Real Case of Payroll

Real Case of Payroll

A lot has been said by now about the benefits of outsourcing company administrative operations, but the transition to the transfer of some functions to an external company requires quite a lot of internal work on the part of the company. That is why payroll often becomes the first step on the way.

Why do many companies today give payroll project to specialized subcontractors? As strange as this may sound to those who are not yet outsourcing, the answer is quite simple: in planning their development strategy geared towards process optimization and improved efficiency and transparency, many companies begin to work with subcontractors particularly on payroll. This part turns out to be the most autonomous, as well as requiring regular and uniform operations and a high level of precision and accuracy. In a sense, it is precisely at the payroll customer stage that the outsourcer can prove itself.

Advocates of Outsourcing

Some companies take to outsourcing later on, after studying the market, others – implement the approach sooner. Doubtless this happens not out of pure drive for innovation, but because of real business needs. Frankly, more often than not, it is the large corporations with a whole range of branches, each of which needs payroll done by their own rules, which have these needs.

The MONE salon chain, that has 18 beauty salons in Moscow, began to think about outsourcing accounting back in 2009. Because each salon is a separate division and employee salary is calculated on the basis of the particular salon’s revenue and the number of shifts worked, the payroll procedure was quite complicated. Moreover, the accountants kept the records in Excel tables, then uploaded the data, imported it to 1C: Accounting, and only then prepared pay-slips. As a result, there were 11 highly paid Finance Department experts, most of whose activities consisted of routine operations, for 450 employees. In this case, outsourcing was obviously the way to lower the risk of errors due to the complexity of the accounting system, as well as to lower accounting expenses.

According to the MONE Finance Director Elena Trishkina, after all accounting operations were transferred to the UCMS Group in November of 2010, closer cooperation between the companies began and by 2012 the customer reached an absolutely comfortable mode of interactions with the service provider. “Today, there is no bold line between MONE as the customer and UCMS Group as the service provider to separate us. It is more like a thin dotted line,” commented Elena Trishkina. “MONE receives complete, high-quality, verified accounting from the provider; and we are certain that under any circumstances, we can receive closed reports, prepare the analysis quickly and effectively, and report to the stockholders. It is noteworthy that provider’s experts communicate with our line employees directly, so that the stylists can have detailed information on their payroll at any time, for example. UCMS Group is right alongside of us in our operations. Now we live with no worries and this serenity is valuable to the company. So there is definitely a reason to believe that outsourcing has lived up to our expectations”.

Another interesting example is the Hachette Filipacchi Shkulev & Intermedia Group that came out in 1995. Out of 60 companies comprising the publishing house, four are operating in Moscow, and full-time and part-time employee payroll of the Moscow branches was done by two people each of which was responsible for two companies. The turning point came with the resignation of one of the specialists who provided payroll for 450 employees as well as around 400 payments under author and civil agreements. At the time of his resignation, the business had grown significantly and instead of one position, which it would have been difficult to fill, two would have to be opened. As we all know, increasing the headcount leads not only to additional salary expenses, but also to the need to pay additional sick leave, vacation, rent of additional space, purchasing of additional office supplies and equipment, as well as other indirect costs. In this context, outsourcing looked quite attractive; after all the cost of outsourcing agreement was fixed long-term, and there was no longer a dependency on certain employees who would periodically request a raise.

“Before we contacted the outsourcing company, payroll information was often submitted to the Accounting late. For example, two hours before payment, a request for payment of an unexpected bonus might come in. There was no time to get the amount approved. As a result, some payments were not even documented. Orders on salary changes or title changes were backdated. But accounting was considered accurate because there were no complaints from the recipients. As a result, there was a large amount of data that was practically never checked. We had to correct the errors,” commented Lyudmila Smirnova, Vice President of Finance of the Hachette Filipacchi Shkulev & Intermedia Group.

In addition to all of the above, the publishing house had a lot of technical problems due to the fact that payroll was done in the 1C: Salary and HR 7.7 system, which does not allow for detailed data for planning and reporting. There were technical errors in the manual information transfer to the 1C: Accounting 7.7 system. This became one more argument for payroll outsourcing, especially as the cost of the service turned out to be approximately the same as the cost of maintaining the two employees.

“The transition period was accompanied by certain psychological discomfort on the part of the Accounting and HR management. Not everyone was certain that the dismissal of in-house payroll was the right decision,” noted Lyudmila Smirnova. “The main quality criterion of the project was that the employees did not feel that anything changed in the payroll process, and the total expenses of the publishing house for transferring the business process to the outsourcer were around 30% of the monthly cost of its services”.

One more outsourcing pioneer was Ehrmann. Until 2002 employee payroll of the largest food manufacturer was done by accounting employees, but the need for increased information confidentiality, as well as reduced payroll expenses played its part. Outsourcing has made it possible for only one company employee to have access to sensitive financial information, as well as eliminated an entire range of additional expenses. “When you contact an outsourcer, positions in Finance, Programming, or special payroll software become unnecessary. That way, the company saves on equipping workplaces and on expenses due to payroll processing in-house, including the salaries of the specialists,” noted Ruzanna Grigoryan, the Ehrmann LLC HR Director.

Despite the fact that payroll is done in another information system, there is automatic data import to the accounting software for storage of archive information at Ehrmann. Moreover, the contractor is financially liable for payroll quality and timeliness. If excessive salary was accrued for an employee, for example, it is the outsourcing company that compensates the overage.

The management of Imperial Tobacco Russia group of companies also made a decision to outsource payroll back in 2003. The problem of transitioning to an external contractor was that there was a large volume of stored data, as at the time of project initiation there were 36 separate divisions in various regions and the company headcount was 600. “The service was quite new and the proposal of UCMS was the most acceptable in terms of cost-effectiveness,” commented Nellya Khametova, Payroll Budget Specialist of Imperial Tobacco Russia.

The testing stage took about a month, during which the experts strove to exclude various technical errors. There were quite a few reasons for discrepancies: there could be blunders in setting up payments, uploading links, inconsistencies in the codes of accruals and withholdings between the internal accounting systems and contractor’s system, and so on.

In the end, however, payroll outsourcing has freed the company management from the need to visit funds and various government agencies on the regular basis; the payroll was done quicker, and was accompanied by a large number of detailed and clear reports. But the most important thing is that with the increased workload the company did not have to increase its workforce or worry about upgrading its software and hardware.

Summary

Successful examples of payroll outsourcing clearly testify to the fact that by transferring from the traditional in-house approach companies of various sizes can achieve business transparency and get rid of a lot of headache that is due to direct and indirect costs, as well as administrative hassles such as employee firing, information leaks, and many others. It is obvious that outsourcing does not always create immediate significant savings, but it clearly creates a foundation needed for further strategic development and transition of additional functions, such as HR and Accounting, to an external company.