Webcast 24 Feb 12 - TCO of Payroll Delivery_Final

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To become the single recognized community for improving the quality, effectiveness, and efficiency of the processes involved in supporting and enabling the outsourcing of HR services including learning, recruitment, and other HR processes.

EMEA Payroll Workgroup

Total Cost of Ownership of Payroll Delivery

Friday, 24 February 2012

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Welcome & Introductions

Today’s Speakers: Christine Briody Carol Haag Rudi De Roeck

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Agenda

Which components construct Payroll’s TCO?

Why monitor the TCO for Payroll Delivery?

How does geographical spread influence TCO?

What are benchmarks to compare your TCO?

Which strategies are available to reduce TCO?

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Background Terms TCO Total Cost of Ownership (or Operation)

A financial estimate designed to help assess direct and indirect costs commonly related to software or hardware. It is a form of full cost accounting. It includes all costs (including those difficult to get or to validate by the organisation):

Visible costs (labor, IT, external,...) Staff fully loaded cost (social & benefits + overheads, managerial costs,…) Quality costs (audits, SOX,…) Avoided costs (replacement system costs,…)

A method that calculates the full cost of a product/function during its life cycle, taking into account two components: Fixed costs: expenses not dependent on the activity of the business. i.e.: internal IT, salaries… Variable costs: expenses that are correlated to the business activity and vary with the number of units produced. i.e.: external costs charged per employee

Cost Amount of money, time or energy required to obtain or produce something (product or service)

Price Amount of money for which a thing is bought or sold Price = Cost / (1-%Margin)

Cost savings Inflow of money gained by buying a product or a service at a cost lower than the historical cost or the projected cost.

Expenses Outflow of money used to pay for a product or service that is done or sold

Value The bundle of benefits that you expect to receive from your selected product or service.

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“Price is what you pay. Value is what you get” Warren Buffet


Which components construct Payroll’s TCO? There are a number of basic key components that make up the Payroll TCO Labour costs

• Payroll • HR • Finance • Legal / tax specialist • IT • Other? E.g. procurement support with payroll service contacts – tenders and renewals

Payroll system costs • Licensing and support contracts • Interface maintenance • Peripheral systems, payroll data feeds etc. • Outsourced services fees

Other payroll costs • Banking charges • Printing and stationery costs • Recruitment and training • Employee expenses • “At seat” costs – office space, desk set up, connectivity and desktop computer

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Scope of Payroll TCO

Preparation Payments Calculation Reporting

Build to gross Gross to net Ees & 3rd parties Internal / External

Supporting Technology

Internal and external services / support Employee queries, third-party queries, rejected payments process etc.

ESS / MSS

HR changes

T&A data

Validations, exception reports, checks and corrections, pre-payment runs

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Different operating models will break out the costs in different ways…

Payroll’s TCO - Different Operating Models

Outsourced payroll • Retained staff cost – could be

vendor manager role only depends on level of outsourcing

• Monthly fees • One-off activities (exception events) • Enhancements (Change requests) • Year-end processing • Ad hoc processing • Consulting services

In-house payroll • Staff costs – potentially high

due to need for in-house skill • Staff training and development • Payroll tax advice line • System changes • System development • Peripheral solutions – data

archiving, portal updates, workflow etc.

Shared services payroll • Service delivery charge (based on fully loaded staff and at-

desk costs plus a technology charge) • Help-desk support costs • Local admin, document and file input/transfer

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Other Payroll TCO considerations :

Steady state delivery vs. Implementation • Cost of purchase of new system (licenses and design, hardware, connectivity) • Cost of implementation of new system (consultant and specialist IT) • Project costs • Backfill costs • Pay-back from implementation to steady state

In-house transition to Outsourced • Set-up costs • Internal project resource costs • Vendor project resource costs

Size of payroll and benchmarking • Size is a key factor – a good TCO for one organisation may be poor for another • Benchmarking is a useful tool – make sure you are comparing like for like…

Payroll’s TCO – Different Situations

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We often don’t think about the payroll TCO until we are looking at a project or a business case for change…


Why monitor the TCO for Payroll Delivery?

Establish cost baseline • Develop payroll metrics • Identify improvement opportunities • Accurate business reporting • Understand scale vs unit cost drivers

Benchmark performance • Internal – business unit to business unit, country to

country • External – how am I performing relative to peers, industry

sector etc. Upper, mid, lower quartile?

Develop Business Case for change • What are my high cost areas? • Can I make savings? • Can I improve quality of service without increasing cost?

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Understand how you are performing over time, comparison to others, cost reduction opportunity



The TCO for payroll increases exponentially as function of the number of company locations.

To cope with this phenomenon, companies must: • implement solid governance structures and repeatable

cost control mechanisms; • use short communication lines with the locations; • cut through payroll complexity and limit the number of

supported languages; • improve efficiency and effectiveness in the payroll process

(e.g. BPR, 6Σ SIPOC) and then enforce process execution discipline;

• leverage skills and reach of global expert houses in the field of employment compliance.

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The purpose of benchmarking payroll operations is to assess productivity and reduce costs.

Create a baseline for benchmarking payroll performance metrics, such as: Number of FTEs in the payroll department; Average annual salary of payroll FTE’s (fully loaded costs) Number of employees paid and payroll frequency; Number of IT FTE dedicated to payroll; Average annual salary of IT FTE’s (fully loaded costs) IT System Costs related to Payroll Software (maintenance,

upgrades, hosting, interfaces… ) Total other costs related to payroll e.g. Temporary FTEs, SOX,

audit, legal watch, consulting, cost of errors, penalties & fees… Total outsourcing costs (if applicable)

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Payroll Inputs Number of Employees processed 950

Total Number of Payslips Processed per Year 11, 400

Cost Components Summary Total FTEs Involved in Payroll 2.5

Payroll Labour Costs 150, 000 €

Payroll Outsourced Costs 0

Payroll IT Costs 58, 900 €

Payroll Other Costs 2,200 €

Current TCO Total Cost of Ownership (TCO) 211, 100 €

TCO per Payslip 19 €

Annual TCO per Employee 222 €

Payroll FTE Ratio (Total Employees/Payroll FTE) 380

Sample TCO Summary


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Average Payroll FTE Ratios

Payroll Model Good Ratio for Retained Payroll Staff

OK/Average for Retained Payroll Staff

In-House Country De-centralised

1:700 1:500

In-House Country Centralised SSC

1:900 1:750

Outsourced (Processing Service) Regional Centralised SSC

1:1200 1:1000

Outsourced (Managed Service) Regional Centralised SSC

1:1800 1:1500

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Caveat: many components can impact on these ratios, such as employee type, level of automation, system capabilty, country legislation, size of payroll, payroll frequency, number of legal entities, …


Which strategies are available to reduce TCO?

Cost effectiveness stems from comprehensive process transformation and streamlining, not just technology

innovations. Organizations using In-house solutions or hosted software

solutions spend on average 18% more administrating these functions than organizations who outsource

Organizations administering these functions in-house with solutions from multiple vendors, spend an average 18% more then those using only one in-house solution

Organizations outsourcing these functions to multiple vendors spend an average of 32% more than those outsourcing to only one vendor

Providing payroll and HR self-service functionality to employees can result in a 50% lower TCO of workforce administration

Integrating time & attendance with payroll leads to a cost efficiency of 14%

Source: PwC & ADP TCO study, January 2011

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Webcast 24 Feb 12 - TCO of Payroll Delivery_Final