There can be no doubt that in HR, analytics are ‘hot right now’. But while data fans get breathless over the possibilities of what could be achieved with predictive talent or performance analytics, payroll is often the poor cousin. Even though the wage bill is the biggest cost to a business, organisations tend to overlook the importance of the information that resides within the payroll system. No longer, however. Here’s HR magazine’s guide to getting to grips with payroll analytics.
Why does it matter?
Historically, the valuable insight payroll can provide to a business has lain hidden, but the growing importance associated with business intelligence (BI) and availability of software tools to mine and analyse data means that organisations are waking up to its potential.
Ian Hodson, reward and benefits manager at the University of Lincoln, suggests that one unintended consequence of the trend towards outsourcing business processes was organisations “forgot” the value that payroll data provides. Noting that for most companies pay represents 50% to 60% of the overhead, he says: “As we have moved through times of austerity there has certainly been more of a focus on where the pay bill is being spent. Payroll is the only area of most organisations where, for the core workforce, you have both the people and the associated costs, making it a hybrid of HR and finance functions, and a really important entity in its own right.”
According to a 2014 study carried out by Ventana Research, 88% of organisations said they saw payroll analytics as important, and almost 48% reported that they were planning to improve their efforts in this area.
“New analytical tools, made possible by cloud solutions, mean there has never been a better time to take advantage of the big data trend and provide the answers the CEO is looking for,” says David Woodward, chief product and marketing officer at Ceridian UK. “Payroll is best placed to take the lead on this, as it is often analytical and able to interpret numbers.”
Meanwhile, Ian Dowd, marketing director at NGA Human Resources, reckons payroll analytics is a key method for understanding where the “money is going” and what benefit the business derives from its use. “Clearly CFOs need to see the big picture. But as ever the devil is in the detail and this is where HR and payroll play a vital role,” he says. “The HR and payroll functions are the custodians of vital information about cost of activities, rewards and their impact on securing and retaining key skills.” It is therefore essential that HR directors recognise the importance payroll data has in the wider organisational picture and why and how it should be analysed more closely.
What should be measured and analysed?
Remuneration and employee costs are the most obvious area, but to extract maximum value from this data it is important to drill down to a granular level. “The big gains will be where you understand costs such as overtime and absence – what causes them to be high and when they are most likely to occur,” explains Woodward. He adds: “Payroll should also be using analytical tools to provide more sophisticated data and insight to the finance teams. Providing more accurate forecasts over a year will really help finance to budget accurately and manage cash flow.”
Also focus on areas such as National Insurance, time and attendance, pensions, pay rises, expenses, absence and overtime. According to Simon Fowler, managing director of Advanced Business Solutions, a good example of how analytics can help is in the recent changes to holiday pay, with payment now to be based on a 12-week average. “It will lead to greater scrutiny of overtime paid to employees,” he says. “Business intelligence solutions can be used to analyse changing working patterns and determine whether some hours can be switched from overtime to basic. This will help to achieve savings on period wage costs and also reduce the impact on future holiday pay payments.”
Meanwhile, Dowd reports that the potential part analytics can play in improving performance of an individual is starting to be recognised: “The balance of the budget spent on people, aligned with performance and information such as engagement with self-service HR systems all tell a story of employee performance. True correlations are yet to be understood and agreed but this area is generating a lot of interest.”
At the University of Lincoln data is used for forward planning for significant costs, such as pension contributions and National Insurance. “We have a very structured workforce model and investment plan so we are also keeping a watchful eye on the labour costs, use of casual labour and making sure that we remain closely aligned to the finance department and expectations,” says Hodson. “Our remuneration committee is very keen to ensure that the senior pay costs remain understood, and also to inform and strengthen the links between performance and reward at that level.”
What tools are available?
Even before the term big data started to be bandied around, business intelligence and management reporting software had begun to proliferate. Analytics tools are often built into the payroll software but it is important to assess whether these are sufficient for your needs, especially if the software hasn’t been updated recently. The latest generation of BI tools allows you to access real-time dashboards, featuring highly visual charts and graphs that provide instant snapshots of what is taking place in an area of the business. Predictive analytics capability is also built in.
As Fowler points out, dedicated solutions are designed to take “a deep dive” into data. “Specialist solution providers will possess a comprehensive level of knowledge based upon many years of experience, and should have pre-defined industry and domain-specific queries to ensure a smooth implementation.”
While these specialist tools are likely to be superior to what some payroll software providers can offer, keep in mind that to be successful they need to be properly integrated with payroll systems. The “slick, push-of-a-button” demonstration with charts and graphs is very much at the end of the journey cautions Dowd, who stresses that making two or more BI and payroll products work seamlessly together is “not a trivial thing”.
Discuss both cost and ease of integration with the BI vendor before you buy. At the same time, talk to your payroll software provider about the existing or forthcoming analytics available with their software. Woodward concurs integration is key and reminds HR directors that the ever-changing nature of payroll data adds complexity. “If you introduce new data elements to the payroll, a separate system is unlikely to automatically adopt the changes,” he warns. “You don’t want to spend more time maintaining the interface than making business improvements as a result of what the tool tells you.”
What are the common mistakes?
Don’t assume that the technology will do all the work. From the outset, HR and payroll directors must have a clear vision of the areas they want to focus on and well-defined objectives. “It’s essential that analysis supports business goals and drives towards them cost effectively,” says Dowd, adding: “A lack of planning or operational rigidity can lead to projects running awry.”
It is also vital to ensure the quality of data coming from payroll. “Empty columns or fields, invalid entries and inaccurate information will only be magnified when analysing across the database and ultimately produce inaccurate results, impacting decision-making,” adds Fowler. With the array of tools available it can also be easy to get either overwhelmed or carried away by the functionality on offer. Woodward advises not trying to run before you walk: “It is a journey and you should start with deploying impactful charts and dashboards to the business before you start to use predictive tools,” he says.
Data delivers most value when it is analysed and viewed in the wider organisational picture. There can be a tendency for payroll to exist as a silo in organisations though, so mental as well as physical boundaries have to be torn down if analytics technology is to be used to full effect. HR directors have a key role to play in helping payroll take a more organisation-wide mindset.
In terms of the technology, analytics software will interface with back office systems, and the flexibility of cloud-based solutions eases integration. Those with responsibility for implementation need to discuss this upfront with their software providers, as there is much to gain from cross-functional integration.
“Being able to easily extract business critical data from HR to payroll, or payroll to finance, significantly enhances costing analysis to support forward business planning based on reliable and insightful information,” explains Fowler. Dowd adds without integration key questions about the business may remain unanswered. “[For example] how do overtime, sickness and grievance statistics impact on recruitment, performance scores and overall productivity?”
“Software vendors, consultants and infrastructure providers must deliver tools to join the dots and allow us to see our businesses in the round,” he adds. “HR and payroll are like the corner pieces of a jigsaw puzzle. You start here and fill in the gaps to show the full picture of our organisation, people, resources and processes. Only when we see them all together can we manage them effectively.”