Managing payroll is an essential but often expensive core HR activity and payroll software and outsourcing are the two main strategies for reducing the total cost of ownership (TCO) associated. A 2011 survey report from PriceWaterhouseCoopers (PwC), The Hidden Reality of Payroll & HR Administration Costs, looks in depth at the hidden costs behind payroll and HR and seeks to identify some characteristics of cost-effective organizations—covering (in a somewhat roundabout fashion) what the research firm believes really matters when it comes to maximizing your investment in payroll software. Exploring the administration of payroll, workforce administration, time & attendance, and health & welfare benefits, the payroll-related findings (including the role of payroll software) of the PwC study are not necessarily shocking, but they do convincingly question some conventional wisdom of both business software and process automation.
Payroll Software’s Hidden Costs
The obvious and visible costs of any payroll system are often the only ones taken into account when considering the introduction or upgrading of an organization’s payroll software. These ‘surface’ costs include:
System installation - one-off costs related to the initial acquisition and implementation of the software
System upgrade - periodic acquisition and implementation costs related to upgrading to a more current version of the system
Direct labor costs - labor costs for the direct staff necessary to support the system
Outsourcing costs – costs deriving from any outsourced payroll services, e.g. tax filing, paycheck printing, etc.
However, PwC found that the following ‘hidden’ and often unconsidered costs can account for up to 65% of the total TCO:
Direct non-labor costs – cost of consultants, vendor fees and facilities, G&A, and related corporate overheads
System maintenance costs - IT costs specifically related to maintaining the system
Indirect labor costs - labor costs for employees not directly related to the payroll department supporting these functions ‘in the field’ (e.g., collecting, approving and preparing employee hours for payroll; distributing paychecks; answering employee questions about benefits, etc.)
Because these hidden costs are not always explicitly stated or are spread throughout the entire workforce (or at least, the management) they are often ignored—leading to a false impression of the payroll software solution’s TCO; which may in turn lead to future payroll and technology strategies being based on insufficient data.
Payroll Software’s Total Cost of Ownership is on the Rise
Despite the increasing sophistication of payroll software and the definite efficiencies that can be gained from integrating payroll data with other HR and business systems, PwC’s regular survey has noted an increase in cost: “TCO for payroll is actually increasing-contrary to our expectation, and despite technological advances, administration costs have actually increased rather than decreased since 2003 as organizations focus on technology transformation rather than process transformation.” Contrary to expectation, the survey found that the cost of administration had risen by $1 per paycheck, which multiplied by the number of employees every month becomes a significant sum for any business. The key to the mystery seems to lie in a common implementation or adoption failing – most organizations expect the mere presence of the software to create savings; they do not review and improve their business processes to align with the capabilities of the technology leading to unused features and even manual work-arounds – a classic case of trying to fit the square peg into the round hole. Best practice software implementation always includes a review of the processes being automated, so that the full value can be realized. As the survey report says, “The results of the study suggest that many organizations need to focus on process redesign when they decide to change software. Failure to do so drives both these hidden and seams costs described above.”
Deployment Methods for Payroll Automation
SaaS (software-as-a-service) is an increasingly popular deployment method for HR software - highly configurable, no heavy-duty hardware needed, a ‘pay-as-you-go’ model, a reputation of innovation and classed as an operating expense rather than a capital one - when a February 2012 blog can have a top 21 list of SaaS payroll vendors, the market is responding to a definite demand. However, the PwC survey finding may surprise some: “SaaS helps reduce costs for many organizations—but only to a point. Our analysis also 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.” Once again, the identified missing ingredient is the process review. SaaS is a cost-effective deployment method but if the software is not aligned with the processes being automated (and vice versa) then savings are limited.
Payroll Software TCO Reduction Tips
The top four identified TCO reduction tactics are:
Outsourcing – organizations managing payroll in-house were found to be spending on average 18% more than organizations that outsource
Utilizing a common vendor – organizations using several “best of breed” solutions from multiple vendors for payroll and associated functions spend on average 18% more than those using a single vendor
Employee self-service – engaging the workforce with self-service access for personal records and transactions results in a reduction of TCO
Integrating time & attendance with payroll – the improved accuracies from this approach give a cost efficiency of 14% over non-integrated systems.
The Bottom Line on Payroll Software Costs
Having pointed out how expensive payroll can be, highlighted that many organizations are failing to leverage their payroll software, and then cast doubt on the SaaS trend, PwC seem to be aiming for confrontation, if not controversy. However, the core message for enabling cost savings when implementing payroll software – in addition to the tips mentioned above – seems to lie in the process-system interface. The time spent reviewing and honing current systems and matching them to a solution that can deliver what the organization needs seems to be the lever for success. By doing this not only will companies net improvement in organizational payroll software, but they also now have a much better understanding of the payroll process itself—a key element in keeping costs down.
Because these hidden costs are not always explicitly stated or are spread throughout the entire workforce (or at least, the management) they are often ignored—leading to a false impression of the payroll software solution’s TCO; which may in turn lead to future payroll and technology strategies being based on insufficient data.”