In April 2012, Datacom acquired Enterprise Support Asia Pacific (ESAP), a provider of SAP and Software-as-a-Service payroll, human capital management implementation and support services. A year later, these services are being delivered throughDatacom Business Services, an independent entity within Datacom, so organisations no longer have to manage payroll. Director Mark McWilliams spoke with us about how payroll and human capital management are changing in the Australian market and which factors organisations should consider when deciding to outsource these business functions.
Q: Historically, businesses in Australia manage payroll in-house. What have been the reasons for this approach?
A: People don’t tend to change systems like payroll unless they have to due to things like software risk or there is some other compelling commercial reason such as a merger or need for cost reduction. And because back-office systems like payroll don’t get much attention — they don’t generate for the top-line result —, they are very much a case of, “If it isn’t broke, don’t fix it”. So there they are, systems that were implemented over a decade ago, still running quietly in the background.
However, today organisations have come to realise that managing their human capital more effectively can yield massive results for their business, both top line and cost, which then flows to a significant improvement in Net Profit Before Tax (NPBT).
Q: What are some of the areas or functions organisations struggle with when they manage payroll internally?
A: There are several big issues when you manage payroll internally, including:
- Cost: Systems, depreciation, running costs, compliance costs, software costs, people costs all add up when you manage payroll in-house.
- Integration: Often, payroll systems are islands of information in the corporate IT landscape, when, in actual fact, they should be a key tool used for critical business decision-making.
- Business continuity: Often, in-house payroll systems have several single points of failure, especially in businesses with fewer than 1,000 people. Businesses might only have one person to manage payroll because they can’t justify more because of their size, which means that if that person is unavailable for some reason, there is a risk to payroll. All SMEs pretty much have this issue when they manage payroll in-house.
Q: When an organisation chooses to manage payroll internally, research shows it can actually cost more than outsourcing it — why is this the case?
A: Having to shoulder the burden of 100 per cent of all costs to manage payroll internally is the main driver. For example, if you have a 400-person organisation, you probably need at least one payroll person and somebody in reserve to manage payroll. If it is outsourced, you will likely pay for one third of a person; for the same number of staff, this represents significant savings. Keeping up with legislative compliance is also a significant cost for most businesses that manage payroll in-house. As a single organisation buying a payroll system, there is no scale leverage when negotiating the price for the system. There are no scale benefits when you manage your own payroll system.
Q: For organisations that do decide to outsource payroll, either in a fully-managed or partially-managed capacity, what usually sparks the decision to move ahead?
A: There are a number of drivers that spark the decision to move toward managed payroll:
- Cost: In our experience, it’s usually 30-per cent cheaper to have a provider manage your payroll due to savings on internal staff, software maintenance and licensing. For every 1,000 employees, that’s likely to be a savings of $5,000 to $7,000 per month.
- The drive to value human capital management differently: Organisations are being spurred to review systems relating to their people, considering areas such as cost of attrition, training shortages, people development and how best people contribute to corporate performance.
- Joining a “club”: Many organisations have similar requirements with regard to contract types and complexities in payroll. For example, in healthcare, the unions negotiate very similar arrangements across the country, and often these arrangements are complex to implement when you manage payroll in-house. If a hospital can join with others, it can help reduce risk and cost and improve learnings from like-minded organisations.
- Risk/compliance: Often, systems will be out-dated or unsupported or unable to implement required legislative requirements. This will necessitate a change.
Stay tuned for Part II of our Q&A with Mark on the shift in how Australian organisations plan to manage payroll. In the meantime, learn more about how DBS can help manage payroll and human capital management for your organisation.