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A Wealth Of Choices
Instead of outsourcing the entire payroll function, employers today can pick and choose which parts of the process to outsource.
As outsourced HR processes go, payroll is the granddaddy of them all. Payroll, in fact, sits alone as the true progenitor of HR outsourcing, having had its start more than 50 years ago when "service bureaus" first roamed the earth. Outsourced payroll, in fact, led to the start of something big, as other outsourced HR processes, and HR outsourcing in general, eventually followed the path that payroll blazed. So, can you teach an old dog new tricks? Is payroll outsourcing, and the reasons for doing it (or not), much different from, say, a decade ago? For the most part, say some experts, the fundamental advantages and disadvantages of payroll outsourcing remain pretty static. But there is one key difference: Rather than being the all-or-none proposition it used to be, payroll outsourcing now can be more of a pick-and-choose endeavor -- which is especially favorable for employers who don't need the full treatment. Yet, even with today's emerging technology delivery strategies (Software-as-a-Service/hosted applications, for example), the decision of whether or not to outsource payroll is still determined by the same factors as in the past: company size (the larger the employer, the less likely it will outsource payroll), complexity (the more complex the payroll needs, the less likely the decision to outsource), the need or desire for control, concern for data security, and a few others. Again, the main difference is that today's employers have more flexibility in weighing those factors when deciding whether or not to outsource payroll. "From my experience, a decade ago, you either outsourced payroll or you didn't," says Scott Mezistrano, senior manager for government relations at the American Payroll Association in San Antonio. "Now, it's become more like picking items from a Chinese menu." Mezistrano, who served as a payroll professional in private industry before joining the APA, says employers can outsource pieces of the payroll process -- check printing, wage garnishment and child support, tax and regulatory, or W2 delivery to employees. Or, if they choose, they can still outsource the payroll process from stem to stern. Of course, they also can do it all themselves. "You can outsource any number of payroll-related processes, and all with different vendors, if you want," he says. "But that could mean undue complexity and too many interfaces. The trend is breaking up the payroll process into smaller parts, and deciding which ones to outsource and which to keep in-house." That's the case at ServiceMaster, the parent company of various well-known brands such as Terminix, Merry Maids and Furniture Medic. The Downers Grove, Ill.-based company, which has 40,000 employees spread across the country, outsources its payroll tax-collection and filing process to one vendor (Ceridian), several other payroll-related processes to another (TALX), and keeps the customer-service aspect of payroll ("customers" meaning employees) completely in-house. "We're a services-based business, so we believe we owe the same level of service we give to our external customer to our employees," says Greg Harmer, ServiceMaster's vice president of HR services. "We will outsource under certain circumstances, but we want to keep our hands on the employee experience."
Size Does Matter When it comes to employers that completely outsource payroll and those that don't, company size is the biggest determining factor. For example, according to data from the Hackett > Group's Payroll Advisory Program (a consortium of 85 Fortune 1000 companies that meets periodically to discuss payroll issues), while more than 80 percent of those companies outsource select processes within payroll, only 19 percent outsource payroll in its entirety. According to Felicia Cheek, senior business adviser at the Atlanta-based research firm, Advisory Program members frequently focus on outsourcing smaller value-added payroll activities, with the leading areas for outsourcing including W-2 printing and distribution, tax reporting and filing, pensions, payroll processing, unemployment-claims management and employment verification. On the flip side, a recent APA survey found that 58 percent of companies with fewer than 500 employees completely outsourced payroll, compared with 28 percent of companies with 10,000 or more employees. According to Steve Joyce, HR practice leader for the < Hackett Group, while payroll remains one of the most outsourced HR-related processes, percentages can fluctuate even among the small to mid-sized companies. "When there are economic downturns, outsourcing becomes more of a topic," says Joyce. "In that situation, the CEO starts looking for places to reduce costs as a way of tightening the belt. One option is to outsource. "All organizations go through this exercise -- and most try to justify not outsourcing," he adds. "But sometimes, economic factors can drive companies to make the move to payroll outsourcing." Rosemary Collins, a partner and HR practice leader at TPI, the Houston-based consulting firm, says that although large companies have not historically outsourced payroll, some are starting to look at adding payroll into the mix as they consider a comprehensive HRO strategy. The reason? The major enterprise-resource-planning system vendors and firms such as Accenture and IBM are looking to partner with payroll outsourcing providers to offer the service. "Payroll is outsourced because it truly is a transaction-based process, and very well-defined around regulatory and business rules," she says. "There typically is not a lot of independent judgment going into processing payroll. Today's technology is easy to leverage, so why stick with [payroll] or develop it when it's something an outsourcer can easily deliver?" Overall, payroll's senior-citizen status in the outsourcing world means there are a number of well-established providers -- ADP and Ceridian, to name the most well-known -- that have the technology, infrastructure and track record in place to handle it successfully. "Just like it has in the past, outsourcing payroll today helps employers avoid investment and maintenance costs," Collins says. "The original delivery model not as conducive for large-market companies as it was for smaller-market companies. That's changing, but the most business remains in the small-to-mid sized markets."
Out of the Box At ServiceMaster, Harmer says outsourcing made perfect sense (and was an easy decision) when it came to payroll processes that didn't require face-to-face interaction with employees. For example, several years ago the company decided that determining, collecting and filing employment taxes wasn't part of the company's core competencies, so it outsourced that process to Ceridian. Other payroll components, including employment and income verification, unemployment tax management, W-2 management and direct deposit, are all outsourced via a paperless payroll services platform to TALX, the St. Louis-based provider of HR and payroll-related services. ServiceMaster also uses TALX's employee self-service platform, which allows employees to access their pay-stub information via the Web. Harmer says the selective approach to payroll outsourcing is working, as customer satisfaction has been improving since the company began outsourcing about four years ago. "We were not a strong payroll organization until a few years ago," he says. "But in the last three years, in terms of payroll costs and service delivery, I'd say we are a world-class organization now." Harmer says the trend for more choice in payroll outsourcing has been growing for the past five to eight years. "The large payroll outsourcing vendors realized a few years ago that instead of selling you a full application, it's better to come at you with a menu of options," he says. "Tax outsourcing was the first thing, then came these other services as standalones. It's all modular, and I believe it's a trend that will continue to grow." Mike Smith, senior vice president at TALX, says that thanks to improvements in technology that have led to increased data security, speed and direct connectivity, outsourced payroll services and its components are much easier to implement now than a few years ago, and are, for the most part, seamless. "Ten years ago, payroll outsourcing was in a box, in that it was almost an all-or-none proposition" he says. "But that's no longer the case. As the technology has advanced, people are more comfortable with outsourcing discrete pieces of payroll."
Sending It Out Of course, modular outsourcing isn't for everyone. When Boar's Head Provisions Co., a privately held delicatessen-products provider based in Sarasota, Fla., decided to transform its fragmented (and outsourced) payroll process into a centralized strategy, it chose a complete outsourcing solution. According to Alex Baruch, the company's treasurer, Boar's Head had been outsourcing payroll using ADP's products and services for approximately 12 years, but each location was doing its own form of payroll processing. In 2003, the company (which does not reveal employment figures or number of locations), looked to consolidate payroll outsourcing into a single, companywide process. At the same time, it also decided to standardize its timekeeping and HR functions on the ADP platform. "The outsourcing function is not about flipping a switch to turn it on and off. It's a process that needs to be managed," Baruch says. "We started using ADP for payroll outsourcing about 12 years ago, but about five years ago, we saw it was not working as well as it needed to work." Boar's Head never considered bringing payroll in-house. Instead, it upgraded its time management and HR systems using a hosted solution from ADP, and consolidated payroll into one process. "We were looking for quality output and a high level of customer service and satisfaction," says Baruch. The company looked at a range of potential vendors in its payroll outsourcing search, but in the end decided that ADP had the "best mousetrap" for getting the payroll process unified. "Being an existing customer also made the decision easier," Baruch says. For those considering a centralized payroll outsourcing solution, Baruch says there are three critical factors in making the decision. The first is to understand your objectives -- where you expect to end up when the process is completed. The second is maintaining strong management of the process. And the third is to ensure you have senior management buy-in and support, both before and while you are implementing a payroll-outsourcing solution. "For it all to work, you need a collaborative effort across the board," he says.
Bringing It Back In Sometimes, the decision to outsource payroll simply doesn't work out. In such cases, an employer might decide to abandon the payroll outsourcing process and return to an internal solution. That was the case with Citizens Bank, a 225-employee, 16-location regional banking company based in Elizabethton, Tenn. According to Sharon Jones, vice president of HR, back in 2003 Citizens Bank could not find an acceptable PC-based time-keeping and tax-filing application for payroll, so it decided to outsource its payroll process. After talking to several vendors, it decided to go with a large provider. "We went full-bore into payroll outsourcing," Jones says. But the company quickly realized that the outsourcing agreement it entered into was not going according to plan. "First of all, we were not satisfied with customer service," she says. "The vendor had a very slow response time. And we never talked to the same person, so we had to repeat the issues every time there was a problem. Also, we were not satisfied with their tax expertise. We never had anyone who could help us with tax issues, so we had to go to CPAs to figure it out." In October 2006, Citizens Bank brought payroll back in-house. Today, it uses Abra Payroll, a hosted payroll application from McLean, Va.-based Sage Software, to manage the process. "Everything came back to us," she says. "Technically, we're not outsourcing, we're just using the Sage software to do our own payroll process." Jones says the major mistake Citizens Bank made in the original outsourcing decision was not getting the vendor's technical staff involved in pre-implementation discussions. "For any company making the decision to outsource payroll, make sure to involve the technical side from the vendor, not just sales staff," she says. "The other critical piece is to decide how much control you maintain over the process, since in our outsourcing situation, we had no real control." TPI's Collins agrees, saying that even though payroll outsourcing is a mature market with few disadvantages, the major challenge -- as is the case in all outsourcing -- is control. "When you get into a fully managed environment, customer service might be a concern," she says. "It's critical to make the service-level agreements very clear, performance-wise. Otherwise, the employer loses control." And that's something that would not sit well with ServiceMaster's Harmer. "We will never give up the employee-contact aspect of the payroll process," he says. "We did it for awhile with benefits, and it didn't work. The frustration level is too high when an employee talks to anyone other than another ServiceMaster employee. We need to control that aspect of payroll outsourcing. "We are privately held, and the new owners initially looked at full payroll outsourcing," he adds. "But it came down to outsourcing what are not core competencies. In our case, customer service is a core competency, so we kept that part of the process to maintain control of a critical part of our payroll process: customer contact."
September 1, 2007 Copyright 2007© LRP Publications |
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