How to Pick the Right Payroll Solution

Updated: May 05, 2009

Issue

Google the phrase "payroll software" and watch as more than one million hits populate your computer screen. No wonder companies are so confused when it comes to selecting a payroll solution that meets their budget, business objectives and work force composite. "Payroll is a very mature area and is the oldest of all the HR functions," said Lisa Rowan, program director for HR and talent management services research at IDC.

But while it may be the oldest HR activity, the days of manually calculating taxes, insurance, 401(k)s and employee earnings are long gone. Now, companies can choose from a wide selection of payroll options, from outsourcing to SaaS (Software as a Service). Here are some tips to help you pick a solution that's right for your business.

Considerations

1. Consider outsourcing. There are plenty of reasons to outsource your entire payroll function. In fact, Rowan said, "I don't know why anyone runs their own payroll." Benefits include increasing internal HR productivity, avoiding payroll mistakes, immediate access to tax law and compliance expertise, increased security and, in some cases, reduced costs.

But the decision to hand over such an essential HR function to a third-party provider shouldn't be taken lightly. According to George Ozenne, a principal with Mercer's HR effectiveness practice, companies need to ask themselves some important questions including, "How large and complex is our organization? What do we hope to achieve by outsourcing payroll? How much payroll data is tied to our HR platform? Have back office functions become too overwhelming?"

"A lot of organizations underestimate all the back office work involved with running your own payroll system, such as managing files, sending records to your bank, handling all the taxes, and printing checks," said Ozenne. In which case, outsourcing payroll may be the right choice.

2. See the world. Given today's diverse payroll policies and regulations, a regional payroll solution isn't going to do a multinational corporation much good, according to Rowan. "If you are a multinational company and have branches around the world, you're going to want something that supports you in those far-flung areas," she said. Oracle's PeopleSoft Enterprise Global Payroll solution, for example, produces multinational payrolls that fully comply with local requirements.

Another option, said Ozenne, is for companies to purchase ad hoc payroll solutions that address particular regions, then roll them into an entire HRIS (Human Resources Information System). "There aren't that many truly global payroll solutions that can support each in-country's payroll requirements," said Ozenne. "Sometimes an HRIS can be more global than payroll solutions."

3. Subscribe to payroll. For companies that want to stay in control of their payroll activities but lack the necessary internal resources, the SaaS model can be the ideal answer. That's because the application and data are housed on the vendor's server, which handles all processing. In turn, users don't have to invest in expensive server hardware or relinquish control of proprietary information to a third-party provider. "There are good reasons to have SaaS," said Rowan. "When you rely on SaaS for something like payroll, the only thing you are offloading is IT maintenance. You still are in charge of everything else related to the payroll process."

4. Make the most of a vendor relationship. With so many vendors peddling payroll options, companies often have the upper hand. It's an advantage worth remembering. For example, Ozenne said, "If you're looking to cut costs in an outsourced environment, go to your vendor and renegotiate." And every so often, determine what it truly costs to run payroll in-house rather than as an outsourced function. You may just discover it's time for a switch.

5. Anticipate integration headaches. Payroll is no different than any other software solution on the market — if not implemented properly, it can give rise to enormous integration headaches. "Integrating payroll is a challenge no matter what," warned Rowan. "And the larger the organization, the more complex it becomes." For this reason, companies would be wise to determine how they wish to manage, consolidate and share their HR data before rolling out a solution.

Next Steps

Now that you have effective strategies for identifying a payroll solution that's right for your business, it's time to assess the top players in the industry. Focus' Comparison Guide: Payroll Providers is the tool you need to get this done. Also, check out more Focus research about payroll, as well as research briefs and community-contributed content, on the related resource center.

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