Payroll Systems: Plugging Small Leaks in a Huge Pipe

Huge amounts of money flow through Payroll. But like an old reservoir system it can develop leaks that can go undetected for years and then cost a lot to fix. There is so much money going through so many properly executed transactions, it is hard to realize that those little leaks add up to major money.

In most organizations, half or more of all cash flows out the door through payroll systems: 52 weeks a year, year in and year out: people get paid, benefits are allocated, leaves accrued, time and attendance tracked, overtime paid and accounted, taxes accrued and disbursed. There are countless opportunities for error – some are steady leaks on corporate cash, some are big surprises like tax restatement, some are constant data changes through multiple new hires, re-deployments, retirements, life changes, acquisitions, divestitures, etc.

Over time in every organization, errors, leaks, and risks accumulate. There are systems changes, new vendors to integrate, and frequent tax updates. Systems and processes need re-tuning. Routine fixes and quality checks add up to big dollars very fast.

Consider some examples of what happens from poor data quality, poor processes, and out-of-date systems and interfaces:

* A national manufacturing company with 10,000 employees recently paid a $250K tax penalty for late payment of taxes on one payroll cycle --- and only 2 days late!

* A national conglomerate with over 50,000 employees spent in excess of $1M per year solely for data correction and multiple processing cycles performed by external service providers due to invalid data.

* A major western city government recently reported that it had overpaid workers who left city employment nearly $950K since 2003. The city contracted collection agencies to retrieve these overpayments with only a 40% success rate. Additionally, the city underpaid departing employees $121K in 2007 alone.

Such common errors can be both expensive and embarrassing. Now, consider your internal manpower time and costs to correct errors and you are spending a notable percent of your total payroll budget. The errors and quality control add a hidden fee to your payroll that can easily add up to over one percent in a complex or poorly integrated organization. A company with a hundred million dollar payroll could be wasting a million dollars a year.

Errors are not just accidents. They come from causes. Finding the causes and changing them doesn’t have to cost a lot and can have an immediate and big payback.

Over time the errors that come during change get embedded in the system and keep multiplying. As a result the number of “exceptions” increases, and whether or not they are tracked, costs go up.

Payroll System and Business Process Improvement

Payroll Operations Review

Start with a fresh look to accurately assess and improve your Payroll operations and systems. At the outset, conduct a Payroll Operations Audit which assesses the current effectiveness of your Payroll processes and systems, and identifies opportunities for improving performance. The Payroll Operations Audit examines in detail the current Payroll processes, controls, organization, systems, and service providers. It clearly defines how Payroll really works in your organization and where there are opportunities for change. The final evaluation provides a baseline for planning for the future, identifies and maps out organization, systems, and process changes to improve quality, efficiency, timeliness, and performance,

Payroll Process & Controls Assessment

A Process and Control Assessment is a subset of the Payroll Operations Review. It evaluates the efficiency and effectiveness of current payroll processes and audit controls, and provides recommendations for improvements. The assessment is a process which conducts a rigorous review of its controls over its systems and operations. Additionally, security rights are reviewed to identify who is allowed to view what groups of employees and what data can be viewed/changed by job function. A strict audit of checks and balances is conducted, including confirmation and approval processes. The results are the identification of opportunities to improve the internal controls, effectiveness and efficiency of systems and operations, reliability of financial reporting, and compliance with applicable laws and regulations.

Payroll Data Quality Audit

Business processes, HCM applications, and state-of-the-art technology are worthless if the information generates the wrong results. Inaccurate, out-of-date, and incomplete information can result in excessive additional costs which negatively affect your bottom line.

Consider the following costs for poor data quality:

* Penalties for underpayment or late payment of payroll taxes;
* Cost of benefits for ineligible populations;
* Impact on benefits calculations;
* Costs for data correction and multiple processes performed by external service providers; and,
* Overpayments to employees.

A baseline of Data Quality audit reports needs to be tailored to your unique operations and HCM system.

Data Quality audits review critical data fields, such as birth date, social security number, base salary, etc., often made to detect erroneous entries. Granted, on line edits should preclude bad data from getting through, but errors could happen. Data entered could be within edit criteria, but still incorrect (e.g., overtime payments made to a salaried employee).

A comparison of edit criteria of all systems utilizing the defined “critical” data elements would be conducted. So often, data differs on downstream systems (e.g., service providers) since upfront systems edits are different whereby data is accepted on one system but rejected by another. Then to complicate matters, data is corrected or changed on one system and not another. A thorough review of data edits and flows is necessary to complete any competent Data Quality audit.

PeopleSoft Payroll Systems

Tax Updates

Often, the tax regulations and rates change with little advance notice or even retroactively. Oracle provides 6 or more PeopleSoft tax updates every year. Applying these PeopleSoft program and table updates quickly and accurately assure proper collection, tax payments, and tax reporting. Errors or delays require manual corrections and overrides which could burden your already strained payroll operations resources. Additionally, if taxes are under-reported and under-paid, financial penalties would be assessed.

Payroll Tax Updates require quick, accurate, and timely support for the following major support tasks:

* Review Compare Reports and document tasks appropriate to this update;
* Apply tax updates;
* Retrofit objects;
* Apply as appropriate: COBOL changes, customizations;
* Review changes with Payroll staff; jointly, create test plans and test scenarios;
* Review payroll test results (NOTE: Based upon the PS Update, other PS modules may also be affected);
* Document changes;
* Migrate changes into production system; and,
* Monitor operational system.

While there is the urgency for prompt updates, there is also a need for thorough and complete testing. Your staff needs to develop systems, integration, regression, and parallel test plans tailored to your PeopleSoft Payroll systems and your individual Payroll business processes. Given time and pressure for accuracy, this is an area where outside support can be especially helpful.

In Summary

Payroll Systems process a large percent of an organization’s money. There are so many transactions where little errors add up fast. The total exposure is so large that it is important to audit frequently to assure changes are handled well. Most organizations have the opportunity to save significant dollars through improved, transformed, and streamlined business processes, re-aligned organizations, improved controls and audits, better systems, and integration of processes and systems.

About the Authors

David J. Dell, Ph.D. (ddell@hrtechteam.com) is the Chairman of HRTechTeam. Mr. Dell is an expert on best practices for Information technology management and HR Business Process Outsourcing. He has conducted assignments for global 100 companies exploring ways to improve their HR systems through technology and outsourcing, produced market research studies for major consulting firms and outsourcing companies, and produced numerous published studies for The Conference Board and other leading organizations including International Human Resources Information Management Association (IHRIM). Widely quoted and a frequent speaker, he was named by the magazine HR Outsourcing Today as a major thought leader in HR Outsourcing. Previously he has been an investment banker and served on the Boards of 2 NASD public companies. As a turnaround executive he has served as both a CIO and head of HR for technology companies.

Ernest P. Canali (ecanali@hrtechteam.com) is the Executive Vice President of HRTechTeam. Mr. Canali is a recognized HR Systems & Technologies subject matter expert and international speaker with over 25 years of extensive experience in HRMS strategic planning and global HRMS systems and operations. Most recently, he was IT Director, Human Resource Systems Technologies for Siemens Shared Services. Previously, he served as Director of HCM Solutions for PeopleSoft’s Northeast Region. He also led global HRMS systems and business transformation at Lucent Technologies, Honeywell International, and Allied Signal Corporation. Additionally, Mr. Canali has been an Advisor to The Conference Board where he developed research reports and was a frequent speaker. He holds a BS degree in Computer Information Systems and Economics from Manhattan College. He was a founding member of the New York Chapter of IHRIM.