KPI's for Payroll: How to Measure Outsourcing Efficiency

If you’ve undergone a big business change such as outsourcing your payroll, KPIs are the most effective way to demonstrate that your decision is paying off – and to identify any issues before they escalate. You need to set out your performance indicators from the outset, and track them consistently for a rolling, up-to-date view. It’s especially helpful if you already have KPIs from your previous provider or in-house team too, in order to compare efficiencies.

KPIs for payroll are centred on resource allocation/relative cost and accuracy levels. Accurate calculations and reporting are crucial to payroll, because mistakes can lead to:

• Additional staffing hours to rectify them
• Diversion from other important business matters
• Late/incorrect reporting penalties from HMRC
• Compliance issues
• HR headaches due to unhappy employees

KPI measuring also allows you to analyse your organisation’s compensation overheads and compare costs to benefits.

Calculating payroll adjustments and ensuring compliance can be complex, so trusting an external specialist can really pay off – as long as they’re doing their job properly.

Here’s a quick look at the main KPIs you should be measuring to ensure your outsourced payroll provider is delivering an effective and efficient service.

Accuracy and errors

This KPI underpins everything because the devil is in the detail when it comes to payroll, and reliable, accurate data is essential for all other aspects to run smoothly. Even the smallest of undetected errors can lead to big issues down the line, so it’s important to track accuracy and rectify mistakes as soon as possible.

The larger your workforce, the larger the margin for error, due to the myriad variables that need to be considered, such as:

• Timesheet tracking for each employee
• Salary types:

1. Annual salary
2. Hourly rate
3. Basic salary + commission
4. Overtime
5. Contractor fees

• Leave adjustments:

1. Sick leave
2. Bereavement/compassionate leave
3. Maternity/paternity
4. Annual leave allowances
5. Time in lieu

• HMRC/tax calculations
• Pension contributions
• National insurance

This core KPI for payroll should be measured and assessed regularly – at approximately the same time every pay period. The focus here is on errors, so total them up every month and chart them on a spreadsheet (or your preferred method) so you can add to it and compare figures on a rolling basis.

Once you’ve collated enough data, you can use the information to calculate your payroll accuracy as a percentage figure:

Number of payroll runs with errors ÷ total number of payroll runs.

If you want to delve even more deeply, perhaps to ascertain if there’s a specific ‘weak spot’ in the service, you can even allocate errors to separate columns by type e.g. the part of the process where the error occurred. This can help you provide valuable feedback to your provider so they can deal with any issues within their own team or processes.

Overtime assessments

Measuring KPIs for payroll specifics isn’t just about ensuring efficiency from your provider – it can also add weight to your internal business management too.

Your people are your most important resource and need remunerating for their hard work, but overtime costs can add up and actually end up a false economy if you’re not savvy. By measuring your overtime stats, you can build up a picture of your internal resources in relation to workflows and any subsequent inefficiencies in your staffing.

You can measure your overtime KPI by totalling the cost of all the overtime you’ve paid out (again, do this monthly for a consistent audit trail) and then separating these costs by department, and again by each team within those departments.

If you notice that a particular team is consistently submitting overtime hours, it’s time to look at the reasons why. Payroll outsourcing providers will often be able to use their software to draw out these details for you, taking care of the maths while you take care of managing your business – freeing up more time to investigate the reasons for inflated overtime. It may be that your customer base has recently grown, leading to a production boom that your current workforce can no longer manage on their own – in which case it may be time for a new hire, diverting funds towards a more cost-effective solution than perhaps paying time-and-a-half for overtime.

You can also look at the operational processes within the team. Are there gaps in communication or poor software functionalities that are slowing workflow down, thus necessitating your staff to stay later to get the job done?

If it’s a seasonal glitch, you may want to build in a contingency for hiring casual workers to help pick up the slack at the same time every year, in anticipation of the additional hours needed to fulfil client requirements.

Time to complete payroll runs/productivity

One of the reasons why payroll outsourcing can prove to be more efficient is the quality of the software tools that your provider will have in place. However, that’s only half the battle won, so by measuring productivity and time to complete each run, you can not only map your provider’s performance, but also identify any potential efficiency gains.

With so many processes to complete in each payroll run, it’s worth breaking this data down into the real ‘nitty gritty’, so you can get a whole-process view.

By breaking down the details of time taken and the process overall, you’ll be able to see any areas that are lacking. For example, if a lot of time is taken in collating and assessing hours worked for salary/overtime calculations, it may be worth investing in a more sophisticated software that can be integrated with your provider’s platform, such as a workforce management solution that allows workers to submit their hours via a mobile device, instead of using paper time sheets..

Other ways to measure time taken to complete and productivity levels can include gathering metrics such as the volume of:

• Payments processed (by individual processors)
• Payments outside of the regular cycle
• Problems leading to retro-active payments
• Time spent fixing data errors
• Enquiries vs time taken to respond/rectify

As you gather more and more data over the months, you’ll start to build up a picture of problems within the workflow that are affecting productivity, along with possible reasons for them. Seasonal industry fluctuations or even colder months that tend to inflate illness absences can all be assessed, allowing you and your outsourced payroll partner to improve and streamline processes in order to accommodate for them.

You can also use this data to compare against the performance of your previous internal team, giving you a clear view of the time saved by outsourcing to a specialist partner – or to raise a flag if this doesn’t appear to be the case. Is your outsourced payroll provider really saving you time, and subsequently money?

Cost per payroll payment

The beauty of measuring your payroll outsourcing KPIs is that combined, some of the data you collate can be used in broader terms too, giving you the opportunity to assess the cost of your payroll services in clear context.

Taking all the metrics you’ve amassed, you can calculate performance on a cost of payroll/cost of payment performance basis. You can compare the cost of your payroll outsourcing against the size of your organisation/workforce, using the totals of:

•  Payroll errors
• Overtime paid
• Software services and other payroll associated expenses

If you had performance tracking in place when you managed your own payroll processes in-house, you’ll be able to compare your new provider against previous performance to ensure that outsourcing is a genuine efficiency for your business. Is outsourcing payroll saving you money overall? Or was it cheaper to run in-house? It’s generally the former, but you need to know for sure so you can assess its true value and your provider’s performance.

As with any business relationship, good communication is vital to make the most of your outsourced payroll service. Set a process in place for regular feedback reviews, where you can discuss anything you feel could be improved, or additional cost-efficiencies that could be realised. If there’s anything at all you’re not happy with, tell them – they should be able to find a solution in order to improve their service and your satisfaction levels.

Employee efficiency

Another valuable KPI for payroll efficiency measuring is how your outsourcing services impact in-house efficiencies. Your internal staff dealing with your outsourcing partner should keep a tally of time spent chasing them to resolve issues generating from your provider’s service.

Are there specific issues that keep cropping up that divert your own team’s attention away from their direct workload? Does this represent a false economy for your investment when compared to the time your own internal team took to process your payroll? If your team keep picking up the slack then the overall value of the service is compromised, so you need to be sure you’re getting the outcomes agreed from your partner.

Measuring efficiencies through the use of tracking and analysing KPIs allows you to break down a variety of different details and uncover the intricacies that lie in investment/benefit calculations, giving you a clear picture of what you’re getting for your expenditure.

Essentially, it’s all about balance: you can calculate the cost of your internal workforce and outsourced provider fees and try to keep them as low as possible, but you also need to consider the efficiencies you’re gaining by investing in any improvements that your provider’s service represents.

You may have had to make a larger initial outlay to bring your tech up-to-speed, but when compared to the ongoing benefits and efficiencies they lead to, you should see that your return on investment is a solid one, when it comes to the speed and accuracy of the payroll service you receive.

If you’re thinking of outsourcing your payroll to a specialist, you can expect to experience a range of efficiencies which ultimately translate into a positive revenue decision – but only if you get the right partner. Service quality differs between providers in any sector or specialist field, so you need to do your homework and speak to several potential providers before you go ahead.

During the vetting process, ask each provider what metrics they measure and how they can facilitate your own KPI assessments – transparency is key, so if they seem reluctant to support your endeavours in this respect, it may be worth reconsidering them as an option. It’s also important to check independent reviews and any case studies, so you can see for yourself the results of their work before you trust them with your own payroll.

A good quality outsourced service will free up time for you and your team to focus on other essential business matters, while providing financial value and processing efficiencies, to ensure a reliable return on investment.

By using these KPIs for payroll outsourcing, you can continually measure the value of the service you’re receiving.