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Are You Throwing Money Away by Outsourcing

November 1, 1996
Related Topics: Human Resources Management Systems (HRMS/HRIS), Outsourcing, Featured Article
You’re not alone. Throughout the 1980s, thousands of companies seeking greater convenience outsourced their payroll and human resources management systems (HRMS) to service bureaus. That phenomenon was indeed a lucrative trend for the service-bureau industry that reaped big profits for its shareholders.

At the time, it also seemed like a favorable trend for the customers of those service bureaus. Customers freed themselves from the high cost and frustration of maintaining their payroll/HRMS function in house on antiquated mainframe systems. Faced with government rules and regulations that rendered information access difficult on such systems, HR managers were joyous at the prospect of outsourcing the task.

Unfortunately, that convenience came with a steep price. Customers had to relinquish control and responsibility of their payroll/HRMS and learn to accept costly and often inflexible solutions doled out by the service bureaus. I know because I served eight years as a senior executive for one of the nation’s largest providers.

Today, I’m on the other side, and I see the tide turning. Judging by the actions of hundreds of growing companies nationwide, we’re witnessing a shift in the opposite direction as payroll and human resources managers seek to regain control of their systems. What makes this shift possible is a technological revolution that enables the development of payroll/HRMS software systems based on flexible PC and PC network platforms. With the advent of these inexpensive platforms, more and more users feel empowered to overcome misconceptions about the cost and complexity of implementing and maintaining in-house payroll/HRMS software.

Companies are proving that in-house solutions provide quick access to information, high levels of control and flexibility, and affordable long-term costs—attributes not typically associated with a service-bureau environment.

Bringing payroll services back home has benefits.
Hundreds of companies that have made the transition from outsourced to in-house systems are reporting levels of efficiency and satisfaction they never knew existed. For example, after 13 years of rapid growth solidifying its position as one of the nation’s leading home builders, Red Bank, New Jersey-based Hovnanian Enterprises Inc. (known as K. Hovnanian) recently embarked on a formal program to increase profits by examining and challenging its business practices. Because K. Hovnanian’s workforce had expanded to 1,100, it’s easy to understand why payroll processing—and the company’s 12-year-old relationship with a payroll/HRMS service bureau—were among the first to undergo scrutiny.

K. Hovnanian’s payroll supervisor, Pat Nazarro, says that making the transition from a service bureau to an in-house system impacted the very foundation of her department. "When we used the service bureau, I thought it was the best way to handle payroll," says Nazarro. "Now I realize I really didn’t know payroll when we were using the service bureau. It controlled everything. I never learned anything because all I did was input data."

She recalls the total lack of control over payroll and scheduling. "Because of the service bureau’s limited time frames, we were constantly bending over backward to send payroll data out to [the provider]. There was no flexibility in the bureau’s schedule, so we didn’t have time to check or question our output. That resulted in a significant number of errors and rework, such as manual and void checks," says Nazarro. Now that the company has more flexibility in entering and reviewing its payroll— and the tools to immediately fix errors—HR rarely has to rework its computations.

Working and reporting in real-time.
If you think it’s tough maintaining a leadership position in the real estate industry, consider the pressures facing manufacturers of another high-demand product—telephone directories. Executives at Atlanta-based Stevens Graphics Inc. can provide numerous examples of how achieving top quality in every facet of their business helps them outperform their competition. With more than 700 employees, the company’s payroll and human resources departments have contributed significantly to Stevens’ growth and profitability.

Established more than a century ago, Stevens now is a subsidiary of Atlanta-based Bell South Corp. and is the nation’s second-largest producer of telephone directories. Shortly after joining the company, compensation and benefits supervisor Kathy Corueil conducted a thorough review of its payroll/HRMS. She quickly determined the service bureau the company had been using was providing inadequate access to information—primarily because the service bureau was using antiquated computer systems like the ones Stevens had long since abandoned.

Corueil then evaluated several in-house software systems, in addition to two other service bureaus. After she was convinced that the purchase, implementation and maintenance of a PC-based system wasn’t the daunting task she had feared, she recommended the transition to an in-house system for the control, flexibility and immediate access to information it could provide.

The service bureau wasn't capable of keeping up with the complicated export feeds we must provide to our third parties.

Stevens Graphics needed a system that allowed everyone in payroll and HR to easily retrieve information from recent periods and years past, write reports on any field within the system, and change any file specifications at any time. Today, HR is in control of its reports at all times, and the company doesn’t have to pay premiums.

The ability to interface with third-party systems was another critical requirement in her original evaluation, says Corueil. Stevens needed a payroll/HRMS that could easily interact with various systems, including its internal IS, accounting system and several benefit-related third-party systems.

"The service bureau wasn’t capable of keeping up with the complicated export feeds we must provide to our third parties for the administration of benefit plans, such as stock, pensions and 401(k) programs," she says. "The cost of doing so would have been exorbitant."

Reexamine your dependence on service bureaus.
The initial uncertainty experienced by professionals at both K. Hovnanian and Stevens is typical of companies that realize they must question HR’s dependence on service bureaus. Of course, bringing the work back in house won’t be the best solution for every company. But, once organizations believe they must make the transition to an in-house payroll/HRMS, HR managers need to ask: Can we afford a system that provides the right features? Can we avoid paying for features we won’t use? How easy will it be to implement and maintain the system? Will my system provider share in the responsibility of the system’s success?

While price-performance guidelines are fundamental, the importance of service and support can’t be overemphasized. Therefore, the key to finding the right in-house system is to identify one that can handle all of your company’s functional requirements, as well as one that offers local and national service and support from the system provider’s own dedicated specialists.

For companies seriously evaluating in-house payroll/HRMS solutions, it’s important to understand that the components of the system include software, system design and implementation, data conversion and training.

Of course, the software you choose must meet your systems specifications and reporting needs. It must include the tools and utilities needed to customize the program to the level of information access you require. It must also allow for custom, user-defined options.

The implementation and design aspect must be managed so that the system, as implemented by the systems analyst, meets your company’s functional requirements and streamlines your workflow. A great system takes full advantage of system features and functionality and allows the users the flexibility to define its workflow in the most effective manner.

The data conversion component comes into play to ensure a smooth transition from your old system. You’ll need the assurance that the conversion will be completed electronically, accurately and with verifiable results. Beware that data-conversion methods requiring manual input, balancing, spot-checking and verification are prone to error and increase the risk of failure right from the start. Insist that the professionals managing the implementation and data conversion know the software inside and out. In other words, know who you’re working with. Ask for a demonstration that proves the vendor understands all the applications, workflow issues and potential capabilities the software has to offer.

When evaluating the solution provider’s training offering, look for training documentation that’s intuitive and that incorporates preset parameters. Insist on seeing proof of instruction that helps you take advantage of the software’s full range of power and capabilities.

As a final measure of security, insist on background information and references for your potential provider. This procedure will ensure that your candidate has a deep knowledge of payroll/HRMS applications, a sense of caring, a national support center staffed by certified professionals, and a local presence to add an extra dimension of service.

With the knowledge of these important components as your foundation, you can now insist that the cost of all these aspects be included in the total price quote the provider submits to you. A good rule of thumb for medium-size companies (200 to 5,000 employees) is to budget between $25,000 and $250,000.

Some of the more important variables that affect pricing are the number of users that will be involved with the system, whether those users are centralized or decentralized, and applications that only you can categorize as essential or discretionary.

Control, flexibility, value, customization and peace of mind. Those are the attributes HR personnel reclaim after they end their dependence on service bureaus and transition to in-house payroll/HRMS. As a bonus, they’re realizing true cost savings. As converts K. Hovnanian and Stevens will attest, the economic benefits of in-house systems become apparent soon after implementation—especially when compared to the high, recurring cost of service bureaus. "With an in-house system, you have something to show for your investment. You don’t know what you don’t know, until you take control," says Nazarro.

Personnel Journal, November 1996, Vol. 75, No. 11, p. 105-106.

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