Metric analysis

How to reduce total labor costs: metric of the month

Everything seems to be getting more expensive. From wages and fuel costs to the prices of lumber, office paper and essential groceries, very few sectors of the economy have been spared by the rising costs. Now is the time to take a financial review of all of your business processes to determine if there are any opportunities for improvement that could lead to cost savings, large or small.

This month, we’re looking at the total cost of the payroll process as a percentage of revenue. The total payroll cost is the sum of personnel, outsourcing, system, overhead and other costs involved in maintaining payroll records; the calculation of wages, salaries and deductions; and the distribution of paychecks.

APQC’s comparative data on this measure, to which more than 700 companies have contributed, shows that companies in the 25th percentile spend 0.04% of their income on payroll. However, companies in the 75th percentile spend almost three times as much, or 0.11% of sales.

The difference between the 25th and 75th percentiles doesn’t seem that big. However, applied at the scale of a large company, the differences enter into sharper contrast. FoFor example, a 75th percentile company with $ 1 billion in revenue will spend $ 700,000 more processing payroll than a 25th percentile company. For companies operating on tiny profit margins, this could mean the difference between ending the year in the red rather than in the dark.

Think holistically
If you’re looking to reduce labor costs, start by looking at systems, internal processes, and the delivery model. Improvements in these areas often result in substantial increases in efficiency and decreases in expense that quickly add up.

Have you performed a due diligence review of the payroll applications available if the organization processes payroll internally? The organization’s current payroll solution may have worked well when it was half the workforce, but the business may have gone beyond the software’s capabilities and now needs a system that can better manage employee time. requests from a larger company. An outdated system could cost time and money, while a more sophisticated system with automation tools could help reduce processing costs.

Internal processes
Even the newest and brightest payroll technology can’t fix a faulty process. For example, manual touchpoints such as completeness of time records and manager approval are among the most common reasons for delays. If employees and managers aren’t held accountable for timely entry and approval, payroll folks will have to hunt them down for the data they need. Communicate clear expectations to employees and managers for the start and end of submission and approval of time records.

Delivery model
For some businesses, it makes sense to maintain a full in-house payroll department. For others, outsourcing a large part of the payroll process is a better choice. Each organization will need to do their analysis to come to a conclusion about which service delivery model is best for them.

Each model has risks and rewards. For example, payroll outsourcing simplifies the process for the finance team. However, the company is still responsible if the outsourcing company makes a mistake, acts irresponsibly with the data, or fails to submit tax payments on a timely basis. On the flip side, keeping payroll in-house means having tighter control over payroll processes and data, but it also requires adequate finance staff and expertise who may not be able to scale as the business grows. business is growing. More often than not, weighing the risks, costs and benefits of each model will reveal that a model is more beneficial than the alternatives.

As costs continue to rise across the board, it is more important than ever to reduce expenses that can be controlled. The best companies take a holistic approach to improving performance by examining the systems, processes, and structures that come together to run a process like payroll. This approach makes sense because process challenges – and opportunities for improvement – often exist in multiple areas at once. Viewing them as an integrated system will help you think more strategically about where and how you can improve the process.

Perry D. Wiggins, CPA, is Chief Financial Officer, Secretary and Treasurer of APQC, a Houston-based non-profit benchmarking and best practice research organization.

APQC, metric of the month, outsourcing, payroll, payroll systems, process