Trends in Managed Payroll Services

In the third and final part of his review of current trends in payroll software and services, Ian Congreave describes the fully-managed payroll service, otherwise known as outsourced payroll. Not only is this the biggest business growth area for payroll bureaux, they say that it is being achieved with little or no advertising. This "secret" service potentially puts the jobs of payroll professionals at risk. What does it involve and what can be done to forestall it?

The concept of "managed services" or "outsourcing" is not new and should not be unfamiliar. For many years, on-site staff restaurants have been managed by third-party catering companies, despite the catering manager and staff appearing to be employees like everyone else. Other traditional services are going the same way, including cleaning services, car fleet sourcing and management, site administration and maintenance, security, public relations, media services, legal services, distribution, stationery supplies. Public sector organisations have been forced down this road by the requirements of competitive tendering. In many cases, the employees who used to provide the services still work on the same site, but now for a third-party managed service provider.

All of these functions seemingly have common features. One of these is that the outsourced work is not the key activity of the organisation, not the reason for its existence. The argument behind outsourcing is that an organisation should concentrate its drive on its "core" activity and not be side-tracked into committing valuable management resources into work that is better performed by someone for whom it is core activity, experts in that field. Who better to provide quality catering services than a national caterer? Who better to care for the company's public image than a dedicated PR company?

Another factor is that the provider will, in theory at least, be able to supply the service cheaper than the customer can provide it, after taking into consideration the costs of equipment, management time, training and savings from economies of scale. Even if the cost goes up, an organisation may still think it is worth it, if it can push such distractions to one side and fix its management's attention entirely onto its raison d'être.

Yet another commonality is an apparent ease of severing the function physically from the corporate body. If the activity effectively stands alone and operates independently, there is not likely to be any detriment to those parts of the organisation that are buying-in the service.

What has all of this to do with payroll? Simply that, in the view of the bureaux and of an increasing number of directors, payroll is equally a candidate for outsourcing. It shares just the same features. It is not core business, the service can allegedly be provided more cheaply (although whether it can or not does not necessarily matter) and, much more arguably, is supposedly able to exist independently of the organisation that it pays. Who better to provide a fully-managed payroll service than an organisation for which payroll is core business, the payroll bureau?

The managed service

In general terms, the managed service involves the total management of an organisation's payroll operation, handling data capture, processing, printing, distribution and reporting. However, following from the modern bureaux' flexible approach to the provision of payroll services, the service could, if preferred, leave some activities with the customer. The operation is usually handled from one of the bureau's data centres and provides the customer with on-line access to its data and an interface with other dependent systems. One or more payroll officers are allocated to the payroll, depending on its size and complexity, and these become the telephone contact for handling employees' queries.

Among the major benefits highlighted by the bureaux for the fully-managed service are their expertise and level of resources. They are specialists in payroll and able to keep up-to-date with legislation, technology and related products and systems more easily than individual companies can. Because the bureau has a support team of skilled professionals to call on, the payroll operation is no longer vulnerable to the impact of holidays, sickness, training for new legislation, recruitment difficulties, limited office space, loss of skilled staff, peaks and troughs of work, career progression problems, and so on.

Effects on payroll jobs

Most of the payroll operations taken on as managed services by the bureaux are in situations which would not be considered threatening. Most commonly this is where the one individual who administers the payroll decides to leave or retire, leaving little hope of replacing the knowledge and expertise. Another situation is where a company formed from a break-up of a larger business has no existing payroll department. It makes sense for the organisation to approach a bureau in order to fill the gap. Some organisations with an established strategy of outsourcing non-core activities may look closely at making alternative arrangements for its payroll requirements. In some cases, a badly run and ill-equipped department, perhaps with problem staff, may attract the directors' attention to a serious vulnerability. Redundancies will be the unavoidable consequence of the decision to outsource. If the bureau's data centre is nearby, payroll staff are sometimes taken on to continue serving their former employer. In rare cases, where a large payroll department is to be outsourced, the bureau may set up its operation on-site, using the company's computer and retaining the staff.

What can payroll departments do to make it difficult for their employer to consider outsourcing their operation? Some of the following ideas have been generously suggested by the bureaux themselves:

• Keep the structures, procedures and service levels in the department under constant review. Make
the department more efficient. Introduce new technology. Make savings where they can be made.
Be prepared to change and to respond to change in the business.

• Actively promote the department. Treat line managers and employees as customers, not as
interruptions. Set performance standards and service levels and beat them. Resolve queries and
complaints immediately.

• Go beyond accuracy. Be the authority on the company's terms and conditions. Police the input and be
the "last line of defence" against abuses of payment rules.

• The payroll systems are the best source of employee cost information in any business. Become an
indispensable provider of business information.

• Obtain a payroll qualification and encourage all staff members to do so. Show the business that
payroll is professional.

Problems

One of the common arguments in support of outsourcing already mentioned is that some areas can easily be divorced from the rest of the business. This is arguably fallacious in respect of payroll. This is not to say that ways cannot be found of getting pay data from disparate departments to a bureau's data centre, although some companies do find that to be a problem. Of more significance is the role that payroll plays as custodians of tax and pay policy. Can payroll be separated from an organisation's evolving and developing business and HR strategies? Should it not rather be a part of them? Can a bureau, efficiently meeting the interests of many businesses, be expected to achieve the level of ownership and accountability towards each of them? These are serious questions to be addressed by directors considering outsourcing their payroll operations.