Putting an end to the payroll pain
The Budget spells trouble for the wages crew, but IT suppliers aren't complaining, writes John Stokdyk.
The Budget spells trouble for the wages crew, but IT suppliers aren't complaining, writes John Stokdyk.
All leave has been cancelled. The next six weeks or so is the traditional nightmare period for payroll managers. From the minute Gordon Brown sits down in the Commons on the afternoon of 9 March, the payroll community will have until 17 May to implement tax code changes, and any other surprises the chancellor plans to spring in his Budget speech.
While the annual ritual is a pain for users, it actually plays into the hands of IT suppliers, explains Alastair O’Reilly, managing director of Access Accounts. Because legislative changes are inevitable, all of Access’ payroll customers take up maintenance contracts.
‘Annually renewable income is the key to our success,’ he explains. ‘And we get a huge amount of renewable income from payroll. We would be disappointed if the chancellor suddenly announced his intention to stop making short-term changes.’
Apart from the need to change the payment parameters – often at short notice – payroll is otherwise a mundane and largely thankless task that demands total accuracy from a huge number of simple calculations – the perfect recipe for computerisation.
Another characteristic of the payroll scene is that it is more highly segmented than other financial application areas. A number of smaller companies, such as QTAC and Intex, offer standalone calculation packages at the entry-level, where they compete for customers against the likes of Sage and Pegasus, which have payroll packages that bolt on to their core accounts programs.
Colchester-based Access Accounts tends the mid-market, where it also encounters competition from Pegasus and Sage. ‘Payroll can be a deal-clincher,’ says O’Reilly. ‘Customers and dealers like to get fully integrated payroll from the same supplier. It’s one of our USPs against American and European invaders.’
In offering software for companies turning over between #1m and #100m, O’Reilly admits Access’ payroll package cannot match the personnel record-keeping facilities offered by the likes of human resources specialist Peterborough or the big names of enterprise resource planning: SAP, Oracle, PeopleSoft and JD Edwards.
Companies such as ADP and Rebus HR Services, meanwhile, offer bureau services that, taken together, handle the payslips of a sizeable chunk of the UK’s working population (see page 33).
This article will examine how different suppliers approach the annual budget ritual and look beyond the next six weeks to see what trends are likely to emerge in the longer term.
Technology and payroll go back almost 50 years to the first commercial computer ordered by Lyon’s Corner Houses in 1947. Leo, the Lyon’s Electronic Office, was put to work calculating payroll and other admin tasks.
The original Leo spawned several commercial successors, which were floated off from the main catering business. None of the commercially available payroll systems are quite that antiquated, but the maturity of payroll applications has seen the field lag behind other application areas in terms of sophistication.
When human resources (HR) software specialist PWA introduced its new PWA Empower Payroll package earlier this month, it differentiated the software by emphasising it was a full 32-bit Windows application.
The payroll application took around 18 months to develop, said PWA payroll product manager Diane Woodvine. ‘It’s a crowded market, but we were interfacing to so many products, our customers asked us to develop our own. Since it’s a brand new product, we don’t have any legacy systems we have to bring forward.’
Older mainframe or MS-DOS-driven payroll software is often designed to work in ‘batch’ mode, where all the data is prepared beforehand and the calculations and printing are left to run overnight.
Take Budget in their stride
The advantage of Windows software, particularly where it integrates with other applications such as accounts and HR, is that users can make enquiries, enter corrections or run ad-hoc reports without having to rely on favours from the IT department, Woodvine argues.
After years of experience, the vendors now claim to be able to take Budget season in their stride.
Unless the chancellor introduces an entirely new type of taxation or decides on a major structural change, the updating process involves changing the allowance and percentage values in the program’s look-up tables.
‘The changes are usually easily made, and the user can usually do it themselves,’ says PWA’s Woodvine. ‘They like to have that control, but it’s also their responsibility to get the figures right.’
Most software suppliers will compile their own updated tables and circulate them to customers on floppy disks, or by the increasingly popular route of publishing them on their websites.
Peter Prater, managing director of QTAC, doubts that the chancellor will do anything too radical in this year’s Budget. ‘If he doesn’t, it shouldn’t be too bad for us. We’ll aim to get the updated data files out within 24 hours.’
Of course the Budget is not the only factor affecting payroll. The National Insurance reforms due to take affect from 6 April have caused more concern among the developers. The government’s intention may have been to streamline the NI regime by abolishing the lower NI rate, but the introduction of new payment bands and employers’ rebates require new fields on payslips and the associated P11, P14 and P60 forms, explains Paul Fenwick, payroll development manager at Sage.
‘Whereas normally we can do an update for customers by telling them to change the rates and thresholds, this time we had to make some major changes to the software,’ he explains.
Around 80% of Sage’s payroll customers take out the company’s Sagecover maintenance contract and, rather than a disk with some data tables, they will have received a CD-ROM containing the amended program.
The other bugbear facing payroll managers is the Working Families Tax Credit, which will have to be calculated and paid by employers from 6 April next year.
O’Reilly explains that PAYE tax codes – the traditional rebate mechanism – will not be used for WFTC. Instead, the Revenue plans to instruct employers to pay specific amounts of tax back to qualifying employees for 26-week periods.
‘It is simply a new pay type,’ says O’Reilly. ‘It will show up on payslips alongside items such as hourly wages, bonuses, commissions and tax credits. Because our standard software has flexible pay types which can be either positive or negative, I think it will cater for it.’
And to complete what is beginning to look like a particularly uncomfortable year in the payroll calendar, readers in Scotland and companies with Scottish subsidiaries have to be ready to cope with the 3% variable rate of tax that can be imposed by the new Scottish assembly from 6 April next year.
According to vendors, this will be handled by the usual expedient of the tax-code, which will have to be extended to include an ‘S’ prefix.
Payroll software is hardly rocket science and, as has already been noted, the products tend to remain in use for longer periods than other applications. ‘Ten-year life cycles are not uncommon,’ according to Chris Anderson, managing director of Rebus HR Systems. ‘If it does the job and gets you there – there’s no reason to change it.’
But two looming issues may undo the market’s complacency: IT’s old friends, the year 2000 and the euro. According to SAP business consultant Thomas Otter, ‘Year 2000 issues will start with the new tax year in just a few weeks. There will be lots of payroll errors in the next two months.
‘Because the application is seen as mundane, organisations may have overlooked the possibility that ’00’ date code fields could show up errors in areas such as length of service.’
As a German company, SAP has already tackled the euro issue and from the first of January, its employees in Euroland received payslips showing both national currency and euro amounts. Research by PWA unsurprisingly showed that only 13% of companies had considered the euro capability of their payroll software, but nearly 60% were planning to tackle the issue within the next year.
Perhaps as a corollary, sales prospects looked promising, with 31% planning to install new software within a year and a further 14% planning to do so within two years.
When customers start shopping, Rebus MD Chris Anderson advises that, rather than focusing on which software product to use, customers should look at the supplier and how they cope with the upgrade process.
‘We can all offer attractive Windows screens and make it look glitzy, but how robust is it underneath and how much confidence do you have in the supplier for the next ten years?’
The next step forward, according to ERP and outsourcing vendors, are ‘self-service’ payroll services, made possible by the Web.
Rebus clients can already do so, says Anderson. ‘We provide them with a browser tool that lets them go in and interrogate the live data in real time; with no downloads.’
Payroll managers have their own PC tools to interrogate records stored by their bureau over fixed data lines, but the Web tools are designed to cater for a wider audience.
Increased security risks
‘Net access is so powerful because, rather than having to ask the payroll manager what their overtime bill is, line managers can look it up for themselves.’ The attraction for payroll managers who spend much of their time answering pay queries is obvious.
The bureau option, and new-fangled ideas such as Web-driven self-service programs are the preserve of only the largest companies, according to Sage marketing manager Peter Thompson.
‘People who run payroll on their PCs tend to do it on standalone, not networked machines because they want to keep the information private,’ he says. ‘We thought when we launched our client/software that client/server payroll software would follow. But clients don’t want better access because of the increased security risks.’
There are security issues, Anderson acknowledges, but claims Rebus has them ‘firmly battened down’.
Like everyone else, payroll specialists differ on whether to expect fireworks in this year’s Budget, but managers contemplating the millennium and the euro alongside the taxation changes planned between now and April 2000 would be forgiven for planning to take March off next year.
Not the payroll software professionals. ‘Because all of them are coming at once, there’s a lot of awareness in the payroll market,’ says Sage’s Thompson. ‘That’s why more people are keen to buy software – it takes the headache away for them’.
OUT OF SIGHT, OUT OF MIND
If the only constant in payroll is permanent change, the ultimate cure is to put the entire job out to a bureau. Rebus – previously known as CEP – has several irons in the payroll fire. Its Unipay subsidiary is the developer of the Uni2000 payroll package but, in 1991, the company branched out into bureau services in a bid to widen its market.
The results have been remarkable – the company’s outsourcing wing has seen 30% year-on-year growth, with a 100% spurt over the past year.
‘Outsourcing has become more and more proven,’ says Chris Anderson, managing director of Rebus HR Services. ‘The early players were considered trailblazers, but it is now a mainstream solution.’
Other business process outsourcers – notably Andersen Consulting and CSL in the accounts processing field – have shied away from payroll, which set the pattern for this latest trend. On the customer side, putting payroll out allows them to focus on their core activities, says Anderson, but he also says Rebus’ concentration on payroll and payroll alone has been a major element of its recent growth.
‘We win business because we can convince customers we are focused on our main task – payroll.’
The company has the added advantage of using a product that it can tailor to meet all of its customers needs. ‘Efficiency is one of our main drivers: we can get economies of scale and by automating as many tasks as we can, we are able to do it with fewer staff and more reliability.’
INLAND REVENUE PLUGS INTO EDI
Following Labour’s promise to increase commitment to electronic data interchange, the Inland Revenue set up a pilot scheme in 1997 to allow employers to submit P45 and P46 information electronically, and receive P6 data back.
Benefits of the ‘Employer Electronic Communication’ initiative include ‘a reduction in costs and manual data entry and improved accuracy’, said project manager John Glanville.
The pilot has been deemed a success and the Revenue is keen to extend it. Aside from the core exchange protocols, the Revenue aims to make other forms available online.
EDI will undoubtedly speed communications, but the EEC service is currently oriented to large companies, leaving most Sage customers stranded. ‘We’re keyed up to do it too,’ Thompson says, ‘but they can’t support the size of our market. We’re waiting on them to get geared up.’