Looking after the pennies

Over a period of three years, the staffing levels in the payroll department of the company I used to work for decreased by a third, while the number of employees on the payroll increased by a half.

To many companies, payroll is just another business cost. Controlling and reducing costs is an important aspect of any business manager's job - and that includes the payroll manager, or any other manager with responsibility for payroll. But there is another and more subjective reason for wanting to keep costs down. Payroll jobs can be at risk if a company believes that savings can be made by totally outsourcing the payroll.

Total outsourcing has been a successful venture for some companies, but the advantages and disadvantages must be weighted carefully as it is very difficult to reverse the decision later. And outsourcing is not the only way to reduce or control payroll costs. What options are available to an in-house payroll department?

Basics
Reducing costs is not necessarily a matter of simply cutting back, such as not replacing a leaver, or trimming the training budget. The same effect can be achieved by creating income for the department, even if that is simply a matter of identifying existing income that is not being credited to the payroll cost centres. It is also important to understand that, if there is one thing that is more important than reducing the costs of a business function, it is the organisation's perception of the value that that function adds to the business.

Real reductions
There are many opportunities to make real cost reductions in payroll. Many departments complain about being understaffed, so the following ideas are all ways of reducing the workload while maintaining the quality of the service, or even improving it.

• Many modern payroll and personnel systems make use of workflow techniques, such as the Internet, intranets and e-mail, to streamline the organisation's processes. Make use of these facilities if they are available but, if they are too high-tech for your operation or your software does not support them, explore how the same principles can be applied within your resources. The secret is to map out your existing processes and see how they can be streamlined. How is everyone's time being used? Can some activities be scrapped or be performed more efficiently? Nothing is sacred. Get ideas from everyone involved, not just the payroll department. Consult your software supplier on how the facilities the system does provide may be used more effectively. Don't make the mistake of continuing a procedure because "it has always been done that way".
  
  
• Aiming for 100% accuracy is admirable, but at what price? Even if every bit of data input is double-checked, will that eliminate all errors? A balance is needed between the ideal - no errors and no recalculated payslips - and the cost of achieving it. Instead of double-checking everything, identify potential input errors by running off exception reports. For example, a report might list employees with basic hours that exceed 40, or more than 10 overtime hours, or a tax refund that exceeds £50 - or whatever parameters are relevant to your payroll. Concentrate on checking the exceptions and see to what extent the errors reported after the payroll run increase or decrease. Keep adjusting the parameters up or down until an optimum level of checking and errors is achieved.
  
  
• Weekly payrolls are very labour intensive in comparison with four-weekly or monthly payrolls. Equally, payment by cash or cheque is very expensive and time consuming when compared with direct credit. Can further moves be taken towards these more efficient pay cycles and methods?
  
  
• Can time-consuming payroll queries by reduced? The different types of queries could be logged for a period and alternative methods of resolving them considered. Could the payslip be made more informative? Could line managers be supplied with a list of common questions and answers in order to forestall employee queries? If employees generally have access to the Internet, or an intranet, could a series of "frequently asked questions" be provided? Can line managers and employees be given secure, self-service access to the payroll to obtain their own information and maintain relevant data?
  
  
• If the payroll relies on manual input of pay and time data, explore the different ways of automating data collection. A time and attendance system is an ideal solution if the cost can be justified. Otherwise, could departments record the data on a spreadsheet instead of paper so that it can be imported into the payroll? Another option is to scan input documents in order to convert them to data.

Creating income
If the payroll department's profit and loss statement shows only that it spends money, perhaps that impression can be corrected by getting the accountant to show any income, however small, that is generated by the payroll process. Examples are the employer's charges for handling trade union check-off deductions, the administrative charge for court orders, the NI compensation recovered by small employers for SMP, and charges for issuing copy payslips to employees and completing status enquires for building societies.

An area of income that is commonly forgotten is the cash-flow benefit from the interest accrued by the organisation on the tax and NICs waiting to be paid to the Collector. The report produced by the University of Bath in 1998 indicated that, at that time, the cash-flow benefit to the smallest employers amounted to about £10 each year, but for employers with more than 1,000 employees, it more than offset their gross compliance costs. Since then, the payment of tax credits out of monies due to the Collector has reduced this benefit. Nevertheless, any interest accrued in this way should rightly be shown as income for the payroll department.

A more ambitious approach for a larger payroll operation would be to generate income by providing a payroll bureau service to other companies. Many public sector and some private sector organisations already require their payroll departments to charge out their services to their internal clients and, as a result, are forced to operate competitively as a business.

Perception v. Reality
Although it may be possible for a payroll department to add real value to the business, it is the perceived value that it adds to the business that is likely to be more important. It is ironical that a smooth and silent payroll department is likely to have little perceived value in the business, however cost-efficient and reliable its service might be. In contrast, the department that is actively involved with the business and that provides a service that exceeds the traditional role of payroll may succeed in making itself indispensable.

Payroll's two unique assets are its employment cost information and its understanding of PAYE and NICs legislation. The personnel department may know everyone's wage or salary, but only the payroll department knows the real cost of employees to the business. The accountants may understand corporation tax compliance, but only the payroll department really understands Schedule E compliance.

Not everyone working in payroll may be comfortable about raising payroll's profile in the business, providing business information and advising directors about the tax implications of their decisions. Cutting costs is good for the business, but being indispensable is better for payroll.