As an industry leader in human capital and payroll solutions and services, our clients often ask about the payroll process and how to do it better. Two frequently asked questions are: how to structure their payroll function and how to know if they are appropriately staffed. This article will provide some guidance and leading practices on these topics.
Structuring the payroll team
An important part of your organization's payroll strategy—whether your organization be a domestic-only operator (e.g., home-country) or global operator (e.g., multi-country)—is deciding on the structure of the payroll function. Structure involves considerations of how concentrated payroll activities are, as well as the level of payroll activities retained in-house versus outsourced. A depiction of structural options is shown in the figure below:
Of course, reality is often more complex than a simple two by two matrix when a company has a hybrid structural model.
Level of concentration of payroll activities
As an organization grows, the number of employees grows and in turn, payroll complexity grows with all the associated laws and regulations involved in different regions, especially if the organization expands across state, province, or even country boundaries. While the tendency, as a company grows, may be initially to have different payroll departments for each location or business unit, this usually results in redundancies, non-standard processes, and inefficiencies.
The leading practice is to concentrate all transactional and/or administrative finance activities, including payroll, in a centralized model. For example, the Global Payroll Benchmarking Survey | Deloitte US. cites that 77 percent of their survey respondents centralize payroll. For large global organizations, centralization generally takes the form of a regional model because having one centralized payroll team for the globe for large companies is probably too much. (ADP's Business Transformation practice estimates that one payroll full time equivalent (FTE) employee can handle the processing of no more than about 7 small-population countries when the technology is standardized).
In the ideal world (organizations with very mature payroll departments), the organization will establish a payroll Center of Excellence (COE), which is responsible for the overarching governance, standards, policies and processes, continuous improvement, technology and automation strategy guidance, and developing a common set of measures for payroll for the enterprise. These guidelines and policies can then be tailored to individual locations or regions as needed.
A global process owner may be designated for payroll and/or the end-to-end process in order to provide dedicated focus and governance for the process. Advisory firm The Hackett Group has found that 86 percent of top-performers in their research indicate that there is an enterprise-wide process owner for payroll. For example, the payroll global process owner at Halliburton is responsible for analyzing the end-to-end process, increasing payroll efficiency and effectiveness, continuous improvement and benchmarking, and identifying automation opportunities, among other responsibilities.
Large, geographically-distributed organizations should also consider a regional payroll shared services center(s). According to EY's latest global payroll survey, 69 percent of respondents reported that they leveraged shared services for HR and payroll delivery in 2021. Shared service centers foster the standardization of processes, development of process expertise, reduction of duplicate efforts, monitor and facilitate compliance, enable better reporting and analytics. They also emphasize customer service and measurement and accountability through the use of Service Level Agreements (SLAs). For example, industrial manufacturer Kennametal pulled its disparate HR, payroll, and time activities into regional shared services centers in order to centralize, standardize, and automate processes. As a result of this initiative, Kennametal was able to reduce its cost per service as well as generate USD $3 million annual in savings.
Level of activities retained in-house versus outsourced
Organizations generally consider outsourcing activities that are not strategic or that others can do better in terms of keeping up with compliance, lower cost, better efficiency, and/or providing specialized expertise. The payroll process in particular has many complexities, with rules and regulations that vary across industries and frequently change. It's no wonder that this process is a frequent candidate for some level of outsourcing: According to the Deloitte survey, 73 percent of organizations outsource at least some aspect of payroll. For example, taxes and garnishments are specialty areas of payroll, with serious repercussions if they are not done correctly. Therefore, ADP sees these areas of payroll frequently outsourced. According to ADP, top reasons to outsource payroll include: saving your staff's time for more value-added activities, minimizing payroll errors, improving data security, staying on top of changing regulations and improving compliance, integrating data and improving data accuracy, facilitating employee self-service, and saving employer costs in the long run.
Staffing the payroll team
A second question ADP is frequently asked by its clients is how an organization can know whether or not it is appropriately staffed for payroll? Like structure, staffing should follow along with the organization's strategy for payroll. In other words, if a global company has decided to keep local payroll in multiple countries because of unique country requirements and complexities, then it has made a conscious decision to have a likely higher level of payroll staff across the enterprise than other organizations with a more centralized model.
Some good insights into staffing can be seen by examining a company's performance on its payroll process measures. It's a leading practice for an organization to consider a balanced set of performance measures for its payroll process (compliance, cost, productivity, efficiency, cycle time, quality, and satisfaction), so that it doesn't maximize one measure to the detriment of another. For example, if the payroll process has a lot of errors and/or low stakeholder satisfaction, these could be staffing issues (e.g., not having enough staff) or they could be automation issues (caused by a lot of manual processes) or even people issues (e.g., or not having the right training, skills, or documentation to support staff; staff burnout, etc.), or some combination. A root cause analysis will facilitate further investigation into the ultimate reason(s) for process performance.
Fortunately, from a payroll staffing perspective there are available market benchmarks from organizations like those cited in this article that can provide some guidance to help you understand how your company's staffing levels compare to other organizations, both within and outside of your industry. For example, according to the Deloitte global payroll survey, in the U.S. on average, each payroll FTE can handle the payroll tasks for 1,425 employees. ADP's Business Transformation Practice, informed by Hackett top-performer data as well as internal ADP subject matter expertise, estimates that this number increases in a managed services model.
Note that benchmarks should be considered as guidance, not a guarantee. When referencing benchmarks, be sure to understand what assumptions have been made for the benchmark you are using in order to have an "apples to apples" comparison, such as:
- What responsibilities are included in the scope of the resources they are sizing? Does the benchmark include HR, payroll, benefits, compensation and finance tasks or pure payroll tasks?
- Is the benchmark industry specific or cross industry?
- Is the benchmark for a specific organization size range or across organizational size ranges?
- What level of payroll outsourcing is in place for the benchmark?
Subscribers to ADP's Data Cloud benchmarks service can also reference the percentage of staff that are classified as payroll to see how it compares to other organizations, both within and outside of its industry. With these market benchmarks in hand as reference, your organization can see where it stands against other organizations and make decisions accordingly. Again, a staffing key performance indicator (KPI) like this is just one measure on a balanced scorecard of measures (efficiency); be sure to examine your other payroll process measures to understand the holistic picture of how your payroll process is performing, and whether or not you need to modify payroll staffing. And remember that payroll staffing levels are impacted by multiple factors, including the level of digitization and standardization across the function.
Structuring and staffing your payroll function are important considerations that should align with your organization's strategy. Organizations can leverage the expertise of ADP and the experience and lessons learned from others who have gone before in terms of adopting leading practices such as centralization, COEs, shared services and benchmarking. And ADP is here to help you every step of the way as a partner in your payroll grand adventure.
From process benchmarks through its partnership with the Hackett Group or organizational benchmarks from DataCloud to understand where you stand today, to taking administrative work off your hands and providing in-depth expertise through technology only, managed service, or comprehensive outsourcing of payroll (including multi-country payroll) — managing your payroll process has never been easier.