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23 September 2022
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4 minutes

Top benefits of having a Service Level Agreement with your payroll outsourcing provider

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It is advisable to implement Service Level Agreements (SLA) across all business functions, but it is critically important to put a robust SLA in place with your payroll outsourcing provider. Poor performance in this area could have a detrimental impact on your employees and damage the reputation of your organisation.

An SLA sets out the baseline levels of service you expect from a supplier and what remedies are expected if the service falls short of these levels. Ideally an SLA should be part of the contract with the supplier, with a standard of service clearly defined, corresponding to the fees payable. However, we have noted that very few clients focus on the required levels or standards for those agreed services. On average, only one in 20 clients are broaching the SLA topic, and these are typically larger organisations with sophisticated procurement procedures in place.

The cost of non-performance of a payroll outsourcing provider should not be underestimated. It can affect an organisation’s reputation and its employees significantly if the provider does not deliver to an acceptable standard. For example, a provider missing salary payments may constitute a breach of employment terms. Similarly, employees not being provided with required responses to their queries can also adversely affect employee experience and engagement, and statutory payments not being made on time can result in fines or penalties from regulators.

Great expectations

It is vital that the requirement for an SLA is made known at the start of any engagement with a potential payroll outsourcing provider. Communicating SLA expectations at the last minute may lead to a provider increasing their fees or abandoning the deal. The ideal process would be a flow from business need to the scope of services aligned to deliver on the need, followed by the standards or performance criteria and then on to contracting and pricing.

Specific to payroll outsourcing services, the SLA may include:

  • response time to queries from the client or its employees
  • resolution time to issues raised
  • timeliness criteria for each party (client and provider)
  • accuracy in the payroll delivery process, including steps such as salary
  • calculation, statutory submission, banking, payslips and reporting.

A typical SLA measures the overall outcome achieved by the supplier, but simply evaluating the end results will not always represent the full experience of the client. We believe the experience should be measured by the work and effort undertaken to reach the agreed objectives.

These measures can take many forms, but could include:

  • quality and timeliness of data input
  • number of draft payrolls run before the final payroll
  • number of repeat enquiries on the same item
  • time taken to resolve enquiries.

Service governance is critical to managing and monitoring performance delivery and includes:

  • established mechanisms for the delivery of performance standards
    periodic reviews between client and provider
  • penalty and reward for meeting (or not meeting) the agreed standards – for example, service credits, financial penalties, or rewards
  • right to terminate the contract, should performance standards consistently fall below acceptable levels.

When setting performance standards, both parties should aim to be reasonable and practical. Often a client will want performance standards at the highest level: in principle, both parties want to achieve near perfect results and immediate responses. However, this might not be possible to achieve or may be too costly.

For example, you may wish to ensure that your employees’ enquiries are resolved almost instantly at any time of day, but this level of responsiveness would require a support model that would incur prohibitively high costs. An acceptable response could be an automatic electronic acknowledgement of an enquiry, letting the employee know the case has been received and will be resolved within 24 hours.

Overall, you should be clear about what is vital to your organisation, keep a balanced view on service experience and cost, and remain mindful that raising performance standards mid-contract may trigger a fee increase by providers.

Taking action

Companies already committed to a payroll outsourcing arrangement should review their existing contracts and validate if they include an SLA. Otherwise, you should consider working with your current provider to agree on adding an SLA to the current contract or at your next contract renewal. Even if this does not include penalties, establishing agreed-upon service levels supports an aligned view of acceptable performance.

Companies considering outsourcing their payroll should consider asking the potential provider for their position on SLAs. Not every provider agrees to provide SLAs, especially agreements that include a penalty clause for service failures.

In addition to governing the client–provider relationship with a clear and measurable approach, a robust SLA provides insights on performance indicators, demonstrating opportunities for your company to pursue improvements with the provider and within your own organisation as a whole, to help drive it forward.

How can TMF Group help?

At TMF Group, we work with local small businesses and multinational corporations to provide HR and payroll outsourcing services, supporting them at every stage of their growth journey.

We can share insights based on the types and elements of SLAs across a varied profile of clients we work with, including how an SLA drives improvement and accountability for both the client and the provider.

Visit our Global Payroll and HR services webpage to learn more.

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