Banking

Selecting a payroll service provider

Published: Sep 2013

Linda Pullen
Linda Pullan, Head of Payroll Alliance:

There are huge changes taking place regarding HM Revenue and Customs (HMRC) processes, in particular implementation of real-time information (RTI), which has had a major impact on UK employers. This new system of communicating information to HMRC has meant that employers have had to review their payroll and BACS software to ensure it is up to the task. Unfortunately many legacy payroll systems have either not been upgraded to RTI, or the cost has made employers reconsider their options.

As a result of RTI and the introduction of auto-enrolment pensions, a number of employers are considering outsourcing their payrolls. In this respect, they have two choices: they can either outsource the technology and use a payroll bureau but retain their payroll team, or opt for a fully-managed service.

There are pros and cons to both options, so it is important to consider the choices carefully.

An employer should be aware that the cost of providing a bureau or fully outsourced service is never advertised. This is because each solution is tailored to the individual client’s requirements. As a result, this means they will need to send out a RFP to the providers they are interested in. But before an employer drafts a proposal, they should think about what they want from the payroll system. As payroll is usually an employer’s biggest cost, an accurate and efficient payroll service is fundamental to employee relations.

Many employers make the mistake of changing software but not updating their requirements. Instead, what they should be thinking about is how they want the payroll function to develop, using blue-sky thinking.

So before taking the plunge in issuing a RFP, here are my top tips for success:

  • Choose a reputable company that is established in the market.
  • If you work in a specific industry, such as retail, then choose a company that is experienced in offering payroll services in this field.
  • Large providers will be able to offer advanced technology, but smaller providers are usually able to provide a more personal customer service.
  • Include everything you want the system to do now and in the near future to fulfil your requirements, as it will be more costly to add them later.
  • An accurate payroll specification is invaluable.
  • Ad hoc reports can be very expensive, so consider a report writing function.
  • Don’t underestimate how long this process will take from start to finish.
  • Pay particular attention to ‘exit’ clauses in the contract, otherwise it may be cheaper to stay in and suffer than to get out.
  • Always do parallel runs before going live.
  • If you opt for a fully-managed service, don’t be too quick making your internal expertise redundant because if it doesn’t work out you have no one to bring the service back in-house.
  • Ask the providers for a list of customers that you can speak to before you make your final decision.
Mike Edwards
Mike Edwards, EMEA Head of Market Management, Global Transaction Services (GTS), Bank of America Merrill Lynch:

To a certain extent, best practice for payroll services RFPs is no different to the approach taken with any cash management RFP. However, when dealing with payroll, the fact that the payment of employees’ salaries is at stake makes it is even more critical that you choose the appropriate solution from a suitable payroll provider for your business, and that the implementation process is seamless.

In preparing for the RFP, the first element is to engage the correct internal stakeholders. The core RFP working group should be comprised of representatives from different geographies and functions to ensure that feedback and buy-in is sought from a range of people who will be affected by changes to payroll – including the commercial teams and HR.

The next stage is to consider the scope of the services required. Payroll is sometimes treated as a bolt-on component to a company’s broader cash management programme but this approach risks missing a significant opportunity. The effective management of payroll payments can help improve a business’s overall cash efficiency and contribute to a better working capital position. For this reason, it’s worth considering how it can be combined or aligned with a broader cash management or working capital solution.

The geographic scope of the RFP is also vital. A harmonised global solution brings greater efficiencies and may enable payment accounts to be rationalised. However it’s difficult to find a one-size-fits-all service from payroll providers because of the considerable local nuances that exist. The European marketplace is particularly fragmented, for example. Many payroll providers are focused on enhancing their formats in order to comply with the Single Euro Payments Area (SEPA) in time for its 1st February 2014 migration deadline, but these formats are largely being developed at a local and in-country level first, rather than at a pan-European level. It can therefore be challenging for companies to attain a holistic payroll solution from providers and may have to support multiple in-country solutions.

Payroll data is highly sensitive, and an additional element to consider is the level of security to be expected in the data delivery process, irrespective of whether the data will be delivered as part of a bulk payments file (which may include other payment types), or a dedicated payroll file. Individual payment items can be masked to increase privacy, but it’s important to decide how much information masking is required and to ascertain whether providers can meet these needs. Once the payroll file is created, there is also the challenge of establishing who and how the file is approved to go to the bank or direct clearing payment process, and controlling the risk that surrounds this.

Any RFP process related to payments is an opportunity to review the wider picture. By using one global payment solution, you can make your payments process more efficient and increase control over your working capital. It can be time-consuming, but thorough preparation can lead to a better outcome and end solution, which will benefit all employees.

Mark Paraskeva
Mark Paraskeva, CEO, SME Division, IRIS

Outsourcing your payroll to an external provider can provide many benefits including freeing up time, reducing costs and utilising the expertise of experienced payroll professionals. With recent complex legislative changes, such as Real-Time Information (RTI) and automatic enrolment, an increasing number of companies are looking to outsourcing as an option for their payroll. It is important to remember, however, that the level of service you will receive from an outsourcing provider can vary greatly, so the decision of which provider to go with is not one that should be rushed or taken lightly.

Before you begin looking at providers, you should have already decided exactly which parts of your payroll you wish to outsource. While some outsourcers may only take on the entire payroll process, this may not be the best option for some businesses. Some outsourcing providers will give you the option of outsourcing a part of your payroll, if you wish to control certain elements yourself. This can often prove to be a more cost-effective option.

When you start looking at outsourcing providers, one of the first things you should be considering is their track record with other clients. Do they have any easily accessible case studies or testimonials? Don’t be afraid to ask them what their customer retention rate is. With RTI and automatic enrolment having a major effect on the way payroll is processed, seeing some evidence of how your prospective outsourcing provider successfully handled these requirements should be a vital step in your decision-making process.

As well as the company in general, you should also consider the staff who work there. Is the outsourcing provider staffed by Chartered Institute for Payroll Professionals (CIPP) qualified professionals? You also want to ensure they are BACS accredited, as this is a main part of payroll which many people decide to outsource. One of the main advantages of outsourcing your payroll is the ability to leverage the expertise of others, so you want to make sure your payroll will be handled by professionals you can rely on.

There are many other questions you should be asking when considering outsourcing your payroll. What is the pricing structure for the services provided? Are there any ‘hidden extras’ for changes, new starters, leavers, etc? Where is the service based? What support will they provide during the transition phase?

The most important step to take is to decide which questions you want to ask before you begin looking at different outsourcing providers. By having a clear plan of exactly what you want to achieve by this partnership, you can ensure you are getting the best possible service at the best value for money.

The next question:

“What are the main obstacles in setting up a collections-on-behalf-of structure (COBO) and how have corporates overcome these issues?”

Please send your comments and responses to qa@treasurytoday.com

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