When Practice Drives Payroll: How Labor Spending is Designed to Leak

For many organizations, payroll can account for over half of all expenditures, as human capital is often any organization’s largest, and most important, asset. Labor accounts for as much as 60 percent of overall operating expenses, but managing the costs of this workforce is not always done efficiently. Payroll overspend is a problem for today’s employers, and related losses can account for 0.5-2 percent of a large company’s total annual payroll and labor expenses. For many Fortune 500 companies, this can amount to upwards of $30 million[i] a year being lost due to misspent labor costs and poor utilization. So what are some of the contributing factors of this overspend?

Often, finance leaders haven’t studied how overspend can creep into their organization, so they don’t know what to look for or even that there is a problem in the first place. Employees however, the people on the front lines managing their time and schedules, may be inadvertently inflating their time or missing opportunities to maximize utilization. Overtime can be a result of many types of time inflation – overtime is not a cause, it’s a symptom of larger or hidden issues. With the increasing reliance on part time workers, overtime may diminish, but unwanted time inflation could persist and become even more difficult to detect and avoid without new ways of thinking and creative types of controls.

Audits can be outdated and fail to identify sources of labor overspend because the sources of overspend can have small impact at the individual level but be pervasive across the organization. Patterns of long standing overspend won’t stick out in an audit. For example, missed meals are a common source of unwanted, unbudgeted paid time, and are easy to excuse or overlook. Tracking these missed meals can be time consuming and burdensome. However, when you multiply the number of employees across the enterprise who are missing meals, resulting in additional or overtime pay, the amount of overspend can result in millions of dollars being spent unnecessarily.

Why does it matter?

Any type of overspend is compounded by the fringe costs of labor – the employer taxes, benefits, and obligations that are attached to every payroll dollar and every worker. By reducing overspend, an organization can add an additional $.15 to $.25 on every dollar saved[ii]. It may seem incremental but because labor is one of the top expenses, a small improvement in labor spend can have a significant impact on profits. By eliminating labor overspend, organizations can create funding for other business initiatives that will provide money year over year.

Why is overspend so overlooked?

One reason overspend has been so overlooked may be because, to date, schools don’t teach finance classes on timekeeping, labor scheduling, and the systems that actually manage labor. Finance leaders tend to look at trends in spending without updating and validating whether the baseline is reasonable. The data is also looked at in aggregate instead of in detail, and the large volumes of data end up obscuring the pockets of persistent problems. Leakage hides in the data — averages hide problems.

Financial leaders also tend to focus on budget variances. Budgets built on years of overspend often fail to expose where the labor model is underperforming. A fresh look at labor standards and bottoms up budgeting can reveal meaningful savings, productivity gains, and even revenue growth when labor is right sized.

Some additional reasons why overspend is overlooked include:

People report underpayments, but rarely report overpayments

Just ask payroll how many manual checks are for an overpayment correction, versus underpayment, and you will see the disparity. When these figures are not similar, the checks and balances are outdated and not identifying the overpayments, especially when they are inflationary, discretionary, and happening routinely.

HR has almost never met a policy with an expiration date

Pay policies are designed to solve a workforce payment gap – such as an incentive to get people to work weekends or holidays, or to comply with a meal break mandate. These policies however are rarely written with a termination date or even a review cycle to evaluate whether the business need still persists. Practice becomes policy, policy becomes the perpetual status quo.

Few organizations see payroll and time and attendance as strategic

Organizations tend to not invest in the tools and skills necessary to achieve success by analyzing, quantifying, and remediating excess labor spend.

Pay is personal

Change is difficult because no one wants to be the person who “takes pay away.” However, it is part of the fiduciary responsibility of the organization to spend wisely and to direct limited funds to the activities that drive a healthy organization.

What you can do about it

• Ask whether your organization can pinpoint where time can be inflated and productivity wasted

• Figure out what the gaps are in your processes and systems

• Charter new policies and strategies that outline how things and people should operate to closely manage the cost of the workforce

• Quantify in dollars the cost of your current financial management culture (do you trust more than you should, do you audit enough, can you see enough)?

If leaders do not have the information they need to identify labor overspend resulting from things like unapproved overtime and missed meals, they will not be able to plug the gaps. Creating a cost control or ‘labor cost optimization’ culture out of the human resources and finance departments is one way to help limit misreporting. Additionally, time and people analytics tools can help track inefficiencies and create line item accountability with workforce management practices. These tools can help identify sources of labor overspend—fixing an immediate need, optimizing for future improvements, freeing up HR, and saving hard dollars.

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This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

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Lisa Disselkamp is LaborWise Innovation Architect for Deloitte.

[i] Where Workforce Costs Are Hiding,” ISG and Deloitte Analysis

[ii] As found through Deloitte experience

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