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Is it time for a shared payroll strategy between finance and HR?

Keep your fingers crossed for Dean Shoesmith. As these words hit the page, the head of HR for both Sutton and Merton Borough Councils in South London is preparing to hit the big red button that will see a brand new, big-bang, shared-services system crank into life. He hopes it will prove why HRDs and finance departments should work together on payroll services.

What is different about this big bang is that it involves sharing HR services between not just those two councils, but with a third for part of it, neighbouring Kingston upon Thames borough council, which will include the payroll chunk.

It is the culmination of two years of work on a masterplan for HR shared services across Sutton and Merton, which Shoesmith reckons will save each borough £250,000 every year. A governing board comprised of Shoesmith, finance representatives from all three councils and representatives from HR, payroll, appraisal and recruitment, have together drawn up their shared vision, agreed on a payroll provider - which also has a seat on the governing board - and bashed out who is responsible for what.

From 1 April, payroll will be run from one platform across the three councils, governed by both HR and finance across the trio. Could this shared solution provide a way out of the perennial confusion as to who owns payroll, and a path through the myriad accountability, reporting and legal burdens payroll presents?

The oncoming auto-enrolment legislation is a microcosm of the challenge contained in this collaborative approach. A survey of 103 payroll, HR and accounting professionals, conducted this February by the Chartered Institute of Payroll Professionals (CIPP), found 27% of employers would be asking payroll, HR and finance to collaborate on overseeing changes to payroll necessary to comply with auto-enrolment, which goes live this October. A little over 23% of companies said they would put auto-enrolment solely at the feet of its HRD and just 9% would hand it entirely over to finance. Bluefin, the employee benefits advisor, has suggested departments as far away from HR as IT, or even legal, should play a part in rolling out the new pensions responsibilities.

Payroll is a financial function, but pertains to employee salaries and links to employee benefits. Politically and practically, how can HR and finance be organised to share payroll?

Finance directors, for their part, like the idea of sharing payroll. It sings to their interest in streamlining and making cost savings, but it can be a battle for hearts and minds. Narin Ganesh, group FD at relocations company Crown Worldwide since November 2009, says that while his predecessor outsourced payroll, he recently tried - and failed - to make a case to his board for bringing it back in-house, as part of a project to re-define the relationship between finance, payroll and HR. "We do retain a payroll administrator function in the business, which sits as part of the finance function now, but was part of HR before. HR didn't want it, so it ended up with me," Ganesh says.

"The in-house payroll administrator is intended as the interface between company and outsourced provider - but in practice, we actually have pockets of payroll work going on in HR anyway."

Despite having identified that the outsourcing arrangement was dysfunctional, because it lacked clear objectives from the outset, the company decided not to have in-house collaboration between HR and finance. It instead chose to draw clearer lines between HR and finance, keeping payroll off the HR mandate. "The outsourcing provider was not being held up to the right level of scrutiny and work ended up being done in-house to cover for its deficiencies," Ganesh says. "I set about re-defining the relationship with the outsourcer - even having to withhold payment in one case - but its performance improved dramatically and we now draw on more services. At the same time, we are re-defining the scope of work that needs to be done in-house and removing payroll from HR as far as possible; the latter is over-burdened with stuff that isn't adding value."

He admits demarcation between HR and finance is "blurred" and that he spends a lot of time working out the issues between them. "The functions should collaborate - payroll straddles both teams, so collaboration in my view is pure commonsense."

The lack of a shared payroll strategy raises the risk of compliance issues. Payroll ends up delivering compliance with employment law by virtue of its role - and as payroll is still, more often than not, reporting into finance, compliance risk lies with staff who are not trained in those laws. Auto-enrolment is an opportunity for companies to address that compliance risk on a more systematic basis, and to take a shared HR-finance approach.

"HRDs and FDs can be ambivalent about payroll, because it is often seen as not adding any real value to an organisation. Many see it as just a function that needs to be undertaken," says Paul Rains, director of Transact HR, a performance measurement company. "Though traditionally payroll reports into finance more than HR, some savvy HRDs with control over payroll have harnessed the analytical skills of payroll professionals to provide them with management information about the workforce, which assists in strategic planning and the resolution of operational issues. A uniform approach to auto- enrolment makes good commercial sense and needs to be planned jointly by HR and finance to be effective."

Payroll outsourcing is common, but there are many employers that want to control the process and are looking to in-house shared services for that. Defence multinational Thales implemented a shared finance and HR service platform in 2009, incorporating an in-house payroll shared service, for its entire UK business. Management and governance of the process is the responsibility of HR, but the over-arching strategy is set collaboratively by finance and HR for their respective teams.

The driver was governance controls across the group; HR 'owns' payroll production and reconciliation, finance runs the general ledger, budget control and does costing projections. A payroll service delivery manager curates the payroll piece with a team of 10 payroll and finance specialists looking after 8,000 paychecks.

The result? "Excellent payroll controls, with effective segregation of duty, minimal payroll error rate, credible 'one version of the truth' HR information," says Joe Ales, director for HR shared services at Thales UK.

How did the company deliver that? Sort out the politics first, draw the battle lines, agree terms, and draw up the plan with all parties involved.

"Strategically, it was decided payroll would be directed by its main functional customer, HR. But the business recognises payroll is a critical operation within finance as well, so we invested time in defining clear 'lines of sight', as well as the segregation of duty and where responsibilities for activity actually sit," Ales explains. "While the governance and direction of payroll is managed through HR, finance is a key stakeholder in the process; there are clear 'hands-offs' in the payroll production, payment and reconciliation between both functions."

Sutton and Merton's Shoesmith concurs. He appointed Sutton the 'lead' borough of the trio for HR shared services, with its director of resources heading the governance board. The roadmap for delivery was written by HR at Sutton and Merton (which under his leadership had already merged into one team). A shared HR and payroll platform is in place.

The governance board appointed an outsource payroll bureau for the shared service, but a shared payroll client team has been formed out of Sutton as the lead borough.

This was particularly prescient, given the introduction of auto-enrolment this October. Jes Turner, programme manager at payroll provider ADP, doesn't see how payroll can do auto-enrolment at present, and says that company HR departments should be responsible - though HR sees auto- enrolment as a payroll job. "HR passes the information, but payroll determines the contributions. This argument is falling between the cracks for some employers," says Turner.

As always, the devil is in the detail. Sutton was running a small in-house payroll client and outsourced payroll processing out of finance; Merton had an in-house payroll team sitting in HR. Each team had different suppliers, contracts and cultures.

With contracts too expensive to terminate, Shoesmith was pragmatic. "To embed a shared service approach on a single platform with one way of running payroll, we had to align contracts we were tied into with some mini contract extensions that run until we can switch to a new provider," says Shoesmith.

"We have had to agree on key protocols between HR and finance and each borough, so we know the outsourced provider can run our plan in a simple way, and we have agreed we will do things the way of the system - rather than what often happens, which is that people invest in a system, then later try to tailor it to the way they work."

A common chorus comes out of FDs and HRDs that have enacted payroll shared services: it's a partnership with particularly acute need for clearly defined leadership. "I would recommend anyone thinking of doing this to manage design and implementation using effective project-management and change-management disciplines, to clearly define the business case, scope and who owns what aspects of the payroll process," says Ales.

But it is Shoesmith who sums up the risk and the reward: "You need a common language between finance and HR. Thus far, we have ironed out most problems," he says. "But the proof of the pudding is in the eating and it boils down to personalities - the ability to problem-solve, compromise and find solutions." That should be something with which HRDs can assist their financial opposite numbers.

Facts and figures

  • 20% of employee salaries are processed by outsourced payroll services
  • 30% of total HR costs come from payroll and personnel costs
  • 'Visible, measurable' payroll costs around €200 per employee
  • Switzerland has the lowest uptake of payroll outsourcing (1% of businesses), while Denmark and Belgium have the highest uptake at over 80% of businesses in both countries

Auto-enrolment in a minute

From 1 October 2012, legislation will start to roll out, meaning that, depending on the size of the organisation, by 2017 every employee aged between 22 and state pensionable age, earning above the income tax personal allowance threshold, must be automatically enrolled by the employer into a qualifying pension scheme, to which both employer and employee contribute (the employee can later opt out if they wish).

Employers are required to either make a 3% contribution towards a defined contribution scheme, the National Employment Savings Trust (NEST), or to offer membership of a defined-benefit scheme that meets certain criteria.

Preparedness is patchy. In March, a Northgate Arinso study of 100 senior decision-makers responsible for auto-enrolment found seven in 10 worried about the additional workload and new processes required to comply. Nearly half don't understand what the new legislation requires of them. Worse, the cost of amending payroll systems in a business with 7,500 staff is thought to be as much as £300,000.