Pay Dirt

Big changes in the technology of human resources management have cracked open a market worth billions. Entrepreneurs inside and outside government are scrambling for shares.
By Anne Laurent
alaurent@govexec.com

Federal pay processing once was a chummy little market cornered by a handful of fee-for-service operations in large departments. Today, that market is breaking wide open under the pressure to downsize and streamline human resources operations and cut payroll costs.

Traditionally, agencies kept their own records of personnel actions on home-grown, mainframe-based computer systems, most over 16 years old, according to the 1997 "Governmentwide Human Resources Information Systems Study" conducted by the Human Resources Technology Council. New hires, promotions and other pay-related data had to be laboriously entered by hand, and agencies either did their own payrolls or paid to have them done by bigger agencies that had developed expertise and capacity by paying their own large and complex workforces.

With about 2 million employees, 2,200 labor union bargaining units and many unique pay systems, the government is a payroll nightmare. Uncle Sam pays people working abroad, part time, or for quasi-governmental institutions and corporations, and handles deductions for multiple retirement systems, a complex health insurance program with nearly 300 providers, the Thrift Savings Plan, and taxes for every U.S. state and territory, as well as the IRS.

Until recently, the daunting size and complexity of federal
payroll and personnel processing had frightened off private companies. Private firms still aren't pushing to process the federal payroll, but with the development of client-server computer technology and enterprise software systems capable of collecting, processing and presenting masses of data online and across entire organizations, a few companies have entered the federal HR information market. Their arrival is shaking up the payroll market and the federal businesses that had cornered it.

Software companies such as PeopleSoft, Oracle, SAP and a few smaller firms have begun federalizing their commercial HR products. Enterprise software looks like salvation to HR officials being pressed to squeeze people, time and money out of their processes. These enterprise systems promise to allow non-HR managers to:

  • Use desktop computers to design organizational models.
  • Do "what-if" HR analysis.
  • Create position descriptions.
  • Classify jobs.
  • Conduct personnel actions.
  • Manage recruitment.
  • Administer training, benefits and pay.
  • Track salaries.
  • Handle performance reviews and evaluations, union agreements and grievances, disciplinary actions and discrimination complaints.

Using client-server technology instead of mainframe computers means the new systems are easier to use and change, cheaper to run and permit more access to information.

As the human resources council noted in 1997, "the trend appears to be moving toward utilizing [commercial, off-the-shelf] software and joining in partnership with the private sector." This move to COTS HR applications has set the payroll market spinning and churning as never before. Payroll providers running specialized payroll programs mostly on mainframe computers are running to catch up with the seamless, online, real-time world of enterprise applications. Agencies want to get and manipulate their payroll data every bit as quickly as the other personnel and finance information speeding through their new software systems. To keep customers happy, payrollers are scrambling to create speedy links to the new applications. Many are considering replacing their non-commercial and mostly mainframe systems. And more agencies are moving to become payroll marketers as they adopt advanced HR systems.

Perhaps the best evidence of how the HR and payroll world is changing is a new venture pairing PeopleSoft with a government partner new to the payroll market: the Veterans Affairs Department. The HRLINK$ Federal Franchising Service combines PeopleSoft and Andersen Consulting with the VA's Austin Automation and Financial Centers and its HR Shared Services Center in Topeka, Kan.

PeopleSoft, which prefers to develop software rather than install it, often partners with systems integrators such as Andersen, which will handle installations for HRLINK$ customers. VA's data and financial centers in Austin, Texas, will operate client agencies' PeopleSoft HR systems and handle payroll processing. VA's Topeka HR service center will do customers' HR administration. The VA gained its PeopleSoft experience by installing the company's HR management system departmentwide.

But VA's most important role may be as stalking horse for the commercial firms in the finicky, skittish federal market.

"Government organizations feel more comfortable broaching outsourcing with another government organization," says Stephen J. Rohleder, managing partner for Andersen's America's Federal Government Practice. Letting VA head the partnership also gives the firms contracting advantages. "Federal agencies have a better understanding of government business processes and the interagency contracting process is simpler and more efficient," according to an October research paper on the unusual alliance by GartnerGroup, a Stamford, Conn., technology research and advisory firm.

On March 3, HRLINK$ celebrated its first successful engagement: installation and operation of PeopleSoft's personnel system at the Federal Energy Regulatory Commission in Washington. While the customer base is small, just 1,200 employees, the FERC deal is a big wake-up call for other agencies providing payroll services, such as the Agriculture Department's National Finance Center (NFC), Interior's National Business Center (NBC), and the General Services Administration. The trend-setting VA is the only agency providing PeopleSoft's full payroll suite, and it is the biggest player to enter the payroll market in many years.

Payroll Players

NFC, still the biggest civilian agency payroll processor, pays upwards of 450,000 employees at 126 agencies, including USDA, every two weeks. It also is record-keeper for the governmentwide Thrift Savings Plan. NFC has been in the cross-servicing business since 1983, though a moratorium on new clients from 1992 to 1998 slowed its growth and opened opportunities for other payroll providers such as Interior, the Health and Human Services Department and GSA.

NFC processes payroll for about 35 percent of the non-Defense, non-postal workforce. Agencies submit payroll information online or by batch and can download a number of NFC payroll reports, as well as query the system for specific information. Other significant players include:

  • Interior's National Business Center, which pays 180,000 employees, including all of Interior's.
  • GSA's Heartland Finance Center, which processes pay for about 25,000 employees at GSA and 31 other small agencies and commissions.
  • HHS' Program Support Center, which handles payroll for HHS and plans to reinvigorate its cross-servicing business soon.

In addition, the Defense Finance and Accounting Service pays 5 million Defense civilians and service members a month. Its payroll operation is under study for contracting out.

John Ortego, a feisty, business-savvy technology expert, took over NFC in August 1997 and is busy expanding and improving operations. Under Ortego, NFC has begun providing Employee Personal Page, a program that offers World Wide Web access to payroll, leave, travel, insurance, savings bond and other personal information for employees of NFC customers.

This summer, NFC will begin offering the Personnel Office Desktop Solution (PODS), a system to automate hiring and other processes now performed by HR offices and managers. NFC also has built interfaces to bring in data from agencies' home-grown payroll systems as well as a one-way connection to accept data from PeopleSoft's HRMS. A two-way connection is in the works. Ortego is planning to replace the center's legacy computer system in the coming years and is mulling over whether to bid on DFAS' payroll/personnel services.

Despite NFC's heft in the market, Ortego acknowledges that the arrival of PeopleSoft and other HR and payroll systems providers is altering NFC customers' needs and thereby NFC's approach. But NFC is making the changes necessary to keep clients happy and win more business, he contends. "I'm not out to compete directly with them, but I am out to offer a quality product at a fair price," Ortego says. "I might even partner with them. I'm not ready to turn over 35 percent of the government payroll now but if [in the future] I were convinced that it was in the best interest of the government I would petition to turn it over."

Business Drivers

Business needs are driving agencies to change their approach to managing human resources and HR information. Downsizing and the focus on results are forcing top managers to more carefully choose, assign, train and reward staff. The 1993 National Performance Review targeted HR staffs for a 50 percent reduction by the end of this year. The number of civilian personnel specialists governmentwide fell by 21 percent-8,900 jobs-between 1993 and 1997. Some personnel offices lost as much as 40 percent of their staff since 1992. These reductions are forcing HR managers to seek ways to give employees and managers more access to HR information and the ability to manipulate it directly. The need for help in most HR shops has become severe enough that, at agencies' request, GSA is preparing to add HR services to its federal supply schedules. Instead of being forced to rely on personnel offices that are sometimes distant and unreliable, managers are being given direct access from their desktop computers to staffing information and greater ability to take personnel actions, such as classifying jobs, advertising for help or approving training.

Having suffered staff losses, HR shops want relief from administrivia-entering and re-entering personnel actions in old computer systems and answering and re-answering basic questions from employees and managers. HR organizations are attempting to become consultants and advisers on strategically managing employees. A growing number of agencies are installing enterprise HR systems to eliminate repetitive data entry, get a better handle on HR management information and enable employees and managers to conduct basic HR transactions themselves.

At the Treasury Department, a class action lawsuit brought by black agents against the Bureau of Alcohol, Tobacco and Firearms highlighted the need to better manage HR data. The lawsuit revealed that ATF couldn't prove it equitably provided training and career assistance to agents regardless of race. Treasury realized that a central HR database containing training information about each employee would put its bureaus in a better position to respond to such challenges.

"Now, HR is not just a transaction processing organization, it's helping managers do the right things," says a high-level Treasury official involved in the HR reorganization. "For example, if one port in Customs is performing better than the others, we want to know why and why the others are not. We do not now have the data to [know] that and we need that data to assign resources." Treasury has begun a 10-year, $335 million project to install HR management software from PeopleSoft across the department. The project began last fall with ATF and the Office of the Comptroller of the Currency.

Too Much Typing

Treasury also realized that replacing its bureaus' 100 legacy HR computer systems would reduce operating costs and improve productivity by eliminating the need to re-enter personnel information into each system. Installing enterprise HR systems allows agencies to reassign the many HR staffers now tied down in data-entry jobs.

In 1992, the VA began replacing its 30-year-old payroll system. "We went to 45 VA sites and documented the as-is process and saw a lot of redundancy," says Sandra Weisman, VA associate deputy assistant secretary for financial systems. "HR people were spending 50 percent of their time answering questions, 40 percent processing transactions and maybe 5 percent to 10 percent doing strategic HR advisory work." VA also discovered it had 250 HR shops with 3,500 employees. By 1995, the HR update had blossomed into a reengineering effort involving procurement of a PeopleSoft HR, time and labor, and payroll system.

VA discovered then what Treasury has just recently realized: Installing COTS HR software isn't simply a system replacement. "It's a strategic change initiative facilitated by a system replacement," says the Treasury official.

Faced with a choice between making costly modifications to HR software to fit existing organizations and practices or re-engineering, most agencies choose the latter. "You don't want to customize more than about 20 percent, or you might as well not be buying a COTS system," says Joe Colantuoni, director of HHS' human resources service program support center.

"We used PeopleSoft as a tool to help streamline business processes and staff," says FERC Chief Financial Officer Thomas Herlihy. "When PeopleSoft was selected, there were 32 staff in the HR office. Knowing the product would simplify processing, as people left we did not backfill those jobs. Now there are 18."

"HR is not terribly complex," says Herlihy. "If all employees have access to information and you don't have to rekey it five or six times, it saves a lot of effort. Now we only do it once. We are able to populate data fields from the database instead of typing in the whole thing."

Surveying the Field

Once they decide to move to enterprise HR systems, agencies face other considerations, such as which transactions to automate-recruitment, hiring, promotions, benefits tracking and administration, time and attendance, or a combination. Few software products can handle all of them, and fewer still are committed to handling them in the complex federal environment. The field thins further if agencies want a single integrated system rather than one knit together from many different products.

Technologically savvy agencies also are likely to want systems that can run on the World Wide Web. "We're looking to move capacity to employees and managers, so we wanted a product that wasn't geared to sitting on a personnel person's desk," the Treasury official says. That requirement can knock out contenders such as NFC's Personnel Office Desktop Solution, which was designed for HR employees.

Large, diverse departments also face problems a small, relatively generic agency such as FERC doesn't have to think about-employees such as bank regulators, maintenance people or assembly line workers, who don't work in offices, for example. HRLINK$ offers a phone and computer accessible self-service function allowing employees to make simple changes to their own records and to ask questions of personnel staffers at the Topeka service center.

Big agencies quickly discover that few HR software systems are geared to organizations with more than 100,000 employees. "We didn't want to sink the product [by] loading in all our employees," says the Treasury official. Most agencies also want to work with well-established firms when they adopt enterprise systems and choose payroll providers.

More Competition

Sixteen years in the payroll cross-servicing business and a large customer base give NFC just the sort of solid reputation agencies seek. But its 30-year-old mainframes and legacy system could hurt it in the integrated, online, real-time HR future. As Treasury installs PeopleSoft's HRMS, for example, it will be looking for added value in payroll services. NFC's interface to bridge PeopleSoft users' data into and out of the NFC system comes at a cost. "The interface gives you a lot of options you don't currently have, but it does not appear to allow seamless integration where what you see is what you get," says Janet Dubbert, project leader for FERC's HR conversion.

During a six-month review of payroll pro- viders in 1997, FERC found NFC's interface would have prevented FERC from getting and manipulating real-time payroll information online. The problem was magnified by FERC's intention to eventually move to PeopleSoft's
financial management system, creating an even greater need for a seamless, real-time flow of payroll data across the agency.

Recognizing the growing presence of enterprise system providers, the Interior Department's payroll processing business is preparing to open its Federal Personnel Payroll System (FPPS) to accommodate commercial products.

Interior's Denver Administrative Services Center, which has been in the cross-servicing business since 1979, processes payroll for 180,000 employees. Customers include all of Interior and a number of other agencies, including the Social Security Administration with its 68,000 staffers. The Denver center merged into Interior's National Business Center in April. Last November, the Denver center put the finishing touches on FPPS, which offers some HR functions as well as payroll. But while Interior was developing FPPS, commercial HR enterprise systems had muscled into the federal market.

"The PeopleSoft systems were not there when we developed FPPS," says Dennis Locke, chief of NBC's applications management office. "The technology passed us by. We had to make a decision whether to stop and keep up with it or get FPPS done. We decided to push forward."

"PeopleSoft has done a tremendous job getting into the federal market. SSA, our largest customer, is working with PeopleSoft, [and] though Interior is saying we are going to continue to use FPPS, SSA may not want to," Locke says. "We have just proposed to the department and to SSA how we're going to move FPPS to an open systems architecture so we will be able to allow commercial products to work with FPPS."

"That's why you want competition," says Locke. "It drives everybody to develop better products. PeopleSoft is pushing us."

There's certainly no lack of competition among HR applications vendors. PeopleSoft, which moved fully into the federal market just four years ago, had made substantial inroads even before it allied with VA. Already, the firm says it's working on installations in 70 percent of Cabinet level agencies. Oracle is active in Defense, GSA and at the U.S. Postal Service. SAP and other firms are trolling for and winning contracts as well.

Payroll providers are in a shootout too. In addition to the big players-NFC, Interior, GSA and now VA in the civilian agency market-HHS is preparing to offer cross-servicing. GSA soon will roll out a new Oracle-based HR system that it will begin marketing this year in addition to its payroll processing services. The Transportation Department, now being paid through its franchise Transportation Administrative Services Center, is cautiously reviewing the cross-servicing market, but appears to be holding back until commercial vendors more fully develop their federal software. The Federal Aviation Administration, which advertises payroll services and support at its franchise operation in Oklahoma City, Okla., recently has been discussing moving its payroll to NFC.

Most observers expect things to settle down eventually, with just a few superlative payroll providers and commercial HR systems left standing. The question is which ones. "Those franchises that will be successful will have a very strong private-sector solution," says Andersen's Rohleder. While most payroll providers are talking with the commercial vendors, few have yet made an irrevocable choice. "I always have dealt heavily with industry, but I will not be ramrodded into a solution unless it will serve my customers," says NFC's Ortego.

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