April 11, 2018

How to build the business case for new payroll technology

The ROI business case for investing in new payroll solutions starts with making pain points and cost saving opportunities crystal clear to the CFO. Here are some key pain points to highlight and an action plan to get it done.

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Often, senior leadership is less concerned about the efficiency, speed, or health of the payroll process and more so about accuracy and compliance. Because of this, investment in system upgrades may be directed towards supporting or maintaining the current solution, versus considering new technology.

But many payroll teams spend too much time and resources to get the gross-to-net-to-zero processed accurately and in compliance, using a solution that may be built on decades-old technology. Payroll executives therefore need to build a strong ROI business case for investing in new technology. This process starts with helping senior leadership understand payroll pain points, which fall into five key areas.

Payroll errors

Payroll errors are difficult to measure. Research from the American Payroll Association reveals that even best-in-class payroll departments don’t achieve 100% accuracy. That error rate could be anywhere from 0.2% to almost 2% of the total payroll. For a mid-size company, say 500 employees earning an average of $60,000 per year, a 1% payroll error accounts for $300,000 in cost.

These errors usually come from erroneous deductions, incorrect timesheets, unaccounted for overtime and holiday pay, tax withholdings, or wage garnishments. The best way to determine payroll error is to take the percentage of payroll where error was in favor of the company (and has been fixed to make it accurate for the employee) and assume a one-to-one relationship on the other side. Any reduction in that error from using better technology is considered a hard cost savings. This will appeal to a CFO.

Payroll productivity

Calculate the time it takes from obtaining gross data – including wrangling timesheets for hourly employees – to closing out the payroll period and generating reports. Automation, especially if the system combines time and pay in one application, will reduce the time required.

Though this is a soft cost saving, position it as a way of enabling staff to focus on more strategic or pressing elements of HR – compensation planning, ACA, and more.

Self-service

Robust employee self-service will free up some of the payroll team’s workload. When figuring out the ROI, account for the time spent by payroll on issues that can be resolved via self-service, such as time-off and scheduling discrepancies. While staff won’t be completely free of dealing with payroll-related issues (you will still have to deal with password resets from time to time), a good chunk of productivity can be gained.

Cost of current process

To run payroll efficiently, what are you paying for today’s process and system? Sometimes all those costs – for example, software, hardware, in-house printers, tax accountants, and more – could add up to more than the proposed solution. Regardless of what that number is, this is a hard cost saving that needs to be accounted for when calculating the benefits of the new solution.

Compliance risk

With a poorly-performing system and process, your company may incur fees or have to settle with regulators due to incorrect tax withholdings. Additionally, if the time and attendance system is not in sync with payroll, wage and hour mistakes and employee misclassifications can arise.

It’s important to account for all of this using likelihood percentages. Probabilities help to determine these likelihood percentages.

What’s the action plan?

After identifying these five pain points and benefits of investing in new technology, your next task is to develop an action plan, which can include the following:

  1. Calculate payroll technology ROI. If a vendor provides a calculator, make sure that it’s built and backed by a third party. ROI stands on one leg: credibility.
  2. Make sure vendors demonstrate how their solutions can address the biggest pain points. Assume and use conservative savings in each area based on that demo. For instance, if you think that the new system will reduce 80% of the workload, use 60%.
  3. Ask vendors to produce post-implementation case studies from customers. Again, this is about credibility: We don’t live in a world where we are able to try payroll software for a year before we make a decision to buy.
  4. Engage stakeholders to help you defend the analysis. It is critical to make sure that human resources, payroll, and benefits buy into the savings. In any presentation to the CFO, a united front will go a long way.
  5. Look for other savings. With software-as-a-service, the cost to add modules is relatively cheaper than it would be for legacy on-premise or bureau solutions. A lot of efficiencies can be gained by automating time and attendance and ensuring very tight integration with payroll. Opt for a system that has one database and a single rules engine governing time and attendance. Otherwise, if employees are misclassified in one system, or the systems don’t reconcile, you’re back to a bottleneck and possibly being out of compliance.

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