ROI on automating the Payroll Function

By: Tushar Bhatia
Date: January 6th, 2010
Posted in: Compensation Planning, HR Best Practices, HR Technology, Payroll | 34 Comments »

It is difficult to anticipate the benefits of taking your payroll online. This was a challenge faced by one of our recent customers where the HR department found it challenging to estimate the ROI derived from implementation of an integrated Payroll software.

This article describes some of the benefits analyzed and presented to the senior management such that critical purchase dollars were allocated for the procurement.

The exercise which started as a small initiative actually helped me dive deeper into how a CFO or CEO perceive their human resources department and what are their expectations from an HR platform.

What I will share here is a small part of the study in how organizations are managing their human capital assets and the challenges being faced versus what are the best practices. In this, I will share what are the different metrics and how can organizations save costs in this critical area.

Elements of ROI

To determine the ROI, we had to first understand how the payroll process works in a manual environment. Our interactions revealed that there are three distinct steps in the successful processing of a payroll which are:

1. Data gathering
2. Processing
3. Disbursement and Reporting

For each of these steps above, there are multiple sub-processes which may take substantial effort and time.

To understand the complexities involved in payroll processing and gaining deeper insights into challenges being faced, we further analyzed many other companies across multiple industry verticals, different employee types (blue collared, white collared, management) and found a median effort for each of the sub-processes. Some of these sub-processes on which we could identify the metrics are:

1. General

a. Number of FTE (Full Time Employees) required

2. Data Gathering

a. Number of time records processed in one year
b. Number of Employee Validation Errors seen during the year for time records which will require corrections and authorizations at multiple employee levels.
c. Time for adding a new employee to the system with salary structures and all other required data
d. Time for removing a terminated employee from the payroll system.

3. Processing of Payroll

a. Number of payroll transactions processed
b. Cycle time for audit of payroll prior to disbursement
c. Number of manual checks disbursed.

4.Disbursement and Reporting

a. Number of payroll related queries
b. No of payment errors
c. Cycle time to process a payroll error
d. Time for creation of reports which are submitted on a monthly, quarterly, half-yearly and annually per employee

Once these metrics were identified, we studied the impact of these metrics in manual processing vs processing using web-based, integrated software such as EmpXtrack.

The example below refers to the results for a mid-sized organization with approximately 1,000 employees across multiple locations. The results are the total time spent in one year for processing monthly payrolls.

Process Manual Payroll Best Practices Number of FTE for managing the payroll process 3.48 employees 0.57 employees Number of time records processed manually 43,500 5,200 Number of Employee Validation Errors seen during the year for time records 350 4 Time for removing a terminated employee from the payroll system. 3.5 days 1.5 hours Number of payroll transactions processed 18,500 16,500 Number of payroll related queries 982 177 Number of manual checks disbursed. 50 or more 12 or lesser No of payment errors 56 7 Cycle time to process a payroll error 7.5 hours 0.3 hour Cycle time for audit of payroll prior to disbursement 230 hours 60 hours Time for creation of reports which are submitted on a monthly, quarterly, half-yearly and annually per employee 1050 hours 75 hours Cost for Processing Payroll USD 190,750 USD 27,550

The analysis of the above data gave an unimaginable saving of costs to the tune of $150,000 per yearwhich is much higher than the cost of acquisition of a software such as EmpXtrack.

The following image graphically illustrates the impact of some of the parameters in the chart above:

We further analyzed the intangible benefits (some of which had cost implications as well) of using our web-based software. Some of these are:

1. No need to print payslips. Employees can view their payslips online and these are emailed automatically as well for their records.
2. Minimum payroll related queries post processing. Allows the accounts/HR to complete many more important tasks.
3. Minimum impact when salaries change. Update at a single place is reflected automatically. This avoids reprocessing of payroll.
4. Low impact when new employees are added. For example – for a multi-locational organization with distributed hiring, it becomes difficult to process payroll for new employees.
5. Minimum impact when employees quit.
6. Integration with time reporting systems saves costly mistakes and reprocessing time.
7. Automatic updates to tax tables when the need arises.
8. Archiving of Payroll data for statistical analysis in respect of different employee types.

To analyze the ROI for your company, please fill in the attached form and contact us. We will be happy to analyze your processes, at no obligations, and suggest areas where improvements can be carried out.

I want to automate Payroll Your Name (required) Company Email (valid email required) Phone Number (required) Your Company Designation/ Title