ROI on automating the Payroll Function

February 3, 2010

Note: Article written by Tushar Bhatia, President, Saigun Technologies.

Introduction

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:

Data gathering
Processing
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 analysis shows saving costs to the tune of $150,000 per year which is more than 5 times the cost of acquisition of a 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.

Read further on my blog Talent Junction