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EY Insights

Keeping Harmony in the
Payroll Vendor Relationship, Part II

By Maureen Nixon and Rachel Bracken

Editor’s note: Part I of this article in the March Global Payroll examined the key components of payroll vendor governance.

Delivering pay is perhaps the most important way a company interacts with its employees. We all know that when pay is delivered accurately and on time, it is never thought of, but when there are problems with the delivery of pay, it becomes the top issue employees and leadership focus on. It works the same way with payment of taxes to regulatory agencies. However, payroll is the single most outsourced function among companies surveyed, followed by tax. As such, it is especially important for an organization to nurture this relationship with its payroll processing or tax vendor. For smaller organizations, which are more likely to outsource than larger organizations because of resource constraints, this becomes even more critical as resources may not be available to support recovery from delivery issues or failures. If you are reading this article, your organization likely already has outsourced part, if not all, of its payroll processing.

With many organizations outsourcing some or all of their payroll processing, managing payroll vendors is becoming increasingly important. The purpose of this article is to continue talking about the importance of payroll vendor governance, in particular, looking at how satisfaction changes over the lifecycle of a deal (see Figure 1), new challenges in payroll vendor governance, and price competitiveness.

Vendor onboarding: Onboarding of vendors should begin even before the official vendor-buyer relationship. This includes identifying risks and gaps in culture, formalizing expectations, and aligning the vendor’s role with the overall business strategy. The vendor relationship manager will have to play a key role here and help the vendor to achieve his or her organization’s goals.

Vendor evaluation methods: “You can’t manage what you can’t measure” is a true statement. With payroll being such a demanding and visible function in an organization, it becomes imperative to consistently monitor the payroll vendor’s performance. Timeliness and accuracy should take precedence over subjective measures such as employee satisfaction. Organizations primarily use surveys, track quantitative metrics, and maintain ongoing dialogues with their vendors.

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According to the article “Strategic HR Outsourcing: Assessment of the Effectiveness of HR Outsourcing,” published in Corporate Executive Board, outsourcing payroll should deliver the same quality of service at a low cost as if it were kept in-house. To increase this quality of service at the same cost while making sure it does not fall short of expectations, several evaluation methods should be in place, and it should be a continuous process.

 

The following are some of the measures for payroll vendor evaluation:

Quality of vendor personnel

  • Flexibility and ability to react to changes
  • Thoroughness in dealing with an issue
  • Post-sales support
  • Accuracy, including the number of logged complaints
  • Ability to react to changes
  • Meeting performance goals
  • Flexibility of services
  • Problem-solving and timely resolution of issues

Service quality/issue resolution

  • Overall customer satisfaction
  • Responsiveness and empathy to user staff
  • Thoroughness in dealing with an issue
  • Customer service and empathy to user staff
  • Overall quality of service and responsiveness
  • Timeliness of the services

Operational efficiency

  • Cycle time improvement
  • Volume reductions
  • Data accuracy
  • Number of errors per transaction
  • Accuracy of problem identification
  • Accuracy of problem solving
  • Effective contract management

New Challenges in Payroll Vendor

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Governance Data, Payroll Trends

Today, more and more organizations are taking an analytical approach in making use of their payroll data. Organizations are leveraging payroll data to make various business decisions. Care should be taken when outsourcing functions that produce data to preserve the company's access to the data. With new analytic capabilities, testing of outsourced activities can change from sample testing to very thorough and comprehensive testing of the full population or cycle. Payroll vendor governance has a new challenge of how to preserve this sensitive data while building capabilities to retrieve the data regularly, whether the vendor’s solution is provided by an ERP or a cloud-based system. Payroll vendor governance plays a crucial role in deciding and comprehending how and when this data can be pulled and the related limitations.

With laws and regulations that continue to change, an organization must remain vigilant in making sure its vendor agreement is up to date. An example would be the European safe harbor ruling. Europe’s top court just found the data transfer framework invalid, which could have a profound impact on the handling of data for organizations with employees in Europe.

Customization Vs. Standardization

There is a growing movement, especially among global organizations, to standardize payroll processes in all operating countries. This is not always a viable option for payroll vendors to deliver. There are many reasons, such as tax compliance, that can significantly vary and increase the time to process payroll and tax payments by country. Additionally, each country may have different forms of payment and regulatory requirements that need to be followed. Therefore, it is the responsibility of payroll vendor governance to strike a balance between overall metrics versus local or in-country accuracy and compliance. SLAs may need to be broken up at a more granular level, such as by country.

In EY’s Global Payroll Survey, 56% of payroll professionals said that it was either important or very important to work with one global service provider. However, 55% also said they were unsure if a single vendor could handle all of their global payroll needs. The truth is, even though there are several payroll providers that have a broad geographic footprint, they often don’t have the capability in every country where payroll delivery is needed.

 

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Price Competitiveness

Companies are diligently finding ways to reduce costs, and outsourcing payroll functions is no exception. Figure 2 shows the average total cost of ownership for companies with low and high complexities (average number of employees is 5,700). It is evident that there is a very small gap between in-house and outsourced payroll functions. Therefore, instituting payroll vendor governance helps organizations to monitor cost-effectiveness and to find ways to minimize cost and to save while not compromising on the quality of service.

 

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Summary

All organizations can benefit from a payroll vendor governance (PVG) program. Implementing this program is a strong business practice that enables management to demonstrate proper oversight and control. A PVG program is essential for functions within organizations that rely on external and/or internal service providers to support their HR, payroll, or benefits programs. A PVG program is especially critical for larger organizations using multiple vendors, those going through merger
or acquisition activity, and multinational companies
that want to understand and manage their global vendor relationships.

Even small organizations should have a PVG If they have internal or external service providers supporting the organizations. A PVG program can be tailored to meet any organization’s size and specific vendor arrangements. All organizations (large or small) would benefit from a streamlined and standardized approach to vendor relationships.

Using a service provider (either internal or external) does not relieve the payroll function of its governance and management responsibilities. Regardless of the service provider, the responsibilities for program administration, employee satisfaction, and fiduciary oversight reside within the organization, not the vendor. Further, the management team that owns the outsourcing relationship must answer to the Board of Trustees, or to the management team, should an issue arise with a service provider. Establishing a PVG program is a leading business practice that facilitates responsible fiduciary decision-making, controls, and governance and assists with the return on investment of outsourcing.