Power point presentation on enterprise performance management
Payroll and HR Administration
1. HR Challenges and Solutions
Payroll and HR Administration:
Use Total Cost of Ownership Methodology to
Expose Process Improvement Opportunities
In association with:
2.
3. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 3
Executive Summary 4
Exploring the Reality of Your HR Costs 7
Developing a Successful Business Case 15
Pfizer Case Study 17
SFD Case Study 18
Fresenius Medical Care Case study 21
TCO Benchmarking Data: Key Findings and Analysis 23
Conclusion 29
About 30
Contents
4. 4 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
Corporate leaders are under growing pressure to make the best possible
use of resources, people, and processes. To meet this challenge, they
need a clear understanding of all elements of their organization – costs,
efficiency, effectiveness, and processes. All too often this understanding
is missing. In many companies, HR is still the only function that fails to
measure and benchmark its performance. As a result, their HR leaders
do not know the true costs – the “total cost of ownership” (TCO) –
of HR processes.
ADP has developed a method of measuring TCO that helps HR functions
find opportunities to improve processes and reduce costs. TCO scans
analyze the total cost of ownership of managing payroll, time and
attendance, HR data administration, and health and benefits processes
by looking at all the costs relating to people, processes, and technology.
These include both “visible” and “hidden” costs, which can represent
well over half of the TCO of a process, according to a 2012 study by
PwC. Uncovering both the visible and hidden costs of HR will reveal
opportunities to make cost savings and establish a link between HR
activities and business results – becoming more strategic and getting
closer to a seat on the board.
Chart 1: Breakdown of TCO by Cost Type
Source: Exposing the hidden cost of payroll and HR administration: a total cost of ownership study,
PwC, March 2012.
Executive Summary
“Uncovering
both the
visible and
hidden costs
of HR will
reveal
opportunities
to make cost
savings.”
Visible costs
Hidden costs
37%
63%
5. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 5
ADP’s benchmarking database shows that HR processing costs vary from
country to country – a reflection of different levels of payroll complexity.
There are also large differences between companies and industries within
the same country.
National and international benchmarking provides HR functions with clear
direction. It can help them define their “as is” situation and begin their
journey to where they want to be.
Why Conduct a TCO Scan?
Companies that have made this journey after carrying out a TCO scan have
achieved a range of benefits. They have:
• Cut HR processing costs
• Improved efficiency
• Made better use of resources
• Improved service delivery
• Increased productivity
• Transformed HR, making it more flexible and responsive to
changing business needs.
Three case studies of HR departments that have benefited from TCO scans
are presented in this report.
“It can help
them define
their “as is”
situation and
begin their
journey to
where they
want to be.”
6.
7. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 7
Understanding the “total cost of ownership” – or TCO – can help HR
leaders make a compelling business case for investment in process
improvements. This means showing that the improvements represent
opportunities to reduce costs, says Andre Rampat, Director at
CorporateLeaders, the business transformation network. He argues that
in the current economic climate, no company can afford to ignore these
opportunities.
“Companies have always looked for ways of managing their resources,”
says Rampat. “But in today’s challenging business environment not
only has the need to cut HR costs and make savings without damaging
business performance gained urgency, there is also a strong business
case for new ways of working that increase employee engagement and
productivity by removing administrative tasks from their jobs.”
Is HR at a Disadvantage?
Many HR departments underestimate the cost of payroll, time and
attendance, HR data administration, and health and benefits processes.
They identify the most visible costs but overlook many others. As a result,
they do not know the true cost of running payroll and other HR processes.
Olivier Parent du Chatelet, Head of HR Consulting at Bearing Point, the
management and technology consultants, points out that to optimize
their effectiveness, HR departments need to monitor HR policies against
clear performance indicators. “It’s even more important to use strong
performance indicators to measure the effectiveness of HR processes,
as well as perceptions of the HR function held by employees and/or
managers,” he says.
“The indicators generally used are both qualitative and quantitative –
including, for example, processing times, volumes and employee numbers.
But it’s very rare – indeed, all too rare – for HR departments to use
financial indicators to measure their performance.”
This puts HR at a disadvantage, especially when company resources are
limited, according to Michele Gray, Director of Business Consulting for
ADP’s Europe, Middle East and Africa region. “It’s important to understand
what HR processes really cost because if you are going to compete for
funding to introduce change, you need to show what savings or return on
investment that change will bring,” she says. “So it’s critical to understand,
certainly your baseline costs, but also the total cost of ownership.”
Exploring the Reality
of Your HR Costs
“If you are
going to
compete for
funding to
introduce
change, you
need to show
what savings
or return on
investment
that change
will bring.”
8. 8 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
The Tip of the Iceberg
The TCO of payroll and other HR processes includes both obviously visible
costs (buying and installing systems) and less obvious hidden costs
(maintaining and running them). There are also direct and indirect labor
costs linked to upgrading systems to newer versions. Over the long-term,
the cost of replacing systems can have a further impact on TCO.
One reason why some costs are hidden is that HR processes are often
“owned” partly by HR and partly by finance, IT, or other functions. So
when HR departments look at their own administrative costs, they may
overlook the costs of employing IT staff to install, maintain, and upgrade
HR systems.
For companies with multiple local payroll systems, data consolidation
is another hidden cost. Pulling together reports generated by different
systems takes time. People performing these tasks may not be part of HR,
but their time needs to be taken into account when looking at the total cost
of the organization’s payroll solution. (See chart on page 9 for the costs HR
needs to consider when conducting a TCO analysis).
Choosing the wrong solution can be an even bigger hidden cost. For
example, if a company needs to set up a new project team, its HR
processes must be flexible, responsive, and fast. “In those situations, the
hidden cost of the wrong solution can hit the bottom line,” warns Gray. “If
you can’t get people online, registered, and paid quickly – if there is any
part of a project build that’s slowed down by those processes, that can
have a tangible cost or risk.”
“One reason
why some
costs are
hidden is that
HR processes
are often
“owned”
partly by HR
and partly
by finance,
IT or other
functions.”
9. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 9
Understanding Your Total Cost of Ownership
A complete cost analysis or TCO scan of HR processes should consider all
the following costs, including those that are visible and the less obvious,
“hidden” costs listed below. Chart 2 provides an overview of the hidden
costs for payroll that is often overlooked and is uncovered by a TCO scan.
Chart 2: Structure costs of Payroll
Visible costs
Hidden costs
IT costs
System installation costs • • • • •
System Maintenance costs •
System upgrading costs • •
Seams costs • •
Labor costs
Direct labor costs • • • • • • • •
Indirect labor costs • • • • •
Training costs • • •
Other costs
Outsourcing costs •
Quality-related costs • • • • •
Data consolidation costs • •
25%
75%
25%
75%
60%
40%
80%
20%
60%
40%
75%
25%
90%
10%
50%
50%
65%
35%
35%
65%
Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 9
Data
collection
Interpretation
&
offline
calculation
Data entry
&
integration
Checking
&
controls
Payroll rules
Processing
Printing
&
dispatching
Validating
results
Declarations
Answer Enquiries
10. 10 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
Clearly Visible Costs:
• System Installation
The initial costs of acquiring and implementing payroll, time and
attendance, HR administration, or health and benefits systems. Often
representing major investments for an organization, these one-off costs
are easy to identify.
• System Upgrading
The costs of periodically upgrading systems to the latest versions. System
upgrading costs are generally highly visible.
• Direct Labor
Direct labor costs include salaries and benefits paid to people employed
to operate HR processes. These costs are usually easy to recognize.
Larger companies often keep their direct labor costs relatively low by
employing entry-level employees to handle administrative tasks and by
investing in process automation. Small and medium-sized companies
typically use fewer automated processes and employ more senior people in
administrative roles, increasing their direct labor costs.
Hidden Costs:
• System Maintenance
IT systems need infrastructure, support, software, and regular
maintenance – which all carry costs. But with IT staff often involved in
maintaining HR systems, it can be difficult for HR managers to track their
system maintenance costs.
• Training
The cost of training employees to use HR systems is sometimes
overlooked. However, it can drive overall costs up, especially when
employees need to be re-trained to use upgraded or replacement systems.
• Indirect Labor
Indirect labor costs relate to people working outside HR who help deliver
HR processes. They include employees who collect information for payroll
processing or answer employees’ questions about pay and benefits. It is
important to consider these often hidden, indirect labor costs.
10 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
11. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 11
• Direct Non-Labor
The total costs of operating payroll and other HR processes may include
fees paid to consultants and vendors, as well as corporate overhead, such
as rent and building maintenance. Again, these costs are not always easy
to recognize.
• Seams Costs
The cost of integrating payroll, time and attendance, HR data
administration, and health and benefits systems. HR departments
often install these systems separately without considering the costs of
transferring data from one to another. This can be done either electronically
or manually – with all the associated labor costs. Human involvement in
data transfer also increases the risk of error – itself a hidden cost. Seams
costs are largely hidden but can be a significant component of the TCO
of HR processes. The PwC study cited above found that companies with
software “seams” spend, on average, 21 percent more per pay check than
those that have outsourced payroll, time and attendance, and HRIS to a
single provider.
• Data Consolidation
Companies with multiple local HR systems, rather than a single database,
may need to pull all their data together – for example, to calculate global
employee numbers. Consolidating data is time-consuming and represents
another, often overlooked, cost.
• Outsourcing
Outsourcing can deliver significant savings, but it also carries costs. Even
companies that have not outsourced entire processes often outsource
selected services linked to those processes, such as tax filing. Fees paid
to an external supplier for these services are not always visible, but can
account for a significant proportion of the TCO.
• Quality-Related Costs
Perhaps the hardest costs to detect are those linked to the quality – or lack
of quality – of HR solutions. Choosing the wrong solution is sometimes the
biggest hidden cost of all, as it can have a major impact on the company’s
bottom line.
Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 11
12. 12 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
TCO Scans: Identifying Future Potential
The existence of hidden components means that HR functions often fail
to consider the total costs of processes when deciding on future delivery
models. That leads to poor choices. It is critical to conduct a full audit of
HR processes before investing in new systems, setting up a shared service
center, or outsourcing any processes. But calculating the TCO is highly
complex and there are few accurate benchmarking tools on the market to
help companies with this task.
For almost a decade, ADP has been carrying out TCO scans for clients
around the world. In the process, it has built up a unique database, holding
data for 880 companies or business units in 72 countries. ADP has also
developed a number of free tools and services that help HR leaders
benchmark and analyze their HR TCO. Outputs of TCO scans are presented
to client companies and are also anonymously included in the database for
detailed benchmarking.
TCO scans enable HR teams to understand their current or “as is”
situation. They can then develop future or “to be” scenarios, showing how
cost savings could be achieved by making better use of people, processes,
and/or technology.
“It is critical
to conduct a
full audit of
HR processes
before
investing in
new systems,
setting up
a shared
service
center, or
outsourcing
any
processes.”
13. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 13
TCO scans look at a wide range of indicators. These include:
• Employee population (number and types of employees)
• Company organization (number of sites, legal entities, and
business units)
• Type of HR/payroll organization (shared service center, on-site,
mixed, etc.)
• Process complexity
• HRIS type
• Level of payroll outsourcing, quality of HR services, productivity
(number of employees managed by each FTE on administrative
teams)
• FTE average costs per profile (for example, manager, clerk, IT
specialist)
• IT costs
• Outsourcing costs
• Payroll costs per employee, per year
Benchmarking, using data collected through TCO scans, shows HR
departments how well they are doing compared to peers (identified by
industry, size, or location). “That is of real value to HR teams, which
sometimes feel isolated – even within their own company,” says Laurence
Fourrier, Payroll and HR Administration Manager at Fresenius Medical
Care France, which recently conducted a TCO scan of its HR organization
and processes. (See Fresenius Medical Care case study on page 21.
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15. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 15
ADP has developed the following four-step approach to building a
convincing business case for HR transformation.
Step 1:
Carrying Out TCO Scans for Complete Cost
Overview
TCO scans first look at the combined costs of payroll, time and attendance,
HR data administration, and health & benefits processes. This reveals the
big picture and makes benchmarking easier.
After analyzing the combined costs, TCO scans usually break processes
down into their main elements to measure the costs associated with
each task. For example, for health and benefits administration, tasks
include enrollment in programs, termination of membership, and
generating payments.
Gathering the Data
Questionnaires and structured interviews with stakeholders are the
most widely used methods of collecting data for TCO scans. This simple
methodology, which can be adapted to specific company situations, makes
it easy to collect data and can provide results for more than 300 processes.
However, small and medium-sized enterprises may be able to collect
all the data they need via a short questionnaire, followed by a workshop
bringing together key stakeholders.
Developing
a Successful
Business Case
“This simple
methodology,
which can
be adapted
to specific
company
situations,
makes it easy
to collect
data and
can provide
results
for more
than 300
processes.”
Carrying Out
the TCO Scan
Analysis and
Benchmarking
Defining Future
Scenarios
Implementing
The Best Option
1 2 3 4
16. 16 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
Highlighting Value Add of HR Processes
In addition to assessing costs, TCO scans look at the value add of HR
processing. “When you get to the executive board level, people will look
at both costs and strategic value add,” says Gray. “So we have value add
assessment questionnaires or structured interviews and we usually ask
the project team handling the business case to talk to their executives
about what’s important for them. That,” she continues, “helps the project
team structure its recommendations around the executive board’s
strategic priorities.”
Step 2:
Analysis and Benchmarking
A TCO scan will reveal opportunities to improve processes and cut costs.
Questions the project team might ask at this stage include the following:
• Do the results of the scan show that HR administration processes
are efficient or not?
• What does the benchmarking data show when compared to the
best performers in the peer group?
• Where are the opportunities for improvement?
• How much can be saved by introducing process improvements or
installing new technology?
“When you
get to the
executive
board level,
people will
look at both
costs and
strategic
value add.”
17. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 17
Pfizer Case Study:
Developing the HR
Transformation
Business Case
The pharmaceutical giant, Pfizer, has
historically had a highly decentralized
operating model. Its 95 country markets
essentially run themselves, managing
their own budgets and making their own
operational decisions. This approach
extends to managing payroll and, as a
result, the company currently deals with 25
different payroll vendors in Europe alone.
Recognizing that this situation presented
opportunities for consolidation, the
company recently carried out a detailed
internal survey of the costs of operating
payroll and time and attendance operations
across all its regions and markets. “This
revealed that when considering migrating
to a centralized vendor, we had a mix
of cost-positive, cost-neutral and cost-
negative countries,” says Brian Zachary,
Pfizer’s Global Director for Payroll and
Time & Attendance.
“Over the years, Pfizer – like other
companies – had made very localized
decisions, and some of those decisions
were not getting us to the level we needed
to support our growth strategies.” Working
with ADP, Zachary and his team started to
assess the data for Europe that had come
out of their internal cost review. “They
helped us assess our costs and formulate
new business case strategies,” he says.
The TCO scan was used to identify
opportunities to reduce costs and
transform payroll operations across
Europe – to make each operation more
flexible and responsive to business needs.
The business case approach, which the
company intends to use throughout this
transformation journey, involves what
Zachary describes as “some very
candid cost modelling” in relation to
different scenarios.
The new payroll model that will emerge
from this process is likely to include some
consolidation. It is also possible that the
company will introduce standardized
interfaces for its payroll systems.
However, significant differences between
countries mean that payroll operations will
continue to be driven by local policies, local
business practices, and local laws.
The different levels of maturity of the
various European markets will also
influence Pfizer’s choices. While a full
outsourcing arrangement might be
prudent for emerging markets in the
east of the continent, in the more mature
western European markets a hybrid model
of internal and external resources might
offer a better way forward, according
to Zachary. “We are not looking for a
single, global payroll provider. That’s not
desirable given our size and complexity,”
he says. “But a near-term reduction from
25 European vendors to three or four
would be a win for us, creating economies
of scale and compelling cost savings.”
Pfizer: Company Profile
Pfizer is a leading pharmaceutical company
operating across five regions: Europe,
North America, Asia Pacific, Africa, the
Middle East and Latin America. It employs
around 110, 000 people, including 35,000 in
North America and 30,000 in Europe – its
second-largest region.
International Payroll Assessment
18. 18 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
SFD Case Study :
Identifying the Hidden
Cost of Shadow
Processes and
Fragmented HRIS
Emmanuel Rétif, HR Director and Business
Partner at SFD, a subsidiary of France’s
second-largest mobile communication
operator (SFR), had several reasons for
asking ADP to carry out a TCO scan of its
HR processes for its 3,100 employees.
“An audit was a way of presenting our
Executive Committee with an objective
view of the issues facing the HR function,
as well as our plans for the future,”
he explains.
“ADP’s consultants had the specialist
knowledge and expertise to deal with our
payroll managers – they spoke the same
language. They also gave us access to their
benchmarking data, which enabled us to
compare ourselves to other companies in
our industry and with similar organizations
in other sectors.”
Rétif describes the methodology used as
simple but effective. Based on an
analysis of standardized processes,
the TCO scan examined differences
between the way processes were expected
to operate and their practical application.
The consultants also found that SFD’s
payroll experts sometimes tried to get
around some processes, and adjusted
those processes, accordingly.
The audit showed that, although SFD’s
HR function had control over its budget,
some costs had been hidden. For example,
new tools developed by the company’s
IT department had not been integrated
into its HR Information System. This
increased processing time and costs.
The benchmarking data also showed that
the payroll team was receiving too many
calls for a company of SFD’s size. ‘Some
days our team was flooded with calls,”
Rétif notes. “We also noticed that our
payroll manager was too technical and not
sufficiently focused on the management
side of his role.”
In response to these findings, Rétif and
his team introduced sweeping changes
to SFD’s HR administrative processes.
They worked with the IT department to
change the company’s time and attendance
management system, limiting the number
of calls reaching the payroll team. The
company also introduced a new centralized
call-handling process that could trace all
requests from employees.
“We also realized that we had not fully
leveraged ADP’s services. So we decided to
transfer more responsibility and increase
the scope of service with a complete
outsourcing of our payroll function,”
says Rétif.
SFD expects to see a return on investment
within two years through a reduction
in the number of full time employees.
“We have made our organization more
flexible so that it can adapt automatically
to business growth or contraction without
increasing our fixed costs,” he says.
“Most importantly, we now have a clear
vision of the next steps we need to take to
significantly improve the performance of
our HR function.”
In conclusion Rétif says, “The way an audit
is conducted is very important. It needs to
be transparent and the people who carry
it out should take the time to explain what
they are doing.’”
National Processes Improvement
19. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 19
Step 3:
Defining Future Scenarios
Possible future scenarios might include installing a new in-house payroll
system, setting up a shared service center or outsourcing HR processing.
By factoring the costs of these solutions into the future total cost of
ownership, the project team can make like-for-like comparisons between
the “as is” and the “to be” scenarios and decide on the right direction
to take.
The project team also needs to look at the functional and geographical
scope of each scenario. In other words, will the proposed changes affect
all HR processes or only some of them? And will all the company’s entities
and regions be covered?
The “to be” scenarios need to show what the HR function will look like
after any move to outsourcing or shared services. How large will the
retained function be? What roles will it play? And does the organization
have the talent to fill these roles? If the right talent is not available,
the cost of hiring new people or developing existing staff will have to be
factored in.
Chart 3 illustrates the findings of a payroll TCO scan for a large
international company, which has been benchmarked against peers. The
chart maps the “as is” or current situation and potential cost reduction
and increased productivity through outsourcing in the “to be” or future
situation. The data is then used to develop the business case
for outsourcing.
20. 20 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
Chart 3: As-Is Versus “To-Be” Situation
Source: ADP TCO Database
Step 4:
Implementing the Best Option
After comparing different scenarios, the project team has to make
recommendations to the company’s top decision makers. While the most
cost-effective solutions are often favored, the need to maintain high service
levels should not be forgotten in the drive to cut costs.
2001:1
458:1
127:1
1064 € 349 €
To-Be=534:1
As-ls=320:1
Productivity
TCO/FTE/Year: €
120 €
High LOW
LOW
High
Legend
X = As Is X = To Be • = Peer group
21. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 21
Fresenius Medical
Care Case Study:
Underestimating the
Cost of HR Processes
Fresenius Medical Care France, a leading
provider of products and care for dialysis
patients, invited ADP to carry out an
audit of its HR structure and processes.
“We used ADP to identify the flaws in our
current organization, assess the risks we
face in today’s tense social environment,
and help us design a more effective
future organization,” explains Laurence
Fourrier, the company’s Payroll and HR
Administration Manager. “We wanted to
have an accurate picture of our existing
operation and validate the reliability of our
HR processes,” he adds.
The TCO scan showed that Fresenius
had underestimated the true costs of
operating its payroll and HR administrative
processes. More importantly, it highlighted
a lack of integration between these
processes. The TCO scan also showed that
the HR staff was not making full use of its
existing HR tools, and revealed room for
improvement in the HR organization itself.
These results did not come as a complete
surprise to Fourrier and his team, who
already knew that they were not as
effective as they wished to be.
Following the TCO scan, the company
redesigned its HR processes, redefining
their scope and standardized them by
deploying new solutions. Fourrier believes
that these changes will allow Fresenius to
reduce the costs of its payroll processes,
although the savings will only be marginal
because the company has decided to keep
its payroll team in-house.
Fourrier expects the changes to deliver
other, equally important benefits,
including improvements in the quality of
HR services, and better use of available
skills and expertise. He also expects that
the new HR processes will ensure greater
consistency between the company’s
national and local HR policies.
A complete TCO scan enabled Fresenius
Medical Care France, “to identify its
problems accurately – and that puts us
well on the way towards finding the right
solutions for the future,” says Fourrier.
Local HR Organization Scan
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23. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 23
The ADP TCO database provides insights into the total cost of ownership
of HR processes – in particular, payroll. For this report, the term “payroll”
includes some pre-payroll and post-payroll activities, as well as time and
attendance processing.
International TCO comparisons
The benchmarking data shows wide variations in the total costs of payroll
activities in different countries. This is partly due to differences in the cost
of living in the countries covered by the database.
The variations also reflect differences in levels of payroll complexity.
“Payroll is far from being a purely transactional process” says Jerome
Philipps, Senior Consultant in ADP’s Global Consulting division.
“It requires understanding of process control and legal expertise, among
other competencies. Both the legal framework and the number and scope
of payroll and sub-payroll processes differ dramatically from one
country to another.”
Processing employees’ personal data can account for more than 50% of
the time spent on payroll in Italy or France, but considerably less in the
UK, where the legal framework for payroll activities is less complex. ‘This
translates into high variations in payroll complexity, which range from a
factor of 1 for the UK, compared to 9 for Brazil and 10 for Italy,’
Philipps adds.
The main factors determining payroll complexity are:
• Local legislation – including variations by industry, proportion of
companies with union agreements, and number of wage types
• The frequency and predictability of legal changes
• The nature and scope of pre- and post-payroll activities, such as
employee registration and deregistration
The resulting differences in complexity have an impact on payroll costs.
The more complex payroll activities are, the greater the expertise needed
to perform them. As a result, average salaries for people in payroll
positions range from €45,000 per full-time equivalent per year in the UK
to €63,000 in Germany, where payroll operations require more knowledge
and expertise.
TCO Benchmarking
Data: Key Findings
and Analysis
“The more
complex
payroll
activities are,
the greater
the expertise
needed to
perform
them.”
24. 24 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
Differences between the laws of individual countries also make it difficult
for multinational companies to implement global payroll solutions. The
pharmaceutical company, Pfizer, for example, featured in our case study
on page 17 hopes to reduce the number of vendor relationships it has in
Europe from 25 to four or five. “Just the burden of managing 25 different
vendor relationships and 25 different contracts across 38 countries in
Europe brings in such a level of administrative complexity that we are
starting to consider other options,” says Brian Zachary, the company’s
Global Director for Payroll and Time & Attendance. However, he believes
it would be unrealistic to look for a single global payroll provider. “There
are too many variations in terms of governance and compliance issues,” he
says.
Productivity Gaps
The benchmarking data also reveal big gaps in productivity, defined as the
average number of employees a payroll team manages per month. Payroll
teams of approximately the same size in France and Brazil deal with 237
and 302 employees per month, respectively. In India, equivalent teams
process payroll for an average of 900 employees per month.
Market Forces
The state of the HRIS and payroll market in different countries is a
further influence on payroll TCO. In France, where this market is
highly competitive, HRIS payroll costs account for 25 percent of TCO
for companies that use systems hosted by an external supplier – an
arrangement known as “processing services.” The comparable figure for
the UK is 40 percent.
In-Country TCO Comparisons
Payroll complexity and costs vary not only from country to country, but also
within the same country.
Industry and Employee Population
Payroll processes covering hourly-paid, blue-collar employees are far
more complex than those for white-collar employees. So payroll TCO is
higher in the manufacturing sector – which employs large numbers of
hourly-paid workers – than in, for example, financial services.
Employee turnover also affects payroll complexity and workload. Turnover
rates of between 30 percent and 50 percent in the retail industry generate
many more transactions around starters and leavers than in industries
with more stable employee populations.
“Payroll
processes
covering
hourly-paid,
blue-collar
employees
are far more
complex than
those for
white-collar
employees.”
25. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 25
Company Culture
The culture of a company and the way it handles relationships with
employees is a further cost-driver. Some companies want to maintain
a dialogue with employees and will therefore create dedicated payroll
positions on each site. Others prefer to operate shared services to handle
employee payroll and administrative queries. This is obviously a more cost-
efficient option, especially for companies with large numbers of sites.
A company’s approach to process improvement also makes a difference.
As Philipps says, “The number of efficiency improvement initiatives rolled
out over the years within HR will lead to very high inherent variances of
payroll TCO.”
Company Size
Larger companies can take greater advantage of economies of scale when
operating payroll and other HR systems. “But the tricky thing is that the
mathematical equation between size and productivity is not linear,” says
Philipps. For example, in Germany, one person can typically handle the
payroll of up to 350 employees. If that number rises to 450, 1.5 FTEs may
be needed, but two full-time positions will often be created. “Without a
savvy job split that means lower productivity and higher payroll operating
costs,” Philipps explains.
International Variations
While payroll TCO in Italy is €412 per employee per year, the figure for
Spain is €251. For India, it is just €92, reflecting the country’s relatively
low cost of living.
Countries with much higher living costs can also have a relatively low
payroll TCO. In the UK the figure is €210, per employee, per year. That’s
similar to Spain, although the cost of living in the UK is much higher. The
reason is that the UK has simpler legislation, requiring people with less
experience and legal knowledge. That translates into lower costs.
In-country Variations
Within the same country, payroll TCO varies from one sector to another,
and from one company to another – even within the same sector. While
the average payroll TCO in a sample of 35 Italian companies is €412 per
employee per year, the minimum is just €197, and the maximum is €709.
“Overall, the ratio between the highest and lowest performers within the
same country can be an impressive 1:5 and offer significant opportunities
for improvement in payroll efficiency and TCO,” says Philipps.
“The ratio
between
the highest
and lowest
performers
within the
same country
can be an
impressive
1:5 and offer
significant
opportunities
for
improvement.”
26. 26 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
The information within ADP’s benchmarking database is not only
intended to help HR teams identify these opportunities. As Philipps
points out, employees and top management still often see HR as largely
“administrative,” not very efficient, and adding little value. But a full
understanding of the costs of transactional HR activities enables the
function to change outdated views of its own role. More importantly, it
helps HR leaders contribute to their company’s efficiency programs. That
is why it is so vital to uncover all HR processing costs through a TCO scan.
TCO: A Lever for Optimized HR Performance
Once a TCO scan has revealed the true costs of HR processes, programs
can be developed to optimize HR performance. According to Olivier Parent
du Chatelet, Head of HR Consulting at Bearing Point, these programs can
deliver the following key benefits:
• Globally consistent HR policies
• A more flexible HR function that responds to business needs
• Clarification of roles within HR
• Harmonization and/or standardization of HR processes to help
ensure fair treatment for all employees
• Real integration of HRIS with other systems
• Improvements in the quality of HR services through service level
agreements and changes to HR roles
• Reallocation of HR resources to activities with higher added value
“As consultants, one of our challenges is to find the right balance between
the ambition of HR leaders to add value and the need to reduce HR costs,
especially in times of economic crisis,” says Parent du Chatelet.
“However, when we audit HR activities such as payroll, we try to measure
other elements that we view as fundamental to sustainable performance.
These include the level of professionalism within HR, the skills levels of
key HR players, and their relationship with customers”.
“Creating an effective customer relationship model, especially for shared
service centers, is another major challenge. It requires regular dialogue
between the service centre and its clients, satisfaction surveys and a
direction set by clear service level agreements.” He concludes.
“A full
understanding
of the costs of
transactional
HR activities
enables the
function
to change
outdated
views of its
own role”
27. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 27
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29. Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities | 29
It has never been more important for companies to understand the
total cost of ownership of their HR processing. Only by developing a real
understanding of these costs will HR be able to deliver the efficiency,
savings, and service improvements so critical to business success in
today’s challenging market conditions.
In order to calculate their TCO, companies need to look at all their
processes – and not focus on any one process in isolation. They also need
to identify the critical “hidden” costs, in addition to the more obvious costs.
The case studies featured in this report show that identifying all these
costs can help HR build a business case for new ways of working that
deliver savings, while improving productivity and employee engagement.
A full TCO analysis can also transform the HR organization itself, making
it more flexible and responsive to strategic business needs. By achieving
operational efficiency and looking at HR strategically will it get visibility
and start the process of getting a seat at the board reporting directly
to the CEO.
However, assessing TCO is a complex task that requires high levels of
expertise. To discover how ADP’s TCO scanning methodology can help HR
functions measure their processing costs, visit
www.es-international.adp.com/tco to get a high-level payroll TCO
calculation online.
Conclusion
30. 30 | Payroll and HR Administration: Use Total Cost of Ownership Methodology to Expose Process Improvement Opportunities
About
Automatic Data Processing, Inc. (NASDAQ: ADP), with more than $11 billion
in revenues and approximately 600,000 clients, is one of the world’s
largest providers of business outsourcing solutions. Leveraging over 60
years of experience, ADP offers a wide range of human resource, payroll,
tax and benefits administration solutions from a single source. ADP’s easy-
to-use solutions for employers provide superior value to companies of all
types and sizes. ADP is also a leading provider of integrated computing
solutions to auto, truck, motorcycle, marine, recreational vehicle, and
heavy equipment dealers throughout the world.
www.es-international.adp.com
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network, exchange ideas, share lessons learned, and drive business
forward in an ever-changing environment. We focus on providing exclusive
membership services, intimate and content-rich networking events,
research, thought leadership and advice on business transformation with
executive needs and experiences at its core.
www.corporate-leaders.com