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Payroll leakage: Start by cutting preventable losses

By Douglas McKewon, Vice President, Outsourcing (Americas)

The payroll process is often not the most obvious place to realize huge and rapid cost savings. By eliminating payroll leakage, the CFO can go from being challenged by it to cost-saving champion.

What is payroll leakage?

In the clearest terms, it’s the money an organization forfeits through antiquated payroll processes. Poor governance and lack of transparency results in overpayments, underpayments, regulatory non-compliance and a basic failure to deliver on obligations to a workforce.

This, in turn, risks long-term repercussions, including lost productivity, a tarnished brand reputation and revenue loss.

Is payroll leakage sinking profits?

It’s possible organizations are hemorrhaging millions of dollars annually through basic payroll process failures. However, the good news is that once identified, it’s possible to turn these losses around quickly.

From work we’ve done with large multinational organizations around the world, it’s not uncommon for organizations to realize savings of many millions of dollars annually. This is done simply by examining the payroll processes and correcting the basic payroll errors commonly made by organizations that lack visibility into and governance of their payroll processes.

According to ISG, a leading global technology research and advisory firm, poorly designed and managed payroll processes, technology and management are estimated to add an additional .5% to 1.5% to the total annual payroll. Considering the typical Fortune 500 salary bill is anywhere from $1 billion to $2 billion, payroll leakage can drain as much as $30 million from cash flow annually.

These could be substantial cost savings for finance teams when their organizations need to rebuild the lost revenues of 2020, while investing in restructuring and a workforce that’s essential to realizing profitability and growth.

10 top financial and operational costs of payroll leakage

  1. Inability to quickly match employee cost to performance profitability

  2. High volumes of salary and benefits overpayments

  3. No cost controls

  4. Complex, manual and undocumented payroll processes prone to human error and loss of intellectual property

  5. Lack of standardized payroll processes, making crisis management and expansion difficult

  6. Compliance risk dues to reporting delays, inaccuracies and manual audits

  7. Risk to data and data protection

  8. No single source of data for rapid business decision making

  9. Brand and reputational damage

  10. Legal cases brought against employer

Turn complexity into transparency

For most organizations, payroll is the greatest cost. It therefore defies business sense that there’s no single source of truth to realize the full cost and efficiency of the workforce. This lack of instantly workable data is proved to be a huge hindrance.

During periods of lockdown during the pandemic, those organizations with no single vision found it almost impossible for HR and finance to understand the implications of spend, performance and risk across their organization.

The result for many has often been huge and always unnecessary financial losses – beyond just payroll leakage.

Plugging payroll leak

Once identified, this is relatively straightforward to do. The number of organizations that have started to track payroll performance using KPIs is noticeable. By putting measures in place, all have reported increased payroll process effectiveness, payroll quality has improved and the risk of non-compliance and the related fines all but eliminated. The net result is an immediately improved financial position.

Bridging performance gaps

FAs it stands, the wash up from the pandemic has left many organizations in a state of flux; in a position where structure and business objectives need to be agile enough to at least get back to the financial position they were in at the start of 2020.

By putting in the processes and technologies that will plug data leakage, costs will immediately start to be reduced and the data essential to creating the intelligence that links all the departments that touch the workforce will be produced.

With advanced workforce analytics and labor cost optimization enabled with this data, it’s now possible to identify and recover sources of workforce overspend. The cloud-hosted software automates the extraction, analysis, modelling and monitoring of previously hidden workforce risks and costs.

To be successful, these departments can’t continue to operate independently. Each is linked by the creators and deliverers of products and services – the people who are paid. The business intelligence created in a standardized digital payroll processes needs to be available to the finance, HR, business development and other core functions to mold current and future business objectives using real-time, retrospective and future data intelligence and projection models.

Eradicate payroll failure for a profitable future

The technology is available for in-house payroll modernization, but increasingly, larger organizations are outsourcing. This eliminates the risk or payroll failure and replaces variable costs with controlled bills.

Over the past 12 months we’ve seen the workplace transformed and new rules and regulations brought in. Post-COVID, we’re going to see continued changes as we all work out what the future of work looks like.

There will be changes to how employees are paid and rewarded. This will add complexity to already challenging payroll processes and potential for payroll leakage. Effective analytics will give organizations insight into the root causes of workforce, scheduling and payroll challenges. Corrected before impact money savings can then be redirected into strategic and sustainable growth initiatives.

Originally posted by FEI Daily on February 18, 2021

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