Metric analysis

How to reduce total wage costs: the indicator of the month

Everything seems to get 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 from rising costs. Now is the time to conduct a financial review of all your business processes to determine if there are any opportunities for improvement that could result in cost savings, large or small.

This month, we’re looking at the total cost of the payroll process as a percentage of revenue. Total payroll cost is the sum of staff, outsourcing, system, overhead, and other costs related to maintaining payroll records; the calculation of salaries, wages and deductions; and distributing paychecks.

APQC benchmarking data on this metric, to which more than 700 companies contributed, shows that companies in the 25th percentile spend 0.04% of their revenue on payroll. However, companies in the 75th percentile spend nearly three times as much, or 0.11% of revenue.

The difference between the 25th and 75th percentile doesn’t seem that big. However, applied to the scale of a large company, the differences come into sharper contrast. ForFor 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 with razor-thin profit margins, it could mean the difference between ending the year in the red rather than in the black.

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

Systems
Have you done due diligence on payroll processing applications available if the organization processes payroll in-house? The organization’s current payroll solution may have worked well when it had half the workforce, but the company may have outgrown the software’s capabilities and now needs a system that can better manage payroll. demands of a large company. An outdated system could cost valuable time and money, while a more sophisticated system with automation tools could help reduce processing costs.

Internal processes
Even the latest and greatest in payroll technology can’t fix a broken 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 processors will have to chase them down to get the data they need. Communicate clear expectations to employees and managers about the start and end of time slip submission and approval.

Delivery model
For some companies, maintaining a full in-house payroll department makes sense. For others, outsourcing much of the payroll process is a better choice. Each organization will need to do their analysis to come to a conclusion on which service delivery model is best for them.

Each model has risks and benefits. For example, outsourcing payroll takes the process off the plate from the finance team. However, the company is still liable if the outsourced company makes a mistake, acts irresponsibly with the data, or fails to submit tax payments in a timely manner. On the other hand, keeping payroll in-house means having tighter control over payroll processes and data, but it also requires adequate finance staff and expertise that 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 one model is more beneficial than the alternatives.

As costs continue to rise across the board, it’s more important than ever to cut expenses that can be controlled. The best companies take a holistic approach to improving performance by looking at 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. Thinking of 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 nonprofit benchmarking and best practices research organization.