For many people, return on investment (ROI) is rarely the most exciting part of the payroll project. However, for an organization determined to operate effectively, profitably and securely in the current economic climate, a detailed understanding of the cost of its payroll function is more than essential. The introduction of a new in-house payroll software system is the ideal opportunity to look at the total cost of the payroll function and then, following implementation, be in a position to measure the ROI of the software itself. The specific and stated drivers for the ROI exercise might include the expense of the purchased solution, validation of the selection and implementation phases, or measurement against the goals identified in the business case that justified the purchase in the first place - all leading to the opportunity to maximize and improve your payroll software.
What is Payroll ROI?
Put simply, the ROI exercise involves:
comparison of the payroll process before and after the software implementation (establishing costs in terms of budget, headcount, time expense and other resources)
the establishment of the total cost of ownership (TCO) of the software (including the cost of the ROI exercise)
analysis of the value of the project
action based on the conclusion drawn
In the words of the Personnel Today magazine Buyers Guide, “The fundamental question underlying any payroll software investment should be: is it worth it? A good investment is basically one which is more of a benefit than cost, but how do measure it?” This is the fundamental ROI question: which payroll-related metrics will give the most relevant picture of the value the organization expected to accrue from these changes to the payroll function? Which measures will give the firmest, most-trusted foundation on which to base future strategic payroll decisions?
Identifying a Payroll Software ROI Benchmark
In order to compare pre- and post-software costs, benchmark information must be in place. This has an impact on the choice of metrics and measures because it relies on the payroll function already having been measured or evaluated in some way. Consequently, the organization is usually either a) restricted to the metrics already in use (or for which historical data is available), or b) any new metrics are introduced sufficiently in advance of software go-live to gather the benchmark data.
Finding the Payroll ROI Metrics in the Process
An article in HRM Today (the HR social network from I4CP, the Institute for Corporate Productivity) outlines a study that took the manual payroll process as a model against which to effectively measure the improvements that lie in automation: “To determine the ROI, we had to first understand how the payroll process works in a manual environment. Our interactions revealed that there are three distinct steps in the successful processing of a payroll.” Having identified the three basic elements of ‘data gathering’, ‘processing’ and ‘disbursement and reporting’, the study went on to further break down these elements into measurable sub-processes and for a broader understanding and comparison recommended analyzing “other companies across multiple industry verticals, different employee types (blue collared, white collared, management)” to find median levels for each sub-process, giving a more objective benchmark where possible. The identified metrics were as follows:
Number of time records processed in one year.
Number of Employee Validation Errors seen during the year for time records which require corrections and authorizations at multiple employee levels.
Time for adding a new employee to the system with salary structures and all other required data.
Time for removing a terminated employee from the payroll system.
Number of payroll transactions processed.
Cycle time for audit of payroll prior to disbursement.
Disbursement and Reporting
Number of pay checks disbursed and time taken.
Number of payroll related queries.
No of payment errors.
Cycle time to process a payroll error.
Time for creation of reports which are submitted on a monthly, quarterly, half-yearly and annually per employee.
The number and choice of metrics that an organization adopts for ROI measurement will depend on a number of factors including size, sector, and degree of commitment to an automated in-house payroll strategy.
Understanding How Payroll Software Costs Effect ROI
The final part of the equation requires understanding the TCO of the software itself; so that an accurate cost/benefits analysis can be made. The Personnel Today Guide points out that the most widely-used software TCO formula is still the Gartner Group’s TCO methodology which, “groups all the costs incurred by a technology system under four headings: capital costs, administrative costs, technical support and end-user operations. The headings are an umbrella for virtually every cost involved in using a payroll software application, from buying to installing, maintenance and support”. Of course organizations should also be cognizant of the on-going costs for elements such as post-implementation training for new hires and system optimization - an issue that is all too often seen as one-time expense.
The Payroll ROI Bottom Line
Calculating the ROI of a payroll software implementation project is simple enough, although it is a precise and sometimes time-consuming exercise. Following the key steps above of benchmarking and comparing post- and pre-implementation data will give an organization a picture of the benefits realized. However, the exercise’s true worth lies in the decisions taken as a result. Any ROI measurement should be fed back into the process and used to guide future payroll strategy and provide lessons learned for other IT and HR projects. Otherwise, the only result of the ROI calculation is to add to the overall cost of the project.