The three sub-processes making up 70% of payroll labour costs The three sub-processes making up 70% of payroll labour costs

The three sub-processes making up 70% of payroll labour costs
31 Oct 2014

About the metric

This metric is important because it shows the top three sub processes that make up the majority of payroll labour costs.

Why it is important

As companies continue to focus on reducing payroll processing costs, it is important to perform a detailed analysis of each cost component to target specific areas impacting their total payroll process cost.

Strategic implications

While payroll costs for multinational companies continues to be high, it is interesting to note that when looking at labour costs, three sub-processes represent more than 50 per cent of the total labour cost.

The three sub-processes are: Payment Calculation: This represents almost 40 per cent of total labour cost and is the highest. Some may find this perplexing because most of the time payment calculation is automated.

However, the cost spend represents the quality of the data that is received to perform the payment calculation. Top performing payroll organisations have strong governance in place that clearly outlines guidelines on how the data is to be sent to payroll.

Ideally, payroll resources should not be spending time reviewing and approving original source data, it should be formatted and ready to go when received in payroll. Unfortunately, this is often not the case.

Payroll Enquiry: This represents 19 per cent of total labour cost and is influenced by the structure in place to manage payroll enquiries. A formal contact centre that handles both payroll and HR related enquiries with a tiered structure in place is ideal.

Unfortunately, many companies are not yet there, forcing payroll resources to spend time answering basic payroll enquiries that could easily be handled by tier one resources in a structured contact centre.

Payroll Accounting: This represents 14 per cent of total labour cost and over the last three years, more companies have transferred ownership from payroll to the function (in this case, finance accounting). Specialised resources are more expensive and do have an impact on labour cost.

In addition, in a global environment, reconciliation activities are often more cumbersome, requiring more resources. Finally, most companies have several general ledgers in place (usually varying by business unit) that also increase complexity, ultimately driving up the cost of the payroll accounting sub-process.

An insight into payroll metrics is important as it can help target areas that are higher cost because of inefficiencies or other variables impacting the process. One way of doing this is by drilling down to each of the components making up the total cost.

In this case, implementing stronger controls around the receipt of source data necessary for payment calculation will have an impact on the number of resources and time needed to fulfill responsibilities in this area. Additionally, the placement of certain sub-processes like payroll inquiries and payroll accounting are also important and ultimately impact payroll costs.

By Felicia Global payroll advisory programme practice leader and senior business advisor at The Hackett Group.

About the metric

This metric is important because it shows the top three sub processes that make up the majority of payroll labour costs.

Why it is important

As companies continue to focus on reducing payroll processing costs, it is important to perform a detailed analysis of each cost component to target specific areas impacting their total payroll process cost.

Strategic implications

While payroll costs for multinational companies continues to be high, it is interesting to note that when looking at labour costs, three sub-processes represent more than 50 per cent of the total labour cost.

The three sub-processes are: Payment Calculation: This represents almost 40 per cent of total labour cost and is the highest. Some may find this perplexing because most of the time payment calculation is automated.

However, the cost spend represents the quality of the data that is received to perform the payment calculation. Top performing payroll organisations have strong governance in place that clearly outlines guidelines on how the data is to be sent to payroll.

Ideally, payroll resources should not be spending time reviewing and approving original source data, it should be formatted and ready to go when received in payroll. Unfortunately, this is often not the case.

Payroll Enquiry: This represents 19 per cent of total labour cost and is influenced by the structure in place to manage payroll enquiries. A formal contact centre that handles both payroll and HR related enquiries with a tiered structure in place is ideal.

Unfortunately, many companies are not yet there, forcing payroll resources to spend time answering basic payroll enquiries that could easily be handled by tier one resources in a structured contact centre.

Payroll Accounting: This represents 14 per cent of total labour cost and over the last three years, more companies have transferred ownership from payroll to the function (in this case, finance accounting). Specialised resources are more expensive and do have an impact on labour cost.

In addition, in a global environment, reconciliation activities are often more cumbersome, requiring more resources. Finally, most companies have several general ledgers in place (usually varying by business unit) that also increase complexity, ultimately driving up the cost of the payroll accounting sub-process.

An insight into payroll metrics is important as it can help target areas that are higher cost because of inefficiencies or other variables impacting the process. One way of doing this is by drilling down to each of the components making up the total cost.

In this case, implementing stronger controls around the receipt of source data necessary for payment calculation will have an impact on the number of resources and time needed to fulfill responsibilities in this area. Additionally, the placement of certain sub-processes like payroll inquiries and payroll accounting are also important and ultimately impact payroll costs.

By Felicia Global payroll advisory programme practice leader and senior business advisor at The Hackett Group.