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While digital technology may have made itself felt across most customer-facing areas of the business these days, payroll – that most vital of internal support functions for keeping employees happy – appears to be lagging way behind.
According to a report by human resources (HR) and payroll services firm NGA HR, which was based on a survey of 2,472 HR and payroll professionals in medium to large-size organisations, while 33% are using on-premise systems to automate their payroll processes, a further 34% have moved to the cloud.
But the Global Payroll Complexity Index 2019 indicated that 11% are still operating completely manual processes, while the rest employ a mix of tools and methods.
Even among organisations that have embraced automation, the picture is somewhat mixed. A survey of 251 UK HR and payroll managers in private-sector companies with more than 1,000 staff, conducted by Censuswide on behalf of HR and payroll software and services supplier MHR, reveals that 52% are still using spreadsheets as part of their payroll process, while just over one-third rely on paper-based timesheets. The reason given for this by over half of respondents was that “things have always been done this way”.
Perhaps unsurprisingly, given the manual nature of at least some of their processes, 76% of organisations also admitted they have failed to pay employees correctly or on time an average of four times over the past 12 months.
The issue, says Pete Tiliakos, principal analyst for HR and technology services at analyst firm NelsonHall, is that traditionally, companies have treated payroll as a cost centre, which means many functions have “limped along with cobbled-together solutions, disparate and outdated, albeit reliable, platforms and a lack of global reporting capability”.
But as more and more businesses invest in HR transformation initiatives, payroll is starting to be pulled along too. “Organisations are realising that payroll is a big factor in HR transformation,” says Tiliakos. “Although the focus has to date been on sourcing, developing and retaining talent, if you don’t pay them on time and accurately, all that doesn’t matter – so payroll is very important and has to be included in the vision.”
This is particularly true in the face of growing numbers of gig workers in the economy, who increasingly advocate on-demand pay models that traditional payroll systems are not set up to deal with.
Other drivers for change include compliance and the rising complexity of global regulations. The problem here is that enabling reliable, globally consolidated payroll reporting is a big challenge when using decentralised, poorly integrated systems that are often different in each country, which tends to lead to the manual collation of reports.
A market in transition
As a result, a common pattern for transformation initiatives is to start with HR and then move on to payroll about 12 months after either initial discussions or the transition itself, although this is not always the case. For example, international expansion or merger and acquisition activity sometimes forces the hand of employers to tackle payroll first.
Melanie Robinson, senior HR director for sales and marketing at payroll services giant ADP, says: “Payroll is a market in transition, but the common thread is streamlining and simplifying manual processes. Whether we are looking at single country or global payroll, it’s about leveraging technology to cut costs, increase efficiency and improve the user experience.”
But that doesn’t mean everything will be plain sailing. Common barriers to change include an inability to make a positive business case that demonstrates a sufficient return on investment, particularly if payroll is simply seen as a cost centre.
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Another is fear of what transformation could mean, particularly if things go wrong. Tiliakos says this is linked to the fact that “many organisations lack the skills and capability to successfully manage change in-house for a large-scale transformation programme”.
A global lack of in-house payroll skills is also having an impact and, as a result, is leading some organisations to go down the outsourcing route.
Nonetheless, Tiliakos believes the future looks bright for payroll. “It’s an interesting time in that technology, such as cloud and robotic process automation, is starting to make an impact and organisations are seeing it and wanting to modernise their solutions and leverage some of that,” he says.
A key consideration here is that payroll data, which is among the richest, most accurate but also most underused data in the business, has traditionally been difficult to get at and analyse. But as companies update and integrate their systems, it leads to “massive possibilities”, says Tiliakos.
“The payroll professionals of the future will undertake a lot more analytics activity and work with bots to ensure they are performing and interpreting what the trends are to create more optimisation,” he says. “It’s a huge opportunity for payroll to become more of a strategic partner for the business, so in future it will be much less about manual processes and heavy-lifting and much more about value-add.”
Case study: The Castle Hotel, Taunton
The Castle Hotel has been able to boost the efficiency of its labour planning activities by integrating rostering and electronic point of sale (epos) software with its payroll system.
Last year, the hotel, located in Taunton and employing about 100 people, replaced a standalone electronic till with cloud-based epos applications from Talech.
The software was also integrated with Deputy’s cloud-based staff rota and time clock packages, which replaced a previously manual system and enabled managers to optimise staff rotas based on current requirements.
Employees can use their smartphones to clock in and out and schedule time away, such as holidays.
Jon Peilow, the hotel’s financial director, says: “Effectively, in the past, nothing joined up and we had to calculate everything manually using spreadsheets. But the process has now become much more seamless and has saved us a lot of admin time.”
For example, the time it takes to process payroll has been cut by half a day a month because it is no longer necessary to manually key in how many hours each employee has worked. Using a CSV file, the information is now uploaded directly to the Castle’s BrightPay cloud-based payroll system, which also reduces the likelihood of manual errors.
The new system, which replaced older Sage applications about six months ago, also enables employees to access all their payroll data via a dedicated portal.
Meanwhile, the hotel’s six department heads are saving up to three hours a week on putting together schedules and signing off timesheets. They also have access to real-time reports on costs as a percentage of sales revenue and can see how much is being spent on labour.
“Ultimately, staff are the biggest cost in hospitality businesses and, while that’s going up between 5% and 6% a year, it’s difficult to increase charges accordingly, due to current market conditions,” says Peilow. “So we need to get smarter about labour planning by becoming more efficient – and that means sharing data with department heads on a real-time basis.”
Whereas in the past, such information was shared monthly, the integrated system means it can now be viewed daily at the touch of a button, to optimise how employees are deployed.
“It’s a much more cost-effective approach and gives us what we need,” says Peilow. “Although we could undertake labour cost analysis before, it was very manual and labour-intensive and so was always at the bottom of the pile. But now we can treat it as a priority because that’s where it is possible to make the most efficiencies.”
Case study: Severn Trent Water
Severn Trent Water’s HR and payroll transformation project is now starting to free up enough time to enable staff to analyse payroll data and use the insights gleaned to boost the wider employee experience.
The utilities provider started its “transformational journey” about a year ago, which has resulted in it revisiting its policies, processes and procedures “to de-clutter them and remove the bureaucracy”, says Joe Carter, the firm’s HR manager.
A key objective was to ensure that such processes became more “seamless and automated” to make it quicker and easier for the company’s 6,500 staff and managers to undertake HR-related tasks, he says.
A second goal was to reduce risk and improve the accuracy of payroll processing, and another was to free up Severn Trent’s payroll team to perform “more meaningful activity that directly supports the business, and ensure there is a human face rather than just a faceless HR function”, says Carter.
Ultimately, though, the aim is to “deliver the best employee experience we can”, he says, and a big part of that is about ensuring people are paid accurately and on time each month.
“Payroll is something that people just expect to work and they don’t necessarily see what goes on behind the scenes, but they soon let you know if something goes wrong,” says Carter. “So by increasing reliability, you can ensure employees get a good experience and can focus on the job they’re paid to do.”
Tight integration between Severn Trent’s long-term outsourcing supplier MHR’s cloud-based iTrent payroll system and the utility firm’s in-house SAP HR applications, plus the fact that the “majority of the payroll side of things is now automated”, means that for the last six months or so, it has no longer been necessary for the three members of the in-house payroll team to key in any information manually, says Carter.
Instead, they can now spend more of their time analysing payroll data in order to understand costs better, identify trends and potentially introduce business change.
“It’s about freeing up time for the team to do more advanced analytics during the payroll run, so they can see if things don’t look right,” says Carter . “But it’s also about spotting business trends, so if there’s a spike in sickness or overtime claims, we can engage with the business, query what is causing the change and see if an intervention is necessary, such as providing more resources.
“While it is still early days here, the aim over time is to focus more and more on gaining strategic value from the careful analysis of payroll data. Using data in this way isn’t just about ensuring people are paid accurately and on time; it’s about exploring what the data is telling us and how we can us it to improve productivity and the employee experience.”