Recent press coverage citing a move toward insourcing, such as Computing's 'The Insourcing Trend is Bringing it all Back Home', has highlighted an interesting evolution in the outsourcing industry. However, this is not indicative of the overall state of the market. In fact HR Business Process Outsourcing (BPO) is set to see 21% growth annually through 2008 reaching $7 billion, according to leading analysts. In contrast, the payroll outsourcing market has witnessed a comparatively high volume of deal failure or non-renewal, with a range of organisations expressing dissatisfaction with the outsourced payroll service they receive. This can result in time-consuming, expensive and disruptive deal renegotiation.
When questioned, business leaders often cite payroll as already outsourced, or near the top of the list should they adopt an outsourcing strategy. That same person, when questioned on perception of the payroll function, may often be of the opinion that it is a fairly time consuming, but transactional process involving keying various data onto a system, then pushing a button and getting payslips out. Business leaders often struggle to see exactly where this time consuming and 'painful' function adds value to their core business. Move further down the leadership chain to those involved with Payroll and HR management and you will likely hear a very different story. In some organisations payroll has become intrinsically linked with, in certain instances responsible for, key personnel judgements and significant feed in to major corporate HR and finance decisions among others. This disparity in perceptions provides a big clue as to the source of the issue.
Firstly it is important to make the distinction that, in the BPO context; payroll outsourcing refers to end to end service. This is what the market has been challenged to find robust and durable solutions to, and it is a very different game to that of outsourced payroll 'bureau' services. The latter have been used widely and successfully for many years and generally involve the service provider performing only the back end elements of payroll; gross to net calculation, payslip printing and reporting among others.
Payroll outsourcing has no greater reason to fail than any other outsourced function. Payroll, it its true sense, is largely rules based and thus meets the widely accepted 'must be 80% rules based' criterion for outsourcing feasibility. Those rules may be more complex and regionally varied than those of other typically outsourced functions, but are there to be followed nonetheless. Why then do a comparatively high number of payroll outsourcing deals result in dissatisfaction or failure?
Exception has become the norm
In order to outsource successfully, documented rules and procedures need to be put in place round a process. It would then logically follow that success is largely dependent upon actually following them. This is a big challenge for most organisations which, historically only having operated payroll in-house, have a set of rules, policies and deadlines to which exceptions are readily made in order to meet the needs of a demanding employee, a manager who hasn't completed paperwork, a late policy change approval or transfer notification request..., and the list goes on.
Exceptions in the processes of numerous functions (travel expenses, mobility, data management, finance etc.) can result in payroll exception handling. The average internal payroll department has become expert in resulting decision making, bending monthly and weekly timetables and schedules, feeding creative customised rules into payroll systems or dreaming up complex manual workaround solutions. This is all necessary to cater for the exceptions arising from lack of discipline throughout diverse areas of the business they serve.
Such lack of discipline will endanger the smooth running of any payroll outsourcing contract as it becomes impossible to follow the rules and procedures upon which an external operation must be built. Cultural change and internal education, together with real emphasis on the importance of adhering to internal policies and procedures, is therefore imperative and must be made a real priority, visibly supported by all levels of management and HR throughout an organisation. To maximise chances of payroll outsourcing success, exception must once again become the exception.
An organisational crossroads
Payroll is the natural crossroads of many other functions; the result of whose processes can have some sort of tangible impact on an employee's pay. It has inputs and outputs spanning many key HR and Finance processes, failures in which often result in payroll inaccuracies. This often leads to the payroll professional gaining in-depth knowledge of a range of other functions' processes and their effects on each other. Payroll has therefore often evolved into a key player in driving synergies and improvements in multi-functional processes; becoming an invaluable internal source of knowledge on those processes or key parts of them and their impact on one another.
The payroll professional thus evolves into an internal consultant of sorts, often relied upon by the organisation to use their wider knowledge to proactively identify issues or make key problem solving judgements or recommendations. Further examples could include payroll providing a valuable training and education resource; enabling corporate finance to properly understand, predict and manage people related costs as well as acting as a 'watchdog' in this respect. Payroll is often also called upon to make educated proposals on how best to integrate new acquisitions, as well as project managing compensation integration and alignment.
The added benefit of an organisation's payroll department having evolved into such a powerful resource cannot realistically be expected to survive an outsourcing deal intact, as the very experience and internal relationships and knowledge built up can suffer. Building a business case around achieving, for example, labour arbitrage savings by outsourcing 90% of a function and then realising you actually need to rebuild 40% of that capability in order to ensure internal senior process knowledge continuity or because complex business critical work needs to be redistributed within the retained organisation is not a great foundation for success.
The ever extending remit
The modern payroll department has in many instances, through design or natural evolution, been encumbered with work and responsibilities that should probably sit within other areas of the business. Examples include employee guidance on domestic and international taxation matters, particularly in cases where organisations have a highly mobile workforce, or a population in regular receipt of bonus and share option rewards. It can be argued that such guidance should more properly be issued by internal tax departments or perhaps external consultancies. But, given that payroll is on the employee front line, some of this work has often settled into the function.
Organisations are known to turn to an experienced and flexible payroll department when it comes to process design or problem solving around complex compensation, taxation or mobility issues among others. In order to fulfil many of these roles, the payroll professional will rely on inside out cross-function process knowledge as well as using judgement and experience to make and influence key personnel or business decisions. Know what you are proposing to outsource. If a payroll department has been 'silently' owning a wider range of tasks this must be recognised and planned around. Outsourcing payroll as a transactional process does not always fit.
The pragmatic road to outsourcing success
Today's organisations can undoubtedly glean massive advantage from empowering their payroll department and professionals as a key strategic resource from which they can expect a high degree of flexibility, well thought out end to end solution design, and proactive cross function issue resolution. However, trying to leverage the outsourcing advantage in conjunction with this could lead to failure. If payroll is to be successfully outsourced as a rules based, transactional process then it must be transformed as such either prior to, or as part of the outsourcing transition.
The fact remains that true payroll is largely rules based. Albeit those rules are comparatively more varied and complex than those involved in many other processes, and compliance with those rules subject to scrutiny from a greater volume and variation of regulatory and audit sources. This heightened demand for legal, statutory and controls compliance is in itself an excellent argument in favour of payroll outsourcing as those companies for whom payroll services is core business are much more likely to be able to stay abreast of ever changing rules, legislation and requirements than the internal payroll departments of individual companies could ever be.
It is accepted that processes which do not involve making business judgements and are 80%+ rules based are those for which outsourcing can offer an advantage. Organisations therefore need to ensure, rather than assume, that their payroll function is precisely that.
Jill Stabler is a Senior Consultant with Alsbridge plc, the award winning advisors on outsourcing, shared services and offshoring. Jill can be contacted at jill.stabler@alsbridge.eu
