The State of Enterprise-wide Payroll Technology, Part I: A Performance Assessment

Global Time-to-Pay Process Perspective Study Results Analysis April 25, 2013 The State of Enterprise-wide Payroll Technology, Part I: A Performance Assessment By Felicia Cheek and Nathanael Novosel Executive Summary The Hackett Group s 2013 Global Payroll Technology Performance Study reveals many organizations continue to struggle with getting enterprise-wide payroll right. The study reveals that only 20% of organizations have payroll processes that require little to no manual intervention, while less than half have a high level of integration between systems. Meanwhile, 61% of organizations lack enterprise-wide reporting capabilities. The Hackett Group s analysis suggests that the biggest challenge comes from globalization, which creates additional complexity due to the great differences across regions in regulations, languages, currencies and operations. Since neither internal IT nor payroll suppliers are currently capable of supporting end-to-end global payroll, 60% of the study s participating companies are considering changes to their payroll systems. In the next two to three years, payroll organizations will be focused on improving integration and self-service while looking to payroll suppliers to improve their ability to offer global, integrated solutions. About this research The goal of this two-part series is to help organizations understand the payroll technology landscape and make effective decisions regarding their payroll technology strategy. Part 1: Current global payroll technology performance and trends. Part 2: Regional payroll differences and their impact on global payroll performance. Lack of Borderless Technology Is Hurting Enterprise-Wide Payroll Processing Performance Before globalization became such a critical component of business competitiveness, top-performing 1 payroll organizations were able to leverage technology to achieve high performance levels at a reasonable cost per employee. But in the post-recession era, as companies expanded their operations in search of new sources of revenue, and pushed for greater automation and technology-enabled self-service to manage costs, payroll technology has fallen behind. Only 25% of the more than 100 companies studied by The Hackett Group express a high level of satisfaction with their current payroll technology (Fig. 1). Unlike payroll technology solutions for any single country, globalization of the payroll process seems to be occurring too fast for both IT organizations and vendors to keep pace. FIG. 1 Satisfaction with current payroll systems Highly dissatisfied Highly satisfied 17% 25% Somewhat dissatisfied 22% 36% Somewhat satisfied 1 Top performers in payroll are those companies that score in the top quartile in both efficiency and effectiveness performance metrics that are based on predetermined demand drivers. Global Time-to-Pay Process Perspective I The Hackett Group I 1

While multinational companies have been paying employees in different countries around the globe for years, they normally have done so using decentralized models, in which the payroll process is managed on a local basis. Unfortunately, as with all decentralized models, costs are higher, collaboration is challenging and needless redundancies abound. Today, companies have an increased interest in leveraging shared resources and services throughout the enterprise for better efficiency and consistency in corporate processes. Presently, 57% of top-performing payroll organizations operate in a traditional shared services environment. They optimize resources, processes and systems to pay employees at lower cost and with fewer resources than other, more typical organizations. Additionally, the growing ease of accessing big data and business analytics is enabling greater insight from centralized, standardized data sets. Payroll technology in its traditional form has proved to be inefficient and ineffective in companies with a global enterprise operating model. Much of the technology s complexity is due to the need to meet legislative requirements at the local level. Multinational companies ERP systems are normally not flexible enough to provide a single, global, enterprise-wide solution for payroll without a great deal of customization. On the other hand, local solutions, designed to meet country-specific legislative and other requirements, do not provide a global solution. This lack of a truly global payroll processing solution has forced payroll leaders to work on designing a global payroll strategy that incorporates several different solutions at different points in the process. These issues are the driving force behind payroll s underperformance in three areas: Enterprise-wide visibility: Organizations cannot get a comprehensive view of enterprise-wide payroll data. Integration: Organizations suffer from data loss and excessive process complexity due to poor integration with other systems. Automation: Manual intervention is error-prone, raises costs and lowers productivity. FIG. 2 The percent of payroll organizations with enterprise-wide or global capabilities is low Enterprise-wide reporting in the payroll system Enterprise-wide reporting in the payroll system in multiple currencies Overall Americas EMEA Asia- Pacific 39% 56%* 19% 26% 21% 20% 19% 22% *Includes domestic companies; the percentage for global companies is closer to those of EMEA and Asia-Pacific rates Source: Global Payroll Technology Performance Study, The Hackett Group, 2013 Enterprise-wide visibility The difficulty of establishing truly borderless payroll systems restricts enterprise-wide visibility across regions, obscuring potentially valuable insights on broad labor-market trends. In smaller companies with less-complex systems, HR leaders could analyze data such as compensation rates, benefits and paid time off (PTO) for the enterprise and compare across corporate offices in one report with minimal issues. However, this approach does not work for pulling data when formats are inconsistent across regions or multiple currencies are involved. The Hackett Group s analysis of enterprise reporting data suggests that current payroll solutions are not capable of providing an enterprise view when operations extend across multiple countries. Only 39% of companies have enterprise-wide reporting capabilities, and the cross-regional data show that an even smaller fraction of global companies have enterprise reporting capabilities (Fig. 2). Payroll leaders need to work toward getting or maintaining this visibility as companies globalize and require more sophisticated analytical capabilities. Otherwise, the business will be unable to forecast and manage employee wage/salary budgets, analyze the impact of change across the enterprise, or proactively monitor and act on emerging workforce trends. Additionally, current technology solutions lack adequate functionality to allow companies to view data in different currencies: only 21% indicate that their system allows this functionality. Without it, manual intervention is required to meet enterprise-wide reporting requirements. Decision-making can be more difficult when companies must factor in currency exchange and labor market rates. In the absence of enterprise-wide Global Time-to-Pay Process Perspective I The Hackett Group I 2

reporting capabilities, many companies require common data standards across all payroll systems as a way to ensure data integrity. Another area of concern is identifying an enterprise-wide system of record. Threequarters of companies use their HR system as the system of record, while about half use the payroll system instead of (or in conjunction with) the HR system. Without a single system of record, preparing enterprise-wide reports and other analytics is much more difficult. Doing so is even more challenging when local legislative requirements dictate that data elements that would normally be included in the HR system also be stored in the payroll system. Payroll leaders should partner with HR organizations to make sure that fundamental best practices are not compromised when finding workarounds for these obstacles. FIG. 3 Integration* of payroll systems with other systems is low, especially in the peer group Percent of organizations with high integration of payroll systems Integration System integration is not only a key enabler for the payroll process, it is necessary to guarantee adequate controls, data privacy and an appropriate set of checks and balances. Most organizations have been able to achieve a high level of integration within one country. However, when it comes to global payroll integration, the predominant approach is standalone systems with few integration points. Human resources Banking interface 48% 50% 81% 79% Analysis of integration rates across regions suggests that only a fraction of organizations have high levels of integration with other key systems (Fig. 3). A lack of integration leads to data redundancy and integrity issues as well as additional effort and difficulty in reporting. As a result, payroll resources are required to devote substantial time to ensuring that data is being managed effectively across systems. Time & attendance Accounting 38% 42% 70% 69% Top-performing domestic payroll organizations have traditionally had high levels of integration between the payroll system and other key systems like HRIS, benefits and accounting. However, until more-comprehensive solutions become available that will allow them to better leverage technology across the enterprise, they must settle for a homemade patchwork of internal fixes to achieve and sustain enterprise-wide payroll. TOP PERFORMERS PEER GROUP * Integration refers to connecting systems so they can send and receive data between them. With high integration, most or all data relevant to both systems can be exchanged without manual effort. Source: Global Payroll Technology Performance Study, The Hackett Group, 2013 Local legislative requirements, cultural differences and a largely decentralized payroll environment have forced companies to step back and rethink their enterprise-wide payroll technology strategy. Even when a payroll supplier markets itself as global, it is probably using a combination of its own systems and those of other in-country solution providers. As a result, they become a consolidator of payroll data, pushing the data out to other systems like HRIS, time reporting and accounting (Fig. 4). If payroll leaders opt to use the services of these companies, they must develop proper checks and balances as well as implement new procedures to ensure that data will be accurately and securely transferred between systems. Additionally, companies can reduce complexity, redundant data entry and the risk of errors by standardizing end-toend business processes. The lack of integration throughout the payroll administration process increases the risk of non-compliance as well as labor costs, so governance and standardization are critical while payroll technology moves to a more integrated platform. 0 Global Time-to-Pay Process Perspective I The Hackett Group I 3

FIG. 4 Global payroll service delivery option: Aggregator model Single data feed from HCM to payroll aggregator system(s) to cover all locations and employees serviced by provider. HCM Updated employee data Location payroll data is parsed by payroll aggregator system(s) and distributed to local/regional systems to update and process payroll records of local employees. Payroll aggregator system(s) Upon completion of payroll process, aggregator brings data from all locations and compiles it for consolidated reporting, tax filing and interfacing back into corporate HCM and GL. Payroll aggregator reporting and interfaces Standard/ custom payroll reports General ledger Tax remittance Source: The Hackett Group Only 20% of payroll organizations today can provide enterprise-wide reports without any manual intervention. Automation A lack of automation can degrade data quality, reduce productivity and increase the risk of data loss. But only 20% of payroll organizations can currently provide enterprisewide reports without manual intervention (Fig. 5). Most have to pull data from multiple systems, then spend time analyzing it to ensure that definitions and other elements are consistent. Many payroll processes require moderate to considerable levels of manual effort. Few organizations have attained a high level of automation. FIG. 5 Manual effort required for payroll processes Global management reporting 30% 26% 24% 20% Legislative and regulatory reporting 17% 41% 30% 12% HRIS data integration 24% 21% 41% 14% Time collection, review and approval 17% 34% 41% 8% CONSIDERABLE MODERATE LOW NONE For example, 58% of companies need at least moderate manual intervention to produce legislative and regulatory reports, and 44% require at least moderate manual effort to transfer data to and from the HRIS system. While clearly a plus for the overall company, globalization tends to hold back payroll improvement and automation efforts, as legislative requirements in each country or region may necessitate the use of particular payroll solutions. When other factors such as variations in business processes across regions are added in, it is not surprising that only 14% of companies require no manual intervention at all for HRIS data integration. The importance of the integration and automation between the HRIS and payroll system is so important that most suppliers offer both under the umbrella of an HCM system. Global Time-to-Pay Process Perspective I The Hackett Group I 4

Only 8% of companies have complete automation across the time collection, review and approval process, even though the level of automation is directly correlated with overall payroll-process quality and compliance. Finally, the lack of automation in the time reporting process has a direct impact on the overall quality and compliance of the payroll process. Only 8% of companies have complete automation throughout the time collection, review and approval process. Payroll organizations must automate local legislative requirements and work rules in order to ensure compliance throughout the time reporting process. Self-Service: A Widely Adopted Capability for Payroll Technology While automation and integration have significant room for improvement, selfservice capabilities are in a more mature state in most organizations. Almost all of the capabilities analyzed by The Hackett Group have been adopted by the majority of organizations (Fig. 6). Enabling employee self-service has been a recognized priority for the past several years, helping make this area a moderate success. Unlike other performance issues affected by globalization, self-service functionality can be more quickly adopted since both internal and external solutions enhance their functionality over time, regardless of region. FIG. 6 Availability of employee self-service With companies using multiple systems of record throughout the enterprise, special attention and consideration should be given to how the data will feed to and from the employee self-service system. This applies especially for organizations with many regional payroll solutions. View payslips (pay statements) Address changes Distribution of payslips (pay statements) Time collection 67% 72% 68% 86% View employee year-end statements (P60s, T4s, W2s, remuneration) 65% Banking data 62% Receive employee year-end statements (P60s, T4s, W2s, remuneration) 59% Annual leave requests/approvals 59% Time-off requests 56% Tax information 49% Submit sickness statements (where required) 25% Payroll leaders should continue to work with the HR organization to further the implementation of self-service and equally important its use by employees. Companies should also be exploring anytime/anywhere web access to make employee data more easily accessible. Global Time-to-Pay Process Perspective I The Hackett Group I 5

What Payroll Leaders Want Payroll leaders are taking steps to overcome the technology challenges that are hampering their ability to provide global service delivery. Over the next three years, they will be reducing the number of vendors they work with (Fig. 7). They are also planning to rightsize the number of interfaces required to balance capabilities and complexity. Organizations with a multi-national footprint are gravitating toward a range of anywhere from six to 50 interfaces. FIG. 7 Number of vendors used for payroll administration 4.25 3.61 Current In 2-3 years Sixty percent of companies are looking to make significant changes to their systems by changing and consolidating payroll suppliers (Fig. 8), and are increasingly considering cloud-based solutions as an option for payroll, HR and employee self-service (Fig. 9). FIG. 8 Percent of companies considering making changes to payroll systems FIG. 9 Percent of companies planning to move payroll to cloud-based systems Payroll 18% 23% 41% No HR 14% 30% 44% 40% 60% CONSIDERING CLOUD NOW WILL CONSIDER CLOUD WITHIN 2-3 YEARS Yes Source: Global Payroll Technology Performance Study, The Hackett Group, 2013 68% of organizations that plan changes to their payroll systems are either considering cloud-based options today or expect to do so within two to three years. Source: Global Payroll Technology Performance Study, The Hackett Group, 2013 To minimize the current complexity in payroll technology, companies want many improvements. Ease of integration with other systems is the top priority for those reviewing vendors (Fig. 10). Organizations are striving to improve in their development areas internally, citing integration, self-service and enterprise analytics as their top criterion when reviewing payroll vendors. At the same time, they are looking for new and innovative payroll systems from external providers, especially those that will facilitate enterprise analytics and seamless system integration. Global Time-to-Pay Process Perspective I The Hackett Group I 6

FIG. 10 Companies want an integrated solution from vendors Scale: 1=Most important; 5=Least important Rank-order score of capability s importance to companies Easier integration with other key solutions More self-service capability 1.76 2.24 Most important Rank-order score of potential services from vendors Deliver seamless integration between the payroll system and the HRIS system Deliver one technology platform for a global payroll solution 2.08 2.88 Most important Better analysis of enterprise data 2.88 Deliver one unified HCM solution 3.06 Anytime/anywhere access to data 3.55 Deliver a comprehensive analytics and automated enterprise-wide reporting solution 3.19 Increased enterprise-wide language and currency support 4.58 Deliver a cloud solution 3.79 Least important Least important Strategic Implications The payroll organization is being pulled in different directions. It is being asked to support more regions globally, but also to make its systems more efficient and tightly integrated. Technology has not been able to fully keep up with the speed of change affecting business. Even those organizations that achieve top performance in payroll processing in one country are struggling to meet the demands of a global environment. To adapt to the changing landscape of global payroll technology, The Hackett Group recommends the following actions: Standardize business processes across the enterprise: To reduce the effects of technology complexity, work on streamlining business processes. Focus on standardizing all enterprise-wide processes, permitting exceptions only when required to meet local requirements (e.g., regulations, languages, currencies). Standardize the end-toend process, not just those activities that occur in payroll, for the greatest reduction in business and technology costs. Make sure improvement projects support both globalization and efficiency goals: Any changes envisioned to help the payroll organization support global enterprise growth must be made with an eye toward whether they will also help streamline and support new capabilities. Assess solutions based on their ability to support planned growth: New solutions such as those from cloud-based services may facilitate both global processes and new capabilities better if large amounts of transformation are expected. If the payroll organization uses an ERP system, investigate vendors plans for rolling out new capabilities and collaborate with them to create a roadmap for improving self-service and system integration. Related Hackett Research Globalization Is Forcing Payroll Organizations to Be More Strategic, September 2012 The Changing Face of Payroll Top Performers, May 2012 Global Payroll Process Forecast for 2011: Cloudy Conditions Will Prevail, October 2010 Global Time-to-Pay Process Perspective I The Hackett Group I 7

About the Advisors Felicia Cheek Program Director, Global Time-to-Pay Process Advisory Program For more than 20 years, Ms. Cheek has worked as a payroll advisor, consultant, both internal and external, and account manager with companies like ADP, Turner Broadcasting System and Xerox ACS. In her position at The Hackett Group, she works closely with finance and HR professionals who own the payroll process in their companies, providing strategic insight, metrics and guidance about best practices. In addition, she has fostered strategic relationships with professional payroll associations in the US, UK and Australia. Ms. Cheek is a frequent speaker at payroll and HR events around the globe and writes for various professional organizations and industry publications. She is a member of the American Payroll Association Hall of Fame and a past recipient of its Meritorious Award. Nathanael Novosel Research Director, Finance Operations and IT Executive Advisory Programs Mr. Novosel has almost 10 years of experience in consulting, research and advisory services for senior executives at companies ranging from $500 million to over $20 billion in revenue. He has authored research on a range of topics in IT, Finance, and Financial Services, tailored to the needs of executives in those functions. He also has expertise in e-learning and self-service diagnostics. Prior to The Hackett Group, Mr. Novosel spent eight years leading research efforts, writing research, advising and presenting to IT executives, and creating actionable tools and templates for members of the IT and Financial Services Practices at the Corporate Executive Board. The Hackett Group, a global strategic business advisory, operations consulting and finance strategy firm, is a leader in business best practices, business benchmarking, and transformation consulting services including strategy and operations, working capital management, and globalization advice. Utilizing best practices and implementation insights from more than 7,500 benchmarking studies, executives use The Hackett Group s empirically-based approach to quickly define and implement initiatives that enable world-class performance. Through its REL group, The Hackett Group offers working capital solutions focused on delivering significant cash flow improvements. Through its Archstone Consulting group, The Hackett Group offers Strategy & Operations consulting services in the Consumer and Industrial Products, Pharmaceutical, Manufacturing, and Financial Services industry sectors. Through its Hackett Technology Solutions group, The Hackett Group offers business application consulting services that help maximize returns on IT investments. The Hackett Group has completed benchmark studies with over 2,800 major corporations and government agencies, including 97% of the Dow Jones Industrials, 86% of the Fortune 100, 90% of the DAX 30 and 48% of the FTSE 100. Founded in 1991, The Hackett Group was acquired by Answerthink, Inc. in 1997. Answerthink was renamed The Hackett Group, Inc. in 2008. The Hackett Group has global offices in the United States, Europe and Asia/Pacific and is publicly traded on the NASDAQ as HCKT. Email: info@thehackettgroup.com www.thehackettgroup.com Atlanta +1 770 225 3600 London +44 20 7398 9100 This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. Atlanta, New York, Chicago, San Francisco, London, Paris, Frankfurt, Amsterdam, Budapest, Hyderabad, Sydney