. 26 April 2006. Retrieved 13 August 2013.

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