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Richard Butterworth | Senior Business Development Manager, CloudPay
In all walks of life, there’s a feeling of great satisfaction when you get something right at the first attempt. The same principle applies to payroll, too: if a payroll run can be processed without any need for amendment or correction of errors, then it shows that a payroll team is doing a great job. And that’s before considering the positive impact that can have on an organization as a whole.
But how can this success be measured, and why is it important? In this blog, we’ll explore the vital KPI that is First Time Approval, and why it’s so crucial to keep track of it.
What is First Time Approval?
As a metric, First Time Approval is the percentage of gross-to-net calculations that are approved by the customer when they make their initial review, without making any amendments. To work out the FTA rate within an organization, we take the total number of payroll runs, subtract the amount that contained at least one rejection by the customer and divide that figure by the total number of payroll runs. This answer is then multiplied by 100 to give a First Time Approval rate as a percentage.
First Time Approval rates are influenced by a variety of different factors. Data that is inaccurate, incomplete or that is simply received late can all lead to errors being made within a payroll run, as can human input error. Alternatively, if the data itself is fine, then the issue may lie within the approval workflow or the calculation engine.
Why is First Time Approval important?
First Time Approval is a good starting point when assessing how efficient your payroll services are. If your FTA percentage is high, then that points to a well-oiled payroll process that’s using good quality data and has the right checks in place, so that any errors are rooted out before they’re sent to the customer for review. On the other hand, if the percentage is relatively low, then that points to a flaw within your processes that’s failing to prevent errors from creeping through.
As the most inclusive indicator of payroll efficiency, First Time Approval is a good metric for predicting payroll's impact (whether that is positive or negative) on an organization's overall performance. Payroll can account for between 40-60% of total business costs - therefore a high FTA rate would suggest that payroll is helping to reduce overheads through efficiency gains and overall helping the organisation's performance levels. On the flip side, a low FTA rate would suggest the payroll function is adding additional pressure by not performing as efficiently as payroll could be.
Because it’s a relatively straightforward metric to explain and understand, FTA is also useful for demonstrating payroll effectiveness to stakeholders who aren’t necessarily well-versed in all things payroll. However, it shouldn’t be treated as a bellwether in isolation: we recommend assessing overall payroll effectiveness by looking at FTA and four other key metrics:
Issues per 1000 payslips - This KPI helps you understand the number of payslips that are affected by data errors in each cycle. Understanding the actual number of payslips that are affected by data errors in each cycle is important. As it helps stakeholders understand the overall impact of their payroll system, which can be monitored to understand the consequences for employees when changes are made.
Data Input Issues - Knowing how many issues are caused by data input errors can help you identify areas that need improvement. When the rate is high, this suggests data collection methods are poor, data transfer is faulty or simply more attention is needed upstream within the payroll system.
Calendar length - This is the amount of time it takes to complete a payroll cycle end-to-end and is a critical metric, which depends on a variety of factors. These range from data accuracy through subject matter expertise to system integration, and each factor is important to understanding and improving the performance of payroll as a whole.
Supplemental impact - When supplemental runs are needed because of payroll inefficiencies, the cost and inconvenience of payroll quickly adds up. Understanding the volume of affected runs can help businesses minimize negative impacts.
FTA performance across the world
When a First Time Approval Rate is relatively low, that means payroll is being held back by continually having to re-do payroll runs with new or corrected data, or by having to recheck the original data to find inaccuracies. This slows down the whole process of executing payroll, with knock-on effects throughout a business. But it’s also worth bearing in mind how regional or cultural characteristics can influence what a ‘good’ FTA rate looks like, and our recent Payroll Efficiency Index report highlighted where some countries have higher average FTA rates than others.
Within our findings, the United Kingdom and Australia ranked among the lowest performers for FTA, meaning that companies in those countries were having to make more corrections and do more re-runs than in most other territories. However, in both cases, there are particular circumstances at play: in the UK, payroll customers generally anticipate corrections and so there is no major expectation to always get payroll approved first time; in Australia, meanwhile, payroll regulations are particularly complicated, making it harder to get everything right at the first time of asking.
The good news is that companies around the world are taking FTA increasingly seriously, and are taking measures to improve their rates. Our PEI report discovered a global increase of 1.89% between 2018 and 2020 (and 4.32% in the Asia Pacific region), while one financial services company that works with CloudPay has set a global target of reaching an FTA rate of 80%. In a world that is increasingly globalized and digitized, First Time Approval rates have an important part to play in ensuring that everyone gets paid on time, accurately and fairly.
Therefore proving that First Time Approvals is one of the most vital KPIs within payroll as well as KPIs such as these provide insight into how a vendor is performing, how well the two parties are working together, and potentially highlighting a number of issues which require remediation.
This is explored in more detail within our new report - the CloudPay Global Payroll Efficiency Index. Download your copy of the report here.
Richard Butterworth | Senior Business Development Manager, CloudPay
