KPI's for Payroll: How to Measure Outsourcing Efficiency

Deciding to outsource payroll is a big step  - you’ve likely had to make a business case for outsourcing, convince your peers, and work out how you’re going to benefit. Now it’s down to you to demonstrate the decision is paying off. 

Having payroll KPIs in place with your new payroll provider from the outset and consistently tracking them, puts you in a great position to show how the new solution is performing. It can also help you identify any snags or teething problems early on and nip them in the bud. 

It’s helpful if you already have KPIs from your previous provider or in-house team too so you can compare efficiencies.

KPIs for payroll are usually centred on resource allocation/relative cost and accuracy levels. Accurate calculations and timely 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/payroll headaches due to unhappy employees

KPI measuring also means you can analyse business compensation overheads and compare costs to benefits.

Running payroll in-house and ensuring ongoing compliance can be complex and time-consuming, so trusting an external specialist can relieve pressure from internal teams and free up time to focus on other areas.  

That’s providing your payroll provider is delivering what they promised. Below we’ve detailed the main KPIs you can measure to ensure your outsourced payroll provider is delivering an effective and efficient service.

Payroll KPI #1 Accuracy And Errors

This KPI underpins everything because the devil is in the details when it comes to payroll! For payroll to run smoothly, reliable, and accurate data is essential. Even the smallest of errors can lead to big issues further down the line, so it’s important to track accuracy and rectify mistakes as soon as you spot them. 

The larger a workforce is, the bigger the margin for error, due to a myriad of variables such as:

• Timesheet tracking for each employee
• Salary types
• Leave adjustments
• HMRC/tax calculations
• Pension contributions
• National insurance

This core KPI for payroll should be measured and assessed regularly, ideally around the same time each pay period. Total errors up every month and chart them on a spreadsheet so you can update and compare them 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 deeper, to figure out a service ‘weak spot’, you can separate errors on your spreadsheet by type.  For example, you could keep a record of the part of the process where the error occurred. 

This can enable you to provide feedback to your provider so they can identify weaknesses and improve the service they provide you with.  

Payroll KPI #2 Timeliness 

In addition to being accurate, payroll needs to be timely. Since April 2013, employers in the UK have had to report payroll information in real time (Real Time Information RTI). 

Instead of reporting payroll information annually, information is submitted to HMRC every pay period. This gives HMRC the ability to view tax and deduction information in ‘real time’, rather than having to wait. 

Submitting reports on time is crucial as late reporting can lead to fines or penalties. There are monthly reports most businesses need to submit, including a Full Payment Summary (FPS), and an Employer Payment Summary (EPS) report. 

In addition, there is annual information which needs reporting such as P11D forms, P60 forms, and P45 forms. 

Another timed aspect of payroll is employees getting paid on time. Although payroll delays are unlikely to happen with an outsourced provider, if there are any delays to employee payments, these should be recorded so that you can assess why there is a problem making payments on time. 

Late payments to employees are not good for staff engagement and retention so any late payments should be thoroughly investigated. 

This KPI should be monitored monthly and late HMRC submissions or delayed payments recorded on a spreadsheet. 

Payroll KPI #3 Overtime Assessments

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

For a business, employees are the most important resource and need paying for their hard work, but overtime costs can add up and end up a false economy if you’re not savvy. By measuring overtime statistics, you can build up a picture of internal resources and any inefficiencies in 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. 

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 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 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. 

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 details of the 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.

This can then 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 the 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 retroactive 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.

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 payroll– or raise a flag if this doesn’t appear to be the case. 

Payroll KPI #5 Cost Per Payroll Payment

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

Taking all the metrics you’ve amassed enables you to work out the value of your provider on a cost of payroll or 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 payroll processes in-house, you’ll be able to compare your new provider against previous performance to ensure that outsourcing was a good move for the 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.

Payroll KPI #6 Employee Efficiency

Another valuable KPI for payroll efficiency measuring is how outsourcing services impact in-house efficiencies. The in-house team should keep a record of the frequency and time spent dealing with your outsourcing partner resolving issues generated by your provider’s service.

Are there specific issues that keep cropping up that divert your team’s attention away from their direct workload? Does this represent a false economy for your investment when compared to the time your internal team took to process your payroll? 

If your team keep picking up the slack, then the overall value of the service is compromised.

We hope you found the above KPIs useful - by using these metrics for your outsourced payroll, you can continually measure the value of the service you’re receiving. If you feel like you’re not getting value from your current provider, or you want to start your outsourcing journey, please don’t hesitate to get in touch! 

The KPIs above are just a portion of the questions you should ask about your outsourced payroll provider. In addition to regular monthly KPIs, there are overall KPIs you should ask about your payroll provider to ensure you are receiving value for money, an excellent service, and are staying compliant with employment laws and payroll regulations. 

Download our free cheat sheet below for more KPIs and questions to ask about your provider. 

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

However, it’s all about balance: you can calculate the cost of an 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, you should see that your return on investment is a solid one.

Choosing An Efficient Payroll Partner

If you’re thinking of outsourcing your payroll to a specialist, you can expect to see a range of efficiencies which translate into a positive revenue decision…but only if you get the right partner!

Service quality differs between providers in any sector, so you need to do your homework and speak to several potential providers before you sign any contracts. 

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 need to track efficiency it may be worth reconsidering them as an option. If you need help analysing and comparing providers, you may find our RFP (Request For Proposal) template really handy! 

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