Why does IKEA Russia go for payroll outsourcing?

Interview with Elena Miklyayeva, Lead Compensation and Benefits Specialist at IKEA

Elena Miklyayeva - Why does IKEA Russia go for payroll outsourcing?

As popular as HR outsourcing is in most Western countries, it has still not caught on to the same degree in Russia – Russian companies prefer to leave only recruiting to outsourcers. Analysts connect this to a fear by companies of trusting outsiders to handle HR processes that are regulated by law. So we talked with Elena Miklyayeva, Lead Compensation and Benefits Specialist at IKEA, about how HR outsourcing can pay off and why companies have nothing to be afraid of.

How it all started

IKEA’s broad expansion onto the Russian market began in 2000. From the very start, the company intended to outsource HR, and especially payroll. Initially the company didn’t even consider other options, since it needed to get up and running in Russia as soon as possible. Performing payroll in-house would have required hiring specialists and creating business processes, which would have entailed spending more time and money.

ELENA MIKLYAYEVA: “During the run-up to entry onto the Russian market, we took a serious look at which provider to select for payroll services, with a three-year contract term. But as IKEA’s Russian presence grew in 2003, we grew dissatisfied with the quality of services we were getting. We decided to turn to another outsourcer, the UCMS Group, which does payroll for us even now. At first we used outsourcing for cut-and-dry practical reasons, but we’ve stuck with it because there has never been any reason to try it another way. This setup has been implemented at all IKEA subsidiaries – seven different entities – with a total of around 5,000 employees.”

IKEA decision-makers had two main goals when selecting an outsourcer. First, they needed a service company with room to grow, prepared to meet the customer’s growing needs. Second, IKEA wanted a trustworthy partner. Since HR processes in Russia are strictly regulated by the Labor Code, any delays or mistakes by an outsourcer can cause severe consequences.

MIKLYAYEVA: “At the same time, our company is always very cautious when it comes to allocating budgets, which meant we needed a provider able to perform payroll for a price acceptable to us. Our experience with our current outsourcer shows that the cost of these services is not high enough to make us think about taking these functions in-house. If we were to decide now to do payroll ourselves, we would have to hire new employees, monitor them, and pay them. Having gone with outsourcing, it’s hard to imagine doing it any other way.”

Key to success

It was probably easier for IKEA to outsource payroll because the company had never done payroll itself. But switching providers in 2003 showed some of the obstacles that can trip up the first stages of an outsourcing project.

MIKLYAYEVA: “After we decided to change providers, we needed to find a new outsourcer. The process of finding a partner is clear and understandable, but making the right choice at this step is the key for the success of the entire project.”

And conversely, a wrong choice of provider means that any work at later stages is for naught. IKEA avoided such an error, carefully selecting a new provider and enjoying a smooth, unnoticeable transition process.

MIKLYAYEVA: “Preparation for outsourcing falls into two areas: reaching agreements on the legal and financial terms for partnership and coordination of the technical portion of businesses processes, and working out the most efficient scheme for cooperation and data exchange. At IKEA, this took several months.”

When implementing any outsourcing project, it’s important to remember that the project does not end when the outsourced processes are tested and “go live.” In practice, it is impossible to coordinate everything during the planning stage and cruise on this alone without changes for the years to come. Situations change quickly and new requirements arise, which the outsourcer must be ready to implement. This is why IKEA is constantly working to strengthen and reinforce partner communication.

MIKLYAYEVA: “A lot truly has changed over our years of partnership. The number of employees to perform payroll for has increased several times over, and our company’s organizational chart has become much more complex. In addition, IKEA’s HR policy is unique in that employees often transfer from one corporate division to another, which demands flexibility and quick decision-making on the part of our outsourcer.”

Working process

To understand how outsourcing works at IKEA, it helps to know the structure of IKEA Russia. Seven subsidiaries (separate legal entities) of the IKEA Group operate in different regions of Russia. Thus payroll requires that information for all seven companies undergo preliminary consolidation.

MIKLYAYEVA: “Here is how we do payroll right now: each manager sends data to the outsourcer once a month. Information about absences, vacations, sick leave, and employee separations is entered during this period into our internal HR system and then we securely export it to our provider. Then the outsourcer’s employees get to work. We selected the data exchange format ourselves, and our partners worked around that to meet our needs.”

Then IKEA receives all of the necessary reports (in the proper format) as well as pay stubs for each employee. In addition, the HR department often needs other urgent calculations, for which time is of the essence. For example, the Labor Code of the Russian Federation requires that employers pay out all money that is owed on the day on which an employee leaves the company.

All of the processes for coordination between IKEA and the outsourcer are described in the project documentation. Before each payroll period, the companies plan all operations and specify the time at which reports are due, with precision to the hour.

Safeguarding sensitive information

There is a view that outsourcing is risky – critics say that when personnel information is shared with an outside company, the risk of a leak increases. In a worst-case scenario, this information could be obtained by competitors, chomping at the bit to lure employees with higher salaries.

MIKLYAYEVA: “I am often asked about the security of outsourcing. First, information security is a major element of the contracts we sign with the provider. There are clear terms that establish the financial liability of the outsourcer in case of a data leak. Second, the provider does not at all want for data to leak – any data incident would indelibly tarnish the provider’s reputation. That’s why our outsourcer, the UCMS Group, independently deploys various security systems, uses ISO 9001:2000 quality control, and actively educates its employees. And third, even overlooking the first two arguments, I don’t see any reason why in-house payroll would be safer than leaving it to an outsourcer.”

Whether handled in-house or outside, confidential information is sent to certain employees; it’s just that with outsourcing, the employees are in another office. Neither group is more prone to make more mistakes than the other. A company’s own specialists may be “our guys,” but that does not mean they will be more scrupulous and professional.

MIKLYAYEVA: “Overall I am convinced that the fears of data theft in outsourcing are far overblown. By making a prudent choice of partner, you will quite likely get better security than you would if you were doing the job yourself.”

IKEA has never done payroll in-house, so it has no point of comparison for expenses. And as noted previously, the expenses are not large enough to even consider switching to another model.

MIKLYAYEVA: “Right now our average payroll expenses are 225 rubles per employee per month. Simple math shows that the total amount we spend would probably not even be enough just to pay specialists to handle those kinds of calculations in-house.”

In order to switch to outsourcing, the main need is for courage – new business models and technologies are meant to be used, not to be feared. As competition grows, companies are reminded of the need to concentrate on their core business and outsource the rest. HR here is no exception.