Roll Your Own

It is not difficult to understand why the payroll operation in most companies begins its life as a part of the finance department. With small numbers of employees to manage and no immediate requirement for a personnel function, the role settles naturally on the accountant. As numbers grow and, perhaps, the complexity of payment structures, the work may pass to a payroll assistant who has total responsibility for payroll processing and who becomes the guardian of the company's Schedule E tax compliance, leaving the accountant to get on with more important things.

What is not so easy to comprehend is why, when an organisation gets to such a size that it requires a personnel function, the potentially strategic role of payroll is not recognised. By now the payroll process is fully automated and the payroll computer files are full of what is probably the most valuable resource to any thriving business, the wages and overheads of the entire workforce. With employment making up more than half of the operating costs of many businesses, the information needed to take total control of those costs is stored away in the payroll files.

Who best understand the significance of this storehouse of critical business information? Usually not the accountants, most of whom are more than happy for the payroll manager to get on with the job at arm's length. They don't want or need to get involved with the complexities of PAYE and NI legislation other than, curiously, in the completion of year-end P11Ds, where accountants seem to know more about the Schedule E taxation of expenses and benefits than the payroll department.

Among the significant roles played by personnel is the development of employment policies, a process impossible to perform effectively without knowing exactly the employment cost information generated by payroll. Payroll managers have never been ones to market their wares. But awareness of what payroll can provide is increasing. On the one hand, there has been a gradual trend over a number of years for responsibility for the payroll department to be moved away from finance and into personnel. Equally slowly but inevitably is the emergence of payroll from a backroom clerical activity, noticed only when it fails to deliver, to a professional management role with its own institute and a range of serious qualification courses up to MSc level.

Modern payroll managers are professional business managers, fully aware of their accountability for Schedule E tax compliance, the value of the information at their disposal, and the significant part they can play in the determination of terms and conditions. What they have to offer is closely related to personnel's role as the driver of pay and benefits policy. Integration of the payroll operation into the personnel function itself is a logical development as businesses seek to harness this new level of payroll expertise. The proportion of organisations that have moved accountability for payroll into personnel is not clear. Some estimates are that up to a quarter of larger businesses now manage their payrolls from within personnel. A recent survey of 52 universities shows that 43 of their payroll departments report to finance, 7 to personnel, 1 jointly to both, and 1 to the treasurer's department.

Integration

However, harnessing this new level of payroll professionalism is only one of the reasons for the functional integration of payroll with personnel. Another key driver of this trend may be the system integration of payroll and personnel software by developers and bureau service providers. Although most financial packages include payroll modules, the structure of financial transactions and employee-based pay data are too different to permit integration. On the other hand, there is such a close affinity between payroll and personnel data that they can share a common database - system integration in its fullest sense.

Conflict and distrust is a common feature of the relationship that exists between many payroll departments and the personnel administrators on whom they depend for documentation and authorisations. The two commonly expressed causes of such antagonism are a failure to understand the significance of payroll deadlines, and the duplication or double-handling of paperwork. Whatever the reasons, the implementation of a new, fully integrated, personnel and payroll system obliges the users to sit down together and forge new working relationships.

For example, the payroll manager in one NHS Trust, where payroll is a function of finance, says that, before introducing their integrated system, "there were inconsistencies in the data and the departments kept as far apart from each other as possible. There was conflict and we did not back each other up." What is the situation after a joint finance/personnel initiative to implement an integrated system? "We started talking to each other and resolved issues of ownership and maintenance. Now we work together, support each other - in fact we are a formidable team."

At WH Smith, the payroll department is a discreet operation within the personnel function. Yvette Lamidey, group payroll manager, says "I am happy within the personnel department and work closely with personnel management on strategic employment matters. Our payroll and staff records systems are the central source of employee information and we provide key measures like labour turnover, absence rates and equal opportunities monitoring for the whole group." Even greater benefits are achievable by integrating payroll department activities with more traditional personnel administration work, in particular the handling of documentation for starters, leavers and changes in circumstances. The savings to be achieved by removing the double-handling of such paperwork are considerable.

In April 1989, the payroll departments in ASDA were moved into personnel and gradually merged with the personnel administration staff who had the job of approving paperwork before passing it to payroll. In 1989 there were 32 managers and clerks in the two separate departments handling the records for 40,000 store staff. Four years later, the number of employees had increased to 60,000, but the staff in the now integrated department had dropped to 22. The reductions were achieved, not just by removing the double-handling of documents, but by the automation of as many manual processes as possible, including data capture, and by careful regulation of levels of checking. In a recent press release, ASDA describes its payroll operation as "one of the most efficient in the UK".

Counter-productive?

There is another option open to a company that doesn't recognise the value of the information available to it through the payroll operation. In line with the popular practice of outsourcing any activities that are not "core" to the business, many companies are handing over their payroll operations altogether to payroll bureaux who offer a fully-managed payroll service. This makes a lot of sense where the continuity of the payroll service is vulnerable because only one person handles it. The approach must be questioned, however, for larger organisations.

There may, in some cases, be valid over-riding business reasons for outsourcing. ASDA's recent outsourcing of its "efficient" payroll operation to Centre-file is prompted by the problem of supporting a highly customised payroll system, especially with the approach of the Millennium. ASDA has always made exceptional use of the information available through its payroll systems and it is to be hoped that this can continue when the staff are off-site and employed directly by Centre-file.

In general, however, in an outsourcing situation, there must be a proper recognition by both parties that the business cannot develop and maintain relevant employment policies without making proper provision for full access to the critical cost information available through the payroll. Without that information, outsourcing is both wasteful and irresponsible. Can a department that has the means of directly influencing employment policy really be viewed as not "core" to the business?

Strategic

How an organisation views its payroll operation is at the centre of these issues. If its services are not viewed as strategic, or if the payroll department does not demonstrate that it is capable of a professional strategic role, it may as well be outsourced along with cleaning and catering.

On the other hand, as a valued provider of an essential information service, it may not be important where payroll finds its home. There is a logical relationship with personnel and there are efficiencies possible from integration. However, it is possible to tap this critical resource whether its home is finance, personnel, or even managed externally by a payroll service provider who shares the view of payroll as a strategic business resource.