by Russ Banham

The online giant turned to probusiness for a seamless payroll solution that was invisible to AOL's employees.

In 1985, America Online was a small company with a big idea: linking the world via a global communications network. The company, then known as Quantum Computer Services, had fewer than 100 employees, and paying them was rather easy-simply sign, cut, and hand out checks. By 1999, though, AOL's workforce had swelled, eventually reaching 14,500 employees in 2002, and its payroll processes were anything but simple. Fortunately, the payroll department had its own big idea: to strategically outsource payroll and other benefits administration functions to an HR outsourcing service provider specializing in payroll, payroll tax, HR, and benefits administration for large employers.

AOL's strategic HR outsourcing initiative was designed to provide seamless and largely electronic payroll services and COBRA administration to AOL's employees. Indeed, the switch to outsourced payroll has been so smooth that few workers would even guess that a third party is processing their paychecks. "We don't think of our service provider as a vendor at all, but as a member of the AOL team," says Dana Andies, director of payroll, at Dulles, Va.-based America Online, Inc., part of the media giant AOL Time Warner.

For AOL, the world's largest Internet access provider with more than 34 million subscribers, outsourcing payroll and other HR functions was part and parcel of its ultimate goal to become an entirely paperless company. Given the paper-intensive obligations of payroll, this was not a slam-dunk. AOL's 11-person payroll department found itself so bogged down with mundane transactional tasks and the need to administer employees in all 50 states with two different payroll schedules (bi-weekly and semi-monthly) that it had little time to provide strategic value to HR and senior management. As the company's labor force skyrocketed over a short period of time, the demands on the department reached impossible levels. "The more employees a company has and the more frequently it pays them, the more work and overhead this process consumes," Andies says. "We simply had to leverage an outsourcing relationship." AOL traditionally prefers to leverage successful outsourcing relationships where possible, rather than building systems internally.

AOL identified the key qualities required of a service provider. Topping the requirement list were two important traits: superior client service and a sound and scalable information technology platform that would meet all of AOL's needs.

In 1999, after making the decision to outsource payroll, AOL handed over the payroll processing responsibilities for its entire workforce to ProBusiness Service, Inc., a Pleasanton, Calif.-based HR outsourcing company. [As this issue was going to press, ADP announced it was acquiring ProBusiness.-Ed.] Once all the data was transferred, the service provider became AOL's de facto payroll department. On a regular basis, the provider receives a transmitted file from AOL that contains new-hire information and any changes to existing employee data, such as a new home address, salary adjustment, or changes in deductions, garnishments, employee status, and direct-deposit information.

No wonder outsourcing of payroll functions is the number one business process outsourcing (BPO) activity at U.S. corporations, according to a new study by Gartner Inc. "Our annual survey of outsourcing activities indicates the top outsourced HR process is payroll, with 51% of survey participants outsourcing this function entirely and 30% outsourcing it partially," says Rebecca Scholl, senior analyst at the Stamford, Conn.-based technology research firm.

The survey, released in October 2002, indicates more than 75% of companies outsource HR functions at present, compared to 50% in 2000. Moreover, the survey projects that most of the companies currently outsourcing some HR functions will enlarge their HR outsourcing budgets in 2003. "When it comes to outsourcing business processes, HR is the one area that has made the most significant penetration," says Scholl.

The reasons for outsourcing payroll and other customary HR functions are cost and quality, says Joe Vales, senior partner at Vales Consulting Group in New York. "Companies are realizing that if they are not world class in delivering, say, payroll services, then they are losing competitive ground if they allocate company resources to managing this process," he explains.

Others agree. "Outsourcing clients embrace the idea that by outsourcing ancillary functions to experts specializing in the particular business process, they gain functionality, lower costs, increase organizational efficiency, and enhance the ability to focus on their own core business and customers," says Steve Wurzbacher, principal at Tenacity, Inc., an Atlanta-based consulting firm specializing in client retention issues. "I don't see any drawbacks from outsourcing business processes like payroll," Wurzbacher adds. "If the deal is properly negotiated and critical expectations on both sides are specifically spelled out, prioritized, documented, and committed to by both stakeholders, then this is a strong value proposition."

The value proposition for AOL to outsource payroll was indeed that. "I had been involved in outsourcing employee benefits in the last 15 years of my career at other companies, so I was familiar with what was needed from an outsourcing provider," says Andies. "I wanted a partner that knew exactly what the payroll process entailed and required. I wanted them to be flexible, nimble, and intelligent about the process-knowledgeable, for example, about how taxes and the amendment process work from start to finish. And I needed a partner that could drill deeply into the complex issues affecting this department."

What Andies didn't want, she says, "was to sit at a table with salespeople." Instead, she now sits at a table, or on the phone and via email, with Ron Huie, AOL's relationship manager at ProBusiness. The two were interviewed at the same time and had a habit of finishing each other's sentences. "Ron is able to read my mind," Andies jibes. So when AOL wanted to consider creating an online time-reporting system, Huie was on the spot with recommendations. "We've got about 900 employees who have to physically turn in a time sheet and then we have to have a reconciliation process at the back end to make sure the sheets actually reflect time reported," Andies notes.

The Outsourcing Juggernaut

Certainly, payroll is one of the most demanding and detail-oriented accounting tasks for an organization. Divergent and constantly changing federal and state regulations governing income taxes-those labyrinthine FICA, FUTA, and other tax compliance requirements-create a patchwork of rules taxing to even the most determined payroll department. On top of that is the need to keep track of different pay rates, bonuses, earnings and deductions, codes, garnishments, and overtime.

Payroll is so time-consuming that a survey by International Communications Research estimates the average small business spends 50 hours a year on it, or roughly one hour a week. Now imagine the time absorbed by a company AOL's size. Equally exasperating is the cost to administer payroll: the Internal Revenue Service estimates that U.S. small businesses spend about $16 billion a year just to keep up with the required paperwork. In AOL's case, one small error in payroll processing could potentially mushroom to affect 14,000 paychecks.

Almost all AOL employees now receive their pay through electronic direct deposits into their bank accounts, a paperless process overseen and administered by ProBusiness. Employees can view their pay stubs, tax data, or various pay deductions by logging onto AOL's intranet and accessing the Employee Central application, which links into The ProBusiness' Employee Services Portal (ESP) Payroll WorkCenter and the View Paychecks application. Such employee self-service is encouraged: for example, new AOL hires are urged to complete and file their W-4s electronically.

ProBusiness lives, eats, and breathes payroll, guaranteeing that the most up-to-the-minute technology and processes will be available. "Our entire philosophy is built around client service," says Thomas H. Sinton, ProBusiness president and CEO. "We want the absolute best and frankest relationship possible with our outsourcing partners to ensure that they're our clients for life. While AOL takes responsibility for the direct employee contact, we take responsibility for the processing end of the business. We're two sides of the same coin."

"Not only do we know AOL, we literally anticipate their needs," boasts Ron Huie, director of relationship management at ProBusiness and the relationship manager for many of the firm's largest clients, including AOL.

"Dana and I started talking about this six months ago," Huie says. "What we are trying to accomplish is an automated way for AOL to track time without having to do manual time card entries. What we've done is brought some solutions to Dana to consider. The solution would reconcile against total investigative discrepancies, giving Dana and her staff more time to focus on strategic tasks. This has now become a definite endeavor."

Another change in payroll effected by both companies concerned the direct depositing of employee pay into their respective banking accounts. AOL's member services employees-the courteous people who respond to questions or concerns from AOL users [the author is an AOL subscriber]-had lower direct-deposit rates than the company's rank and file and, in some cases, were unbanked. "I happened to mention to Ron that we were considering offering a payroll debit card as a direct-deposit alternative for these employees," Andies says.

"But Ron had another idea: that they facilitate the pay card program for this subset of employees instead. We recently piloted the strategy at four of our seven member service call centers and it has been such a resounding success that we're going to launch it at all sites by early 2003."

Huie says the fact that these employees, by and large, were unbanked created a barrier toward meeting AOL's goal of a paperless pay environment. "We worked out arrangements with US Bank to have these employees electronically receive their pay through the Accelapay Visa payroll card, from which they can withdraw cash or pay for expenses as needed," he notes. "We're hoping most member service personnel opt for this convenient and cost-effective service."

Prior to the direct deposit and pay card strategies, AOL paid employees the old-fashioned way: on-site delivery of checks by an administrative assistant who would hand them out to employees at each company location. "Not the most productive or secure model," Andies acknowledges. "We then pursued a strategy of mailing checks, but that, too, was imperfect."

At present, more than 95% of AOL's non-member service personnel electronically receive their pay through direct deposit on payday, which they can then tap immediately, as opposed to a physical piece of paper like a check they have to wait to tap until it clears the bank. Thus, electronic direct deposit not only reduces paper-processing costs and enhances the payroll department's productivity, it also reduces the so-called float leveraged by banks.

Not that all employees have to choose a direct-deposit pay process. Indeed, AOL workers control how they want to receive their pay. But the anxiety that often accompanies a mailed check dissuades many employees from selecting this option.

Perhaps the best testament to the success of the outsourcing strategy is that most employees would not even know it exists. "We don't want employees here to focus on the payroll department," says Andies. "That was our philosophy from the beginning of the outsourcing strategy. We wanted the changes to be seamless and low-key, and we wanted employees to be educated about these changes and why this was best for them. As it turned out, there was no interruption to their day-to-day work. Basically, we see ourselves as the shoemaker's elves-working invisibly in the background." [For AOL's change management strategy, see sidebar.]

The relationship between AOL and ProBusiness has developed into a true partnership. In early December 2002, ProBusiness was awarded a special Strategic Partner Award from AOL for dedication to outstanding service, quality, and customer focus.

In addition to relationship manager Huie, AOL also has a dedicated service provider account manager who has access to teams of specialists throughout the company. "We try to marshal a comprehensive service team on behalf of our clients so they don't have to navigate any problems on their own," says CEO Sinton. "If it is a technical issue, we bring in our technical team; if it's a data issue, we bring somebody over from client integration; and if it's a tax question, we bring in our tax specialists. AOL told us they were looking for a partner, and that is exactly what we told them, too."

Andies says what she finds particularly refreshing about the partnership is its dynamism. "You often hear that this or that is the best way to do something," she explains. "But if I disagree with that process or if I want to change away from that process, I like the fact that ProBusiness is flexible. While I can be pretty demanding, it's never 'my way or the highway.' I may tell Ron this is my end goal and here is how I think we need to get there; I know he'll have alternate routes to choose from. If something's boxed up tight, one tends not to open the box. I want thinking...out of the box."

Sidebar

Check, Please

Few things are more important to an employee than a dependable paycheck. So when America Online, Inc. opted to outsource its payroll to an independent company that would eventually make payroll a paperless process, the decision could have stirred a pot of trouble. Instead, AOL had prepared employees so well for the change that when it occurred not an eyebrow was raised.

Credit goes to AOL's payroll department, which worked with the outsourcing service provider to prepare both its 11-member payroll staff and AOL's approximately 14,000 employees for the transformation. Heading the change management project at AOL was payroll manager Lisa Ackerman (pictured at right), who concedes the responsibility "was a huge task."

"I was very nervous about it, since I'd only been here for a few months and had just learned one payroll system that was now being changed in favor of another one," Ackerman says. "And while I had prior experience in payroll at a computer consulting firm before coming here in 1998, I'd never been involved in a payroll outsourcing strategy. I wasn't sure in the beginning what the road ahead would look like."

The journey encountered not a single pothole. Key to the smooth travel was training and a knowledgeable outsourcing partner, says Ackerman. The service provider "sent us an implementation manager who initially did a demo of what the new payroll system would look like," she recalls. "We then set up several conference rooms for what turned into a week-long training session, basically a series of slides accompanying a manual that ProBusiness had prepared. They then talked us through each slide."

Learning the system's functionality "wasn't difficult," Ackerman adds, "because it was designed to be user-friendly. We transported all our data to the provider, and then learned how to make updates and run reports and audits. The ProBusiness implementation manager stayed here the entire week to answer any questions that popped up as we made the transition. It really wasn't as challenging as I feared."

Selling the new proposition to employees also went without a hitch. "We didn't want employees to worry that the new service would create payroll problems-like their checks would have the wrong amounts, an issue of concern given the direct deposit strategy we had in mind," says Dana Andies, AOL director of payroll.

Ackerman responded by alerting employees via the company intranet about the advantages of electronic payment (direct deposit), chiefly that paychecks would clear immediately on payday-not when the bank cleared them, as in the past. Ackerman also sent a broadcast email to employees featuring an image of what their new paycheck would look like. They paycheck and check detail look virtually identical whether presented in hard copy or viewed online.

Says Andies, "There hasn't been a single complaint since the switchover."