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Micah Fairchild Payroll Software Selection: A Strategic Approach

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 By Micah Fairchild

Effectively Selecting the Right Payroll Software Solution

Dating back to 1954, payroll was one of the first applications in the workplace. Over half a century on, it’s fair to say that payroll is now one of the most commonly automated business operations; and certainly the most frequently-used HR solution. However, there are still many companies moving from spreadsheets to payroll software for the first time. While these payroll technology late-adopters tend to be smaller businesses, organizations of all sizes are now looking at upgrading and/or sourcing out new payroll software solutions—a fact that makes the process of selecting the right payroll application as critical and widespread as it has ever been. Still, given that a new payroll solution inevitably means a serious investment of money and time, it’s no surprise that this selection decision is viewed as one of the most significant that an organization can make. Further, factor in the foundational nature of the payroll function (i.e. every employee has not only a right but also an expectation that they will be paid accurately and on time) and that investment soon turns into one that encompasses both reputation and employee goodwill. Indeed, although there is always the fact that payroll errors can be tricky and costly to correct, for many people payroll missteps represent a fundamental breach of the psychological contract between employer and employee. In other words, selecting the right payroll software solution is of crucial importance on several levels.

Whether that right payroll software choice is a traditional licensed option or open source; an on-premises deployment or cloud-based software-as-a-service (SaaS); the fact is that the market for these types of HR applications is huge, varied, and (to the uninitiated) potentially confusing. Indeed, whether the organizational need is for a basic payroll application to automate simple salary payments, or a state-of-the-art, fully-integrated, multi-functional solution that will transform the entire business, it’s all too easy to end up with the wrong payroll software for the job.

The purpose of this special report is not to provide a step-by-step payroll software selection process chart or guide. Rather, our aim is to bring together the bigger picture factors that selection of a payroll software solution must take into account; from process automation to security to the total cost of ownership (TCO)—issues that can (and should) have significant impact on an organization’s strategic approach to software selection.

A Preliminary Step – Payroll Process Review

Taking a step back, one critical part of deciding on the requirements to be met by the payroll software solution is a review of the organization’s current payroll processes. Unfortunately, far too many organizations ignore this aspect of payroll software selection—unwittingly automating those processes that are outmoded or inefficient to the detriment of the organization. In fact, a recent survey by PricewaterhouseCoopers (The Hidden Reality of Payroll & HR Administration Costs) found that despite the constant improvement and innovation of payroll software, the cost of managing payroll is rising. As PwC suggests, “Cost effectiveness stems from comprehensive process transformation, not just technology innovations”. Indeed, as the report goes on to say, “The required change isn’t always easy, but significant financial benefits may await those organizations ready to really embrace and implement these changes.” Put bluntly, if an organization’s current payroll processes are not efficient (or effective for that matter), then simply automating those processes will result in little improvement (and little long-term business benefit).

Clarity on Payroll Software Requirements

Once current payroll processes have been examined, the first issues to decide before engaging with payroll software vendors revolve around what the organization is actually going to need from its new automated solution. However, the key question here should not be about what features are wanted. Instead, organizations should approach this initial step by determining what the wider business goals this payroll application will help achieve are. Of course, accurate and timely payments are a given. What about the needs for an increasingly off-site workforce though? In that scenario, the ideal payroll solution might need to integrate seamlessly with a time and attendance mobile application used by employees in the field. What about a payroll technology strategy that is centered on boosting employee empowerment and engagement? In that case, employee self-service (ESS) functionality might need to be the focus; revolving around providing individual, anytime access to online pay-slips, tax statements and other personal information. Whatever the case may be a clear understanding of the business goals to which the payroll software is expected to contribute will help start the process of defining required functionalities.

Part of this process of identifying business goals (and consequent functionality) is a wider consultation with stakeholder groups within the organization. While it is fair to say that most employees will be mainly concerned with accurate pay-slips; different departments may have differing priorities—all of which must be met. For example, IT may be concerned with possible networking, hardware, or deployment issues. Finance on the other hand could be focused on system outputs, reporting capabilities, and the export of data. As for HR? Those needs might be entirely different as well—driven by the need for integration with other systems, such as performance, learning, and talent management. Of course, it’s critical that in these stakeholder discussions, the organization’s future-state is not neglected. It’s an inevitable truth that, over time, processes and priorities will change. As such, having at least a cursory understanding of what those potential future directions might be is crucial. In and of itself this “future-proofing” can be solid strategy; in large part because the ideal payroll software choice will have enough flexibility and scalability to keep pace with whatever direction the organization needs to go. However, as SNP Consulting’s report (Future-proof and Time-efficient ways to choose a New Payroll/HR System) suggests, the general rule is that this forward look “should cover a five year decision horizon.”

On top of these issues, a well-defined picture of the expected business benefits the payroll software should provide gives a clear direction on certain subsidiary key issues:

  • Integration: As briefly mentioned above, payroll data and functionality can be integrated with other business and HR systems. In fact, current trends suggest that integration capabilities are increasingly being called for. As evidenced by CedarCrestone’s 2011-12 HR Systems Survey, 21% of respondents indicated that they would be changing vendors; moving from a payroll-only solution to an HRMS (HR Management System) with integrated payroll capabilities (most commonly linking payroll to time and attendance, scheduling, and leave/absence management).
  • Deployment: The basic choice is between the traditional vendors (offering licensed, on-premises installations) and SaaS providers (offering variants of cloud-hosted options). On the one hand, on-premises systems can offer a greater degree of information security and control (i.e. the data does not leave the organization). On the other hand though, SaaS solutions can offer significant benefits as well; partly due to its multi-tenant architecture but also thanks to the fact that the software is accessed through a web browser—greatly reducing the necessity for hardware overhead. Of course, the debate over the merits of each of these options (and the countless variations between them) is far too great to accurately summarize here. Regardless, the model chosen for an organization’s payroll software should be able to grow in the direction that the company needs—an important consideration to keep in mind when weighing out specific deployment benefits.
  • Evaluation: The greater the clarity on business goals and organizational direction, the better chance that quantifiable metrics and objectives can be leveraged to determine the return-on-investment from the payroll software—enabling (once the software is in use) an objective evaluation of the success of both the payroll application selection process as well as the implementation project itself.

Payroll Data Security

While not generally characterized as an organizational need or business objective, data security is no less important than any of the strategic issues a new payroll software solution is designed to address. Indeed, payroll data is undoubtedly some of the most sensitive employee information that an organization is responsible for (e.g. social security numbers, banking details for direct deposit, etc.); and the security of that data is of paramount concern when considering any payroll software solution. In fact, as Vicki M. Lambert (author of Payroll: A Guide to Running an Efficient Department) observes, “But one thing has not changed – in fact, the need for it has increased over the years – and that is security in the payroll department, the need to keep the records confidential and secure.” As such, the core security issues to be considered when looking at payroll vendor offerings are as follows:

  • Employee Turnover: The question of employee access to data is one which requires a degree of rigor to be applied. In both the vendor and the client companies, some employees will have direct access to payroll information. In the current economic climate, staff leaving an organization is an all too common occurrence and offers security risks against which any payroll system should have some protection. A recent Ponemon study suggests that 59% of people leaving an organization either keep or take company information with them as they go. It is reasonable to require software vendors to outline what steps would be taken when an employee leaves (under any circumstances) to ensure that payroll information is secure.
  • Internal Threats: Unfortunately, not all internal data security threats come from departing personnel. Indeed, as a 2011 McAfee white paper (Protecting Information from Insider Threats) states, “Insiders have two variables supporting their activities that outsiders don’t: trust and legitimate access. This allows malicious insiders to conduct espionage, steal sensitive data, and sabotage assets quickly, easily, and with greater stealth than an external attacker.” The ideal payroll software vendor will work in partnership with the client organization to moderate the risk of insider data theft by incorporating measures such as accountability controls and automatic recording of employees’ interaction with information.
  • Security Planning: Ernst & Young’s (E&Y) 2011 Global Information Security Survey recommends that an organization have an information security plan; a strategy that provides a framework against which the company can assess a prospective payroll vendor’s ability to meet its security needs. However, as E&Y’s report unfortunately confirms barely over half of all organizations have such a plan in place. As such, at the very least, the vendor's systems should be compliant with security standards such as ISO 27001, SSAE 16 (formerly SAS 70), and Safe Harbor Compliance (should US-EU interfacing be needed).

Knowing the Total Cost of Ownership (TCO)

Once processes, business objectives, and security measures have been handled, the issue of payroll system costs must be addressed. Of course, vital to making the right choice of payroll software is an understanding of its real cost. There are obvious expenses such as the license fee (if any), system installation, system upgrades (the periodic acquisition and implementation costs related to upgrading to the latest version), direct labor costs (associated with the staff directly involved in supporting the system), and outsourcing costs (deriving from any outsourced services, like tax filing, paycheck printing, etc.). However, in addition to these surface costs, a 2011 survey report from PricewaterhouseCoopers (PwC), The Hidden Reality of Payroll & HR Administration Costs, found a number of hidden costs behind payroll software provisioning which must be taken into account when forecasting the TCO of any new system:

  • Direct non-labor costs (e.g. costs of consultants, vendor fees and facilities, G&A, related corporate overheads, etc.);
  • System maintenance costs (e.g. IT costs specifically related to maintaining the system); and
  • Indirect labor costs (e.g. labor costs for employees not directly related to the payroll department; supporting functions such as collecting, approving and preparing employee hours for payroll; distributing paychecks; answering employee questions about benefits, etc.).

These costs are often spread throughout large sections of the organization’s workforce (such as the management layer) and are rarely explicitly stated in project documentation or vendor information. As such, they are frequently ignored; leading to a false impression of the payroll solution’s TCO. Apart from anything else, neglecting these items can have a significantly negative impact on the payroll software project’s return-on-investment (ROI); often in a way which is difficult to trace and exceedingly hard to rectify.

As a significant aside, the PwC survey also addresses the oft-cited argument that SaaS-deployed payroll software is cheaper; citing, “SaaS helps reduce costs for many organizations—but only to a point”. More specifically, the PricewaterhouseCoopers research highlights that, “Analysis [has] showed that the benefits of SaaS models, when deployed without the added benefit of process outsourcing, taper off as organizations get larger and actually provided no TCO savings, on average, over on-premise software solutions for large organizations with more than 1,000 employees.” The implication is that SaaS payroll cost benefits, while unquestionably real, have a ceiling. That said, PwC is quick to point out that there are mitigating factors in the study; and suggests that rather than focus on any given deployment model for cost savings realizations, organizations should heed three particular recommendations instead.

  • Utilize a common vendor: As PwC research discovered, organizations using several best-of-breed (BoB) solutions from multiple vendors (for payroll and associated functions) spend on average 18% more than those using a single vendor.
  • Leverage Employee Self-Service (ESS): Building on previous studies on this topic, PwC found that engaging the workforce with self-service access for personal records and transactions often results in a reduction of TCO.
  • Integrate Time & Attendance with Payroll: PwC highlights that the improved accuracies from this integrated approach can yield a cost efficiency of 14% over non-integrated systems.

Final Thoughts on Payroll Software Selection

Albeit logical and fairly straightforward, the selection of payroll software is an involved process. The key to a successful outcome though, is to take a strategic and bigger picture view from the start—focusing on the larger-scale (but measurable) benefits that the software is expected to provide. After that, organizations should simply work backward; making their through ever more granular layers until detailed specifications can be drawn up and vendors can be invited to submit proposals.

When working through the increasing detail, there are a number of broad points to bear in mind. Aside from crucial C-level sponsorship, the payroll software selection (and later, implementation) project must engage with all key groups within the organization, including specialist functions such as HR, Accounting, IT, Procurement, etc. Further, to underscore a point made early on in this report, the likely payroll needs of the organization in the future should be taken into account when deciding the fit of any particular payroll solution. Mobile payroll is reaching majority adoption; social media tools are becoming embedded in various HR applications; and employee and manager self-service options are continuing to expand. As such, as the client’s payroll needs expand, the ideal solution will need to expand with them.

For an organization to select payroll software that perfectly matches its requirements, a balance must be maintained between differing opinions, competing priorities, and the ideal expectations of the client versus the reality of what the market can offer (which admittedly is sometimes different than what the payroll vendor can promise). As succinctly puts it, “Selecting the right software cannot guarantee the success of a project, but picking the wrong system can ensure failure.” End

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Although there is always the fact that payroll errors can be tricky and costly to correct, for many people payroll missteps represent a fundamental breach of the psychological contract between employer and employee. In other words, selecting the right payroll software solution is of crucial importance on several levels."



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