Dos and don’ts... outsourcing payroll
Customers don’t always rate their outsourcing payroll service highly after the initial implementation stages. So how can you minimise the risks? Anna Scott gives some tips
Date:
05 November 2009
Source:
Guide to HR outsourcing
Page:
14
Payroll outsourcing has been, perhaps surprisingly, relatively immune to the recession. As more firms recognise the cost savings associated with outsourcing their payroll, providers have seen the number of deals they get picking up. “Recessions increase interest in outsourcing, because companies look for where they may be able to save on cost,” says Roger Fullilove, senior global product manager, HR Access.
But companies aren’t necessarily happy with the service they are getting. Research carried out by Orion Partners for HR Access found that while 89 per cent of respondents report good customer service at implementation stage, this figure drops to only 30 per cent after the initial stages of implementation.
Experts’ predictions for what will happen to the payroll outsourcing sector in five years’ time vary, from increased links between payroll and other HR systems to the need for a bigger focus on the employees’ experience of payroll. Whatever happens, outsourcers already need to show flexibility in responding to rapidly constricting and expanding workforces, and reflect this in their pricing models. For the client too, there are vital measures it can take to make sure the outsourcing relationship is successful. Here are some dos and don’ts:
The Dos:
DO Understand what you are trying to achieve
There should be clear reasons for outsourcing payroll. And it follows that understanding what payroll outsourcing is and isn’t about is essential, says Patricia Taylor, global HR services and business process outsourcing director, Logica. “You need to look inside your organisation at every aspect of work, especially IT processes, and understand which processes belong with an outsourcer, and which should stay in the organisation,” she says.
Organisations have been compelled to outsource because they have made redundancies, adds Declan McGrath, director of operations, Midland HR. “That doesn’t work. It’s the companies that say they don’t want to be doing the payroll [themselves] that have the best relationship with Midland,” he says. “But people are afraid of losing control and that is why they don’t outsource.”
However, companies shouldn’t forget about what they have outsourced. “The client still has responsibility even once they have outsourced something,” says Rachel Anderson, head of outsourcing advisory services at Orion Partners. Caleb Baker, general manager, HRO, Asia, for outsourcer Talent2, agrees: “Avoid giving complete responsibility to the partner. Payroll outsourcing is not like IT outsourcing – you cannot simply give it to the provider and forget about it. You at least have to be in constant contact.”
DO Examine a provider’s reputation and track record with other clients
First, investigate the financial stability of the payroll provider. “You are entrusting a crucial part of your business to them,” says Ian D’Cunha, director of product and marketing development, ADP. The provider needs to demonstrate its expertise in providing this service to other organisations and that it is financially stable, he adds. Mark Thompson, managing director of COA Solutions, shares this view: “Some outsourcers will carry an element of financial risk, especially during a time of economic uncertainty, and so it’s important to do your homework by asking to see evidence of financial stability.”
Thompson also advises to obtain customer references. “It’s important to find out if the outsourcer has experience of dealing with your type and size of business,” he says. For instance, does the provider have the infrastructure and resources in place to provide a quality service to an organisation with 1,000 employees if it has previously only dealt with smaller companies?
DO Get the contract right
“Cost, risk, efficiency, flexibility – a good outsourcing deal should provide all of these, but a bad outsourcing deal can make them harder than they were in the first place,” says Fullilove. “So the get-go is critical.”
Visit your potential outsourcer, says Midland’s McGrath. “Go prepared. It’s not just about enjoying a buffet lunch. You need to say to the outsourcer: ‘Here are the 10 worst things that happened to us in payroll before and this is what we want to avoid.’”
Organisations should not lock themselves into a contract that doesn’t enforce at least every two years a review: that customer may shrink in size or may have acquired new companies. Taylor says: “If you sign a five-year contract – which I believe is the minimum amount of time to create a good relationship – you need to build something into it so that half-way through both parties can see how much the situation has changed.”
Furthermore, she adds: “As you go through the outsourcing relationship, issues and the environment change and challenges will come up, so you need to have the firmness of structure to go back to the original model of the relationship.”
DO Choose carefully the person in the business to manage the relationship with the provider
Good contract management and vendor relationship management are skillsets in their own right and it’s essential that the person managing the relationship has experience of them, according to Baker.
However, warns Taylor, if it is the former head of payroll in an organisation who is managing the relationship they may end up replicating work. “You need somebody to own the relationship who knows how to run a payroll but is happy enough for someone else to do it.”
Further, contact between the client and the outsourcer should be frequent, open and with the appropriate person. Taylor suggests that at the operational level there must be weekly contact, and during intense times (such as pay day), this can be hourly. At the contract management level, which is taking key performance indicators, for example, the contact should be monthly.
The Don’ts:
DON’T underestimate the importance of company culture
“Different companies respond to different approaches to outsourcing,” says Anderson. “Some outsourcers might only provide an off the shelf package which isn’t right for certain companies.”
Therefore it’s important not to underestimate the importance of your culture, and ensure you educate the outsourcers in the employer brand and culture. Part of this is also about getting employee feedback.
“Payroll touches every employee and it’s the place where you see all the HR processes coming together,” says David O’Connor, marketing and commercial director, Ceridian. “From employee feedback you can gain all sorts of interesting information for management.”
But as well as this, understanding what your employees’ experience of payroll – what does and doesn’t work – is essential in establishing a relationship with a payroll outsourcer. “If there is an ongoing problem with staff then you are going to have to fix those problems before you go anywhere near an outsourcer,” says McGrath.
DON’T choose a provider merely because the service is cheap
Midland HR doesn’t work with companies who merely want the cheapest deal. McGrath says: “Not every organisation fits together. We provide a bespoke service for clients – they define what they want to outsource. If your main reason for outsourcing is price then, in my experience, that is where things get ugly. You need to have a clear decisive reason for outsourcing; it should not be a knee-jerk reaction.”
Equally, clients must make sure that discussions about cost are up front from the start. D’Cunha says that clarity on price is essential. “Make sure there are no hidden costs,” he says, adding that companies should be able to run the payroll as many times as they want before running the live payroll, without it costing any extra.
DON’T try to fit your business around the outsourcer
“The outsourcer needs to tailor its services to suit you,” says COA Solution’s Thompson. In helping them achieve this, companies should ensure they ask about the experience and skills of the staff who will be managing the payroll. You also need to choose an outsourcer that can accommodate your changing needs.
“For instance,” says Thompson, “You may only need to outsource payslip printing at the moment, however, what if you require a fully managed payroll and HR service in a few years’ time? Would your chosen provider be able to provide this much broader service?”
DON’T forget that the outsourcer is an extension of your business
“In particular, companies should ensure that they ask questions about security, including data and onsite security. Visit the facility where the payroll will be outsourced so that you can gain first-hand experience of the staff, working conditions and levels of security. Consider whether onsite engineers have been vetted by the government’s Defence Vetting Agency, for example. Further, outsourcers need to have contingency plans in case of a fire, flood, bomb or other disaster at the payroll facility to ensure that the data and services are protected.
As Thompson says: “If the outsourcer performs poorly, it could directly affect your business operations, reputation and employee engagement – so choose your provider very carefully.”