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Proprietary and Confidential - Copyright © 2011 HROA Proprietary and Confidential - Copyright © 2011 HROA
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
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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…
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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
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How does geographical spread influence TCO?
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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How does geographical spread influence TCO?
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What are benchmarks to compare your TCO?
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
What are benchmarks to compare your TCO?
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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, …
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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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