In this article I explain why payroll systems and HR information systems (HRIS) are different – a payroll system cannot be an effective substitute for an HRIS – yet complimentary when designed and used as an integrated solution. This I call Fusion. In contrast, using a payroll system as a makeshift HRIS or without an integration with the organisation’s HRIS, is a recipe for Confusion.
CAN A PAYROLL SYSTEM BE USED AS AN HRIS?
A simplistic answer to this question is “yes” because many organisations do exactly this. They use a payroll system (either their own or that of their payroll partner) to store as much employee data as possible. Payroll systems have standard fields for personal data, job related data, organisational data, and compensation data. If the payroll system allows it, some organisations create customised fields or re-purpose empty fields to host employee data that a payroll system would not ordinarily contain.
However, by its very design, the purpose of a payroll system is to manage payroll, which ends up in the generation of a payslip, tax documents, statutory deductions, a net payment to the employee, and accounting reports. The purpose an HRIS is to manage a much broader set of HR activities, such as time and attendance (which many payroll systems do offer), performance, recruitment, onboarding, off-boarding, talent identification, employee development, training, compensation reviews, expense reimbursements, etc.
As payroll systems cannot manage broader sets of HR activities, without an HRIS organisations need to perform such activities manually (paper, Excel, etc) or in a separate software. Alternatively, they can decide not to implement such processes, perhaps because it is too difficult without a system.
So, whilst I simplistically answered “yes” to the question “Can a payroll system be used as an HRIS?”, the answer should be “no”.
WHAT ARE DISADVANTAGES OF USING A PAYROLL SYSTEM AS AN HRIS?
The downsides of using a payroll system as an HRIS are probably self-evident to HR professionals. Here are just a few:
- Managing the broader set of HR processes manually or in different systems – because it cannot be done in a payroll system – is neither cost effective nor a positive user experience (for employees, managers, or HR);
- Manual processes are prone to human error and data security risks, while using different systems typically results in poor data quality unless the systems have been integrated (which is expensive to implement and maintain);
- If HR, managers, and employees are not given user-friendly tools, organisations are far less likely to have effective people management practices that drive higher employee engagement and performance; and
- Perhaps most importantly, and notwithstanding budgetary constraints, if an organisation persists in using a payroll system as an HRIS it is effectively sending a message that HR, managers and employees are not worth the investment.
SO WHY DO MANY ORGANISATIONS USE A PAYROLL SYSTEM AS AN HRIS?
Over the years I have seen four main blockers to organisations introducing an HRIS:
- Budgetary constraints may be a barrier to implementing an HRIS even when the organisation understands that they need to evolve, digitalise, modernise. PeopleWeek often meets HR directors that have been trying (unsuccessfully) for years to secure the budget to implement an HRIS.
- Very few HRIS’ have been designed to help HR or Finance to manage the payroll process. They may offer great features for managing a variety of HR processes, but they do not contain all the data needed for payroll and cannot be integrated with the organisation’s payroll software. Those HRIS’ that can be used as the primary source of payroll data typically require a huge amount of customisation, which is very expensive and time-consuming to develop and maintain. As an HR Director, my team and I once customised our global HRIS to integrate with a global cloud payroll solution for managing payroll in more than 60 countries. The project took more than 1 year (which was actually very fast) and was very expensive.
- The payroll function may sit within the finance department rather than within HR. There are pros and cons of each approach, and the purpose of this blog is not to critique the merits of each. However, when payroll is part of the finance function and it works well for the purposes of finance, there is little incentive to invest in a real HRIS. “Working well for finance” means that payroll is accurate and on-time, payroll accounting is reliable, and reports can be generated (cost analysis, planning, provisioning, and forecasting). When all of this is working well, the finance department is often a barrier to implementing an HRIS as they worry that it will have negative consequences on data quality and payroll.
- The reality, unfortunately, is that despite 20 years of headlines about the “war for talent” and the shortage of skilled employees, many organisations simply do not care enough about people management and employee development to invest in an HRIS. Senior management in such organisations may say that “people are our greatest asset” but it is often lip service. Sadly, their employees also probably know it is pure rhetoric. This is very short-sighted in terms of attracting, developing, and retaining high performing teams. Moreover, it is difficult to create a culture where employees focus on product quality and customer excellence if they themselves are not given the basic tools in the workplace. An HRIS is a basic workplace tool.
TRADITIONAL APPROACHES TO CREATING FUSION BETWEEN THE PAYROLL SYSTEM AND HRIS
Once an organisation reaches a certain size, they need the following to operate effectively and efficiently:
- Country-specific payroll software (in-house or outsourced);
- HR systems to help manage HR processes, employee development and engagement;
- Finance and HR teams with fit-for-purpose tools; and
- Accurate and consistent data in their payroll system and HRIS.
At some stage, therefore, it is almost inevitable that an organisation of a certain size will implement a payroll solution (first) and then an HRIS (or a mix HR systems). Whilst the payroll system and HRIS may initially be managed in a siloed way, it soon becomes apparent that a lack of fusion between them is the cause of administrative and operational headaches. Usually because point 4 above is not being achieved. As such, the systems need to be aligned. I have also noticed that whenever data from an HRIS is used to calculate payroll, employees and HR are much more likely to take ownership for the quality of the data in the HRIS because wrong data leads to wrong payslips.
Traditionally, there have been three approaches for achieving this alignment:
- Relying on manual processes, i.e. double data entry, to keep the HRIS and payroll system aligned. This is clearly prone to human error and is inefficient.
- Purchasing a highly customisable HRIS that, with significant programming effort and ongoing maintenance, can be adapted to host all the data needed for payroll and is integrated with the payroll software. This is a good solution but an expensive one that is beyond the reach of most organisations.
- Integrate the HRIS with the payroll system for basic information that is stored in a typical HRIS (employee name, job title, department, cost centre, hire date, employment end date, etc) and then manually enter all other data needed for payroll into the payroll system. This is blend of 1 and 2. It is the best solution for most organisations given that 1 is not a long-term solution and 2 is too expensive.
A NEW APPROACH
PeopleWeek has created a new approach. We have built an HRIS that enables our clients to store all information needed for managing payroll in any country. The main features are:
- Country-specific payroll data management configurations
- Client-specific pay and benefits configurations
- Payment instructions are entered into PeopleWeek (one-time payments, repeat payments, employee benefits, overtime, deductions, etc)
- Payroll cut-off and processing dates are configured in PeopleWeek, and on the relevant dates all the information needed for payroll (including absences and timesheets information) is exported from PeopleWeek to the payroll department or external vendor
- Integrations with third-party payroll software
- Payslips and tax documents are imported into employees’ personal profiles within PeopleWeek
- Payroll Partners can access payroll information within PeopleWeek without having access to non-payroll related information [click here to learn more about PeopleWeek’s Payroll Partnership Programme].
This new approach means that organisations that do not have the budget for Approach 2 – or do not want to unnecessarily spend hundreds of thousands of dollars on a customised solution – can now have it for a fraction of the implementation cost (a few thousand dollars) and quickly. This solution works for organisations with employees in one country or in many countries. HR and Finance can be confident that payroll is accurate, efficient, and secure, whilst other important employee processes are managed using a proper HRIS.
PeopleWeek would love to see more HRIS’ taking a similar approach to help normal organisations with normal budgets benefit from “fusion” and to end “confusion”.
Feel free to contact us at firstname.lastname@example.org to learn more. Final thought: I’d like to recognise the under-recognised work done by payroll professionals across the world. It is often stressful with high workloads and tight deadlines. As an employee we take it for granted that we will be paid on-time and accurately. Whilst this is nearly always the case for employees in most organisations, a lot of effort happens behind the scenes to make this a reality and payroll professionals rarely receive a thank you from employees or senior managers.