Most large banks have cut operational costs sharply, many to the point where further cuts threaten to jeopardize the quality of essential services.
But another major cost-cutting opportunity is hiding in plain sight: payroll.
To provide a sense of how much waste we're talking about, Gunn Partners' benchmarking of payroll practices has uncovered surprisingly wide variations in costs.
For instance, total annual costs to pay an employee vary by a factor of 13, from less than $100 per employee to more than $1,000. Even among similar companies, there are annual cost differentials of $100 to $400 per employee. The savings opportunity can be large.
A bank with 50,000 employees could save as much as $25 million annually by improving performance. We've seen companies achieve cost reduction in payroll approaching 75%, while improving service.
Not all of the cost differentials provide opportunities for savings. Some are related to size and complexity.
Large companies tend to enjoy economies of scale. Complex companies, those with several autonomous units or operations in different states, tend to have higher costs. And companies with a high percentage of hourly, unionized workers tend to have higher costs for time reporting, payroll inquiry, pay calculations, and payment distribution.
Yet despite structural advantages or disadvantages, nearly all the companies we've studied have had opportunities for large savings.
How can you realize the potential savings? The first step is to identify where the costs are. Not all come from within the payroll department. In fact, 30% to 65% occur elsewhere. Those include some payroll activities, such as time reporting and employee inquiry, as well as shared data- processing costs.
To identify the costs, you have to address the payroll process from end to end at the level of payroll subprocesses: time reporting, employee data management, employee inquiry, pay calculation, payment distribution, deductions and remittances, payroll tax reporting, and payroll accounting.
While savings are possible in all, some offer dramatic cost-cutting opportunities. For example, the cost of time reporting, the largest component of payroll, can vary across companies by a factor of 15. Many banks could save as much as $50 per employee here alone.
Once you've identified the costs, what level should you target?
We've found that the mythical "best practices" organization would have an annual cost per employee of $80 to $120. For those with extremely high internal service requirements, it might approach $200.
Here are some ways to achieve that:
Standardize basic payroll services, discourage customization, and modify pay practices to eliminate transactions that are high-cost and low- value.
Reduce the number of pay cycles.
Simplify the payroll process by reducing the number of time reporting techniques, slashing the number of time and pay codes, and streamlining the number of allotment and deduction codes.
Consolidate the bank's em-ployee data bases and automate employee data maintenance and inquiry by using technologies which enable employees to make specified changes in their records.
Provide 24-hour access to employee data and expert systems that can provide scripted answers to inquiries.
Attain close to 100% participation in direct pay deposit and eliminate paper by providing pay statements electronically.
Leverage technology and use it aggressively to automate routine tasks. But be cautious about introducing new technology. Our research shows its costs tend to outweigh the savings.
Manage payroll as a business with service level agreements and an effective system of "menu pricing" and chargebacks, along with performance measures of cost, productivity, process quality, and customer service.
The primary factor contributing to differences in performance is the way organizations process payroll. These differences clearly result from employees working smarter, not harder. Mr. Motter is a partner in Boston-based Gunn Partners, an international consulting firm.