Employees get a sinking feeling when they look at their paychecks and they're wrong! If they believe the payroll department didn't calculate their overtime properly or deducted too much for their health insurance, the first thing they do is reach for the telephone. Then, the payroll staff has to drop everything and reconstruct what happened to determine if they were paid the proper amount.
These kinds of calls were overwhelming the payroll department at Morgan Construction Company in Worchester, Massachusetts. "Our pain was acute," says Jack Bergan, vice president and treasurer for Morgan Construction, whose rod mills shape billets of reheated steel into rod, which is further processed in other machines to make wire, fasteners, and tire cord. Since a limited number of HR supervisors had access to the sensitive payroll data, they were constantly pressed into service to answer these questions. "We had to answer a million questions one by one," he says.
The executives believed the best solution was to put the payroll data on the Web and let the employees access the information themselves. The steel manufacturer had no experience develoing HR Web sites, so it decided to outsource that function.
In addition, research led the executives to prefer an Oracle database for their payroll and benefits program. "Oracle database managers are very expensive to hire. We didn't want to spend $100,000 on a manager who had just limited use," says Bergan. Outsourcing solved this personnel problem.
Outsourcing also preserved the company's capital, since it avoided the expense of the hardware and software needed to power the Oracle database.
Deciding to Outsourcing Everything
Morgan Construction had another personnel challenge that outsourcing overcame. Until recently, the company had employees in Pennsylvania and Massachusetts only. Its payroll staff was able to keep up with the state taxation rules in these two places. Then the company expanded its reach into four more states. "Six states were too much to handle," reports Bergan. "There was no way we could get bigger without outsourcing tax matters."
Morgan Construction outsourced its database management to IBM and all taxation matters to Ceridian Tax Services. The treasurer says the company's board was so satisfied with the outsourcing results that it decided to outsource the entire payroll process. Printing its payroll checks was the last process left.
The decision to outsource this function came after the company downsized its payroll staff to just two. And it wanted this duo to work on payroll on Mondays and Tuesdays only. "It would have taken another two days to print, stuff and deliver the checks. Why burden them with that? We wanted our payroll people to work on other projects the rest of the week," explains Bergan.
The treasurer says there were "a lot of doubters" when the board considered paycheck outsourcing. "Folks don't like glitches in the pay area," he says. When Morgan Construction outsourced its payroll printing to Payformance, a business-to-business payment technology supplier in Jacksonville, Florida, "people were worried," he recalls. The supplier printed Morgan Construction's checks in Georgia and flew them to New England every week. Many felt there were too many variables that could go wrong.
Last winter New England was fogged in and the plane from Atlanta didn't get there on time. "Payformance kept in touch with us the entire time," says Bergan. Thereafter, Morgan Construction changed the time it sends its payroll files to Payformance so the supplier would have a wider choice of flights.
After the September 11 bombings, Bergan says "we were thinking about a million other things when Payformance called." Because the FAA canceled all flights, Payformance scrambled to get the checks to Massachusetts. They got there a day late. "Payformance was very proactive and was ready to do everything possible to support us," says the treasurer.
Morgan Construction decided to take the chance and outsource its paycheck printing because it did not want to make the sizable capital outlay for check printing, which included laser printers and folding machines to stuff the checks in envelopes. Since it only printed 500 checks a pay period, the board felt this was a poor use of its capital. And the check paper is an expensive commodity. "We avoided the ongoing supply expenditure, too," Bergan reports.
Deciding to Become a Supplier
Payformance was incorporated in 1984 to sell software and laser printers to help its customers automate their check printing in house. Its customers were able to scrap their preprinted, multi-part forms for laser printing; this change slashed a 12 step process to three. Currently 3,000 customers, including American Express, Merrill Lynch and IBM, use Payformance software and laser printers.
Last year the company added an outsourcing option. "That cut the process down to three clicks of a mouse," says President Neal Anderson.
The decision to become an outsourcing supplier was simple. Payformance noticed that some big organizations were using its software and printers to start their own outsourcing companies. Anderson says in the early 1990's Check Free, one of the highest volume payment outsourcing companies, was using Payformance's software. "We felt we could provide better service to buyers since we're writing the software," he says wryly.
The arrival and universal acceptance of outsourcing suppliers also convinced Payformance it needed to become one. Previously, it had been hesitant about becoming a supplier because security issues required dedicated phone lines for each buyer. The rise of the Web, which allows secure transactions, removed that obstacle.
Outsourcing check printing provides buyers with cost effective economies of scale. Payformance buys check stock in bulk, achieving a lower cost. It qualifies for bulk postage rates. "We can send a check out the door for 55 cents or less. Most companies are paying 85 cents to $1 per item," reports Anderson.
The supplier, which has now branched out into other payment applications, including money orders and refund checks, now runs 500,000 items a month.
Keeping Skilled Operators
Finally, Payformance takes care of the personnel problems involved with check printing. Anderson says the check printing equipment is so specialized few people now how to run it properly. Companies who print their checks in house "find it challenging" to find and keep skilled operators. Payformance, on the other hand, has a cadre of back up operators because that is its core business.
And that's a big benefit for buyers. Bergan says Morgan Construction "relies on Payformance's expertise and experience. We told them what we needed and then let them handle it," he says.
Lessons from the Outsourcing Primer:
- Printing paychecks is a sensitive process to outsource. The supplier must be ready to meet its obligations under all circumstances.
- Letting a supplier print and distribute paychecks cuts costs by at least a third due to economies of scale.
- The outsourcing supplier bears the capital expenses of check printing, which is a capital intensive process.