Best Practices Can Help Companies Cut Payroll Costs up to 70 Percent - Study

Streamlining data flow and increasing control key to improving processes, Hackett Group research shows

Streamlining data flow and increasing control key to improving processes, Hackett Group study shows

Atlanta, GA  March 3, 2004  Companies with world-class payroll operations can cut payroll costs by up to 70 percent, and streamlining data flow and increasing control is key to improving these processes, according to new research from The Hackett Group.

Enterprises can save millions of dollars in payroll costs each year by adhering to some basic best practices, including streamlining the flow of payroll data, increasing control and creating end-to-end owners for payroll processes, according to research from Hackett, a business advisory firm owned by Answerthink.

The new research, available through Hackett's Payroll Business Advisory Service (BAS), details the payroll practices of world-class companies and provides data and advice about how to obtain similar results. The research bases its results on a survey of nearly 90 large U.S. companies ranging in size from $740 million to $127 billion in revenue.

Among the key findings from the research: world-class companies spend 70 percent less on payroll. Hackett's research shows that fourth-quartile companies spend an average of $407 per employee on payroll, while first-quartile companies spend about 70 percent less, or an average of only $117 per employee.

A breakdown of these costs shows that first-quartile companies spend significantly less in several key areas. In time reporting, first-quartile companies spend an average of 79 percent less than fourth quartile ($28 per employee versus $129). System costs, employee data maintenance and inquiry/response are other areas where the most significant cost gaps exist.

Payroll staffers at first-quartile companies are also enormously more productive than those at fourth-quartile, supporting 3.4 times more employees each (averaging 715 employees per payroll staffer versus 207.6). In time reporting alone, fourth-quartile companies have more than 5 times the number of staff per billion in revenue of first-quartile companies (5.1 staff versus 1.0).

"There are clearly some large gaps here between the best and worst performers, and real opportunities for cost reductions and efficiency improvements," said Hackett Business Advisor Allison Caron. "A company with 27,000 employees can save nearly $8 million each year by moving from average fourth-quartile to average first-quartile in payroll. That's significant."

In addition, Hackett's research showed that streamlining data flow and increasing control is key. The research showed dramatic contrasts between first-quartile and fourth-quartile companies in terms of the number of pay and time codes they rely on, and how they have simplified processes and leveraged systems to push data through their systems much more efficiently.

Fourth-quartile companies use 2.8 times more pay and time codes than first-quartile companies. First-quartile companies are also about 2.5 times more likely to require minimal or no supervisor review of professional employee time, and 61 percent of all first-quartile companies have completely eliminated time reporting for professional employees.

Also, first-quartile companies are almost twice as likely to have flattened the chain of command for payroll and increased the span of control, and are 2.4 times more likely to have realigned payroll sub-processes to provide a single point of control.

"Our leaders are companies that have streamlined the process of capturing data and pushing it through the system," said Caron. "They've taken out unnecessary steps, eliminated multiple reviews, and simplified the management chain."

Caron added that leading companies have improved their front-end time capture mechanisms and have made employees accountable for inputting their own information correctly, eliminating the need for multiple hands in the process as the data goes through the system. "Sub-processes have also been realigned to empower payroll staff and let them take full responsibility to manage their part in the process from end to end," Caron said.

Finally, according to Hackett's research, 77 percent of all first-quartile companies work proactively with their internal customers to differentiate needs from wants, while only 43 percent of fourth-quartile companies make the same claim.

"Payroll managers try to be customer-oriented, but they should also consider when to push back," said Caron. "For example, we've seen companies where the manufacturing organization says they 'need' activity-based costing and multiple levels of approvals. But in reality there are there other, simpler ways to get them what they want that avoid customization, and don't add steps to the process."