The pricing equation in HR and payroll outsourcing has never been simple. One of the biggest problems, of course, is that few organizations can actually do a decent comparison between what it costs them to run part of their business today compared to what an outsourcer would charge tomorrow. How many people have gone through the laborious process of first mapping and then costing their different processes – something that gets harder and harder the bigger and more complex your business gets? In fact, it’s not always easy working out where the relevant business processes actually start and stop – particularly in an area like payroll, where an outsourcer may take control of number-crunching, regulatory filing, paychecks and the like, but still leave you with the task of collecting all the hourly timesheets, absence data and overtime payment details that have to be fed into the system in the first place.

And then there are the indirect costs that tend to get dumped into a general ‘overhead’ bucket – such as the cost of maintaining your software applications, servers and the other IT infrastructure that keeps your HR or payroll system up and running, along with the IT people that manage them. To do a fair cost comparison, some portion of these costs should be thrown into the mix.

None of this is an excuse to give outsourcers license to overcharge, of course. There’s some comfort for customers in the fact that the HR and payroll outsourcing markets are pretty competitive, which keeps a downward pressure on costs. And most reputable providers are transparent about the kinds of ‘extra’ charges that might have sneaked into bills in the past – things that weren’t specified in the original contract because you didn’t think of them at the time, but that you can’t live without. But fundamentally, anyone going into an outsourcing agreement has to recognize the basic economics. You have your own business drivers sending you down the outsourcing path, whether it’s for better quality of service, risk reduction, organizational efficiency, or any of the other benefits that outsourcing can potentially offer. For its part, the service provider needs a profit margin. Somewhere in between is a compromise that keeps everyone if not exactly happy, at least mildly content.

Here at Webster Buchanan Research, we’ve spent more time than we’d care to remember analyzing the different nuances of HR and payroll outsourcing, some of which we’ll explore in a spring publication on the practicalities of the outsourcing pricing equation. If you’re mulling over an outsourcing decision, watch this space.

Earlier this month I met with Jyoti Banerjee and Simon Hughes, both of whom have mid-sized companies firmly in their sights. Jyoti, who I worked with at a previous research organization, is co-founder of M Institute, a not-for-profit set up to support mid-size companies in the UK. The rationale for the venture is pretty compelling. While organizations turning over ₤10m-250m represent only six percent of UK companies, they employ 30 percent of the UK workforce and generate 20 percent of corporate profits. Yet they have a relatively low profile. M Institute was set up to provide an information resource and to represent these companies at government level, and it’s teamed up with the likes of the CBI, the Institute of Chartered Accountants and Microsoft to do so.

Jyoti agrees that company size isn’t really the point. M Institute differentiates companies on the basis of business characteristics rather than numbers, comparing them against nine indicators ranging from funding to the nature of their customer base and the degree of employee empowerment. And it argues that, while mid-sized companies tend to be bracketed with their smaller counterparts under the ‘SME’ (‘small and mid-sized enterprise’) banner, they actually share more characteristics with larger organizations.

Coincidentally, Simon Hughes, is director for medium-sized businesses at Microsoft and is also involved in the M Institute initiative. Microsoft, which has made several acquisitions in the midmarket business software arena over recent years, has something of a vested interest in the space, of course, and has had a hand in some related research activities of its own.

In 2005, for example, it sponsored a research project from Keystone Strategy and Harvard Business School among companies with 100-500 employees, looking at the correlation between IT capability (based on a scorecard measuring IT usage) and business performance. It concluded that “firms that build high capability IT systems grow faster than firms that do not, and do so while increasing both revenue and profits”. Of course, the research doesn’t prove a causal link between IT investment and performance – but it’s an interesting indicator.

As it happens, Human Capital Management is one area where size indicators such as headcount may be more meaningful than in other disciplines. While companies with small employee bases can get away with using manual systems, spreadsheets or the HR admin modules in their payroll or financial software, the need for process automation and reporting grows with headcount. There comes a point – for some companies, at around 50 people - where you need to consolidate all your different holiday, sickness and training spreadsheets into a central HCM system.

Likewise, many of the statistical benefits of people-based analysis – as opposed to day-to-day reporting - really kick in when you reach a sizeable employee base. Knowing you’ve got an ‘attrition’ rate of 8 per cent in your 150-strong workforce isn’t particularly meaningful when it translates into one person leaving a month, for example – but as your headcount grows, these kinds of indicators can provide powerful insight into people management trends.

That said, size will only ever be one factor in HCM IT decision-making. Take recruitment automation, which is partly driven by volume. While the number of job applications you receive will be influenced by the number of employees (and therefore the number of vacancies), other factors include location and local demographics, sector, the type of role, your employee retention rate, and speed of growth. That has practical repurcussions. In particular, if you’re looking to see how other companies tackle the kinds of problems you face today, you'll need to dig deep to find truly comparable examples.

Most companies have a fairly reasonable handle on their day-to-day payroll needs. You encounter the occasional basket case where the systems don’t function effectively –like the medical products distributor that found itself paying employees weeks after they’d left, giving every leaver two weeks holiday because it had no way of tracking how much time they’d already taken, and paying more benefit premiums than the number of employees actually listed on its plan. But it sorted itself out through an outsourcing deal, and its problems were the exception rather than the rule. Payroll may not always be run as efficiently as it could be, but most organizations can at least be assured that they’re paying approximately the right number of people approximately the right amount of money.

That picture starts to change when you talk to multinationals, however. Because payroll procedures and legislation vary in every country, most organizations tend to run their international pay operations on a piecemeal basis, allowing local subsidiaries to buy their own software packages or strike outsourcing deals. Not surprisingly, that makes it tough to get an accurate central picture about outgoings. In a compliance-centric era where senior management needs to prove risk is minimized and controls are in place, it’s hard to cater for a set-up where processes differ from region to region, every payroll department has its own interpretation of best practices, and data is distributed across different systems (see ‘Managing Multi-country Payroll, a Special report from Webster Buchanan Research).

In fact, if you’ve ever asked a multinational exactly how many employees it hires around the world, you’ll know the scale of the problem – there are still a surprisingly large number of companies that would struggle to give you an accurate answer.

All of this is starting to change as multi-country payroll management creeps up the corporate agenda, and Webster Buchanan’s Multi-country Payroll Forum, which will be launched next month, intends to provide some of the answers to these issues. And things are definitely moving. Software suppliers are starting to provide systems that allow you to standardize common processes around the world, while tailoring the software at a local level to meet individual country requirements. And the leading outsourcing firms are following suit, albeit with somewhat different approaches. The challenges, though, shouldn’t be underestimated, from technical issues to the cultural and organizational problems that come with any multinational change management program.