By James Hall, Hewitt Associates

The latest research from Hewitt into business process outsourcing (BPO) in Europe shows that, when people set up shared services, they are uncomfortable with outsourcing everything in one go. Rather than take the plunge, 44% said they would prefer to test the waters – by outsourcing payroll.

This is not a great surprise – we are seeing it almost every day. But it’s increasingly clear that there are tangible benefits to be gained by outsourcing payroll, and there are further benefits if this is done in context with the wider HR picture.

Outsourcing – the European experience
While the US has embraced the prospect of multi-process HR outsourcing quite readily, European companies have approached it in a piecemeal way. Since three pioneering UK companies, BP, BT and BAe, outsourced full-scope HR services in 2000/1 there have been very few to follow. There is a perception of high risk and, until more recently, a poor choice of suppliers capable of taking on these services. While this is now changing, companies are still opting for a lower risk route into HR outsourcing. Payroll offers one such path.

When taking the first step to selecting a payroll provider, companies must be cautious not to limit their wider HR choices. If implemented correctly, managed payroll services can be used as a platform to build more HR capability as time goes on. The key is to achieve data integrity and then to make this data available for reporting and to drive other core HR processes.

Can infrastructure be a barrier?
It is possible to outsource payroll without making a large capital investment in IT. At Hewitt we enable this by providing an integration layer to make our systems communicate with our clients’ systems. This allows clients to stay with their existing infrastructure – which is particularly important because most large companies have a defined technology strategy. If they have already spent millions on, for example, Oracle or SAP, they don’t have to throw away what they have invested – they can build on that investment.

So what are the key benefits?
The benefits of the approach soon become clear and go far beyond those of a traditional ‘bureau payroll’ service. There is a lot more to it than just turning a handle and sending out payslips. Maintaining and managing data is crucial to gain maximum benefit. That means keeping on top of time and attendance records, as well as joiner and leaver information – for this is where 80% of the savings potential lies. It is also about automating as much of the process as possible. The less human intervention there is, the smaller the potential for error and the greater the potential for accuracy. Typically, companies should expect to be able to save 20-25% on their cost of operation and improve service quality and reporting.

The logical next step is to provide helpdesk support for payroll and other HR matters – and this is an example of where the importance of linking all HR data kicks in. Employees will ask questions about HR issues not related purely to payroll. If you try to separate payroll from the rest of HR, then you will not be able to answer their questions – and they become dissatisfied. If you are providing a comprehensive service, you should be able to answer questions relating to wider HR concerns.

Payroll providers are not always offered customer contact. If services are run separately, a company may have its HR based in Glasgow and its payroll in London – raising questions about who is responsible for customer contact. It is vital to link the HR data together so that employees’ questions can be addressed. By managing this process it is possible to set up a ‘one-stop-shop’ for HR.

It also forms the basis of a strong argument to have payroll controlled by HR rather than by the Finance department. The old view was to have different activities in separate ‘silos’. However, our current view of HR is all about integration. If you recruit somebody, they will go on the payroll, qualify for benefits and so on, so it makes sense to manage these issues together to optimise processes.

Quality questions
Payroll is one of those tasks where you get no thanks if you get it right – but nothing will upset an employee more than getting their pay wrong. It is a critical issue in employee engagement. Mistakes are highly visible, so quality is always a key concern. To get it right, the whole organisation has to have the pursuit of quality embedded in its culture.

Many companies struggle to deliver high performance in payroll because their in-house systems have a limited lifespan. They become more and more expensive to support, especially as legislation is making the job of HR more difficult. Business change is another factor; every time something is done differently discrepancies can creep in. Service providers may have old systems, and call-out charges for change control. Also, traditionally in this market, charges have been ‘per payslip – not a convenient way to monitor overall costs.

You have to measure accuracy, timeliness and employee satisfaction in payroll. If you slip up, the implications for morale and in terms of cost to the company are enormous. If a transaction goes through without error, the cost is relatively low. If it is wrong and then needs to be fixed manually, the cost of that transaction increases by 30 to 40 times.

Payroll – a stepping stone towards business process outsourcing?
There is an undoubted trend in business today towards outsourcing. If a company’s vision of its future HR function is to outsource the transactional side of HR, payroll increasingly looks like the logical place to start. It is also a place where tangible benefits can be demonstrated in quality of service.

Add to that the need for efficient management of issues across the different legal systems of different countries, and the overall goal becomes a platform which can serve each country, taking different legislations into account. Outsourcing can provide a cost effective way of achieving that aim.