After outsourcing: is payroll still oversized?

Earlier this year when I was hosting a small workshop of global payroll managers, one of the participants made a revelation that stopped the conversation dead in its tracks. His company had switched in-house payroll over to a managed services provider for many thousands of employees in multiple countries – but it hadn’t managed to reduce its overall payroll headcount by a single person.

Being a charitable bunch, the first reaction of everyone round the table was to try to think of all the reasons why this might not be quite as counter-intuitive as it first sounded. And slowly, as we talked through the different reasons why it could happen, it became clear that several other attendees around the table had ended up retaining more work in-house than they’d expected. In fact, the only person who was 100% happy with the status of their in-house set-up was a global payroll manager who hadn’t actually started out on the multi-country payroll journey.

So why do some companies end up with a bigger retained payroll operation than they anticipate when they go into a managed services outsourcing deal – and just as important, whose fault is it?

One of the most obvious ‘culprits’ is the payroll department itself, which in practice is often really a ‘Payroll Plus’ function – or in extreme cases, a combined payroll/HR admin department. It’s common for payroll teams in some countries to absorb administrative work that elsewhere would be the responsibility of HR or even finance. This is particularly true in some countries in central and Eastern Europe where there is a heavy bureaucratic overhead, as Webster Buchanan explored in a recent research report [see "The challenges of multi-country payroll in Eastern Europe", a special report from Webster Buchanan Research"].  If that non-payroll work doesn’t get passed onto the outsourced services provider, it can leave a mound of work to be completed in-house.

Just as important, even where the payroll team is doing nothing but payroll tasks, it still has to manage the build-to-gross prior to passing data to a managed services provider – and that can mean a hefty chunk of its workload doesn’t get outsourced. That’s made worse when companies outsource without first fixing any key parts of the end-to-end payroll process that are broken, leaving team members scurrying around dealing with messy data inputs before they can even send anything to be processed.

Then there’s the issue of smaller country populations – countries where payroll is a part-time responsibility for someone who’s probably overstretched, and who simply absorbs their newly-freed up time tackling the rest of their in-tray. Again that means there’ll be zero impact on headcount, unless you measure FTE headcounts by fractions – although on a more positive note, it does actually mean some overdue non-payroll work actually gets done.

And then of course there are the suppliers themselves. What if they’re simply making too many mistakes?

Once you bring these operational and structural issues into the equation, there’s much more logic to the concept that payroll outsourcing might not give you all the streamlining you expected. But there are also issues that have less to do with day-to-day payroll activities, and more to do with fundamental philosophies.

One of the potential benefits of a managed services arrangement is that it enables a payroll team that currently handles transactions to shift focus, taking on more of a controls and quality management remit in overseeing the work that other third parties carry out. That shift, however, has several inherent challenges.

Firstly, can the payroll team let go? In theory I should be able to trust that my outsourcer is going to get most things right – after all, the reason I hired them in preference to anyone else is that they proved themselves during our selection process to be specialists in the field. In practice, however, some payroll teams find it hard to cede control, and end up checking vast swathes of data and hunting down every last payroll error pre-payment.

Secondly, there are different notions of what ’quality’ actually means. If I’m a sales manager, delivering high-quality results is all about hitting and exceeding targets that shift on a monthly or quarterly basis, depending both on how my company’s business needs change, the overall economic environment and the capability of my team.

For payroll, however, the quality goals don’t change, at least in absolute terms. Everyone agrees that 100% timeliness is a given. Everyone’s striving for full compliance. And ultimately, everyone wants 100% accuracy – although as an industry we’ve given ourselves a little bit of wiggle room by accepting 99.x% as our goal. If your outsourcer is delivering industry standard quality and your payroll team is pursuing world class, there’s only one place where the differential will be made up – and that’s in-house.

This column was adapted from an article that first appeared in Payroll World

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