Heroic Payroll Fails — # 6 — Phoenix: A Textbook Case of Payroll Disaster
In 2009, the Canadian government, under then Prime Minister Stephen Harper, embarked on what seemed a straightforward mission: to modernise its payroll system for federal civil servants. This mammoth project aimed to centralise and streamline payroll services across over 100 departments and agencies employing nearly 300,000 people. The plan? To use commercial off-the-shelf software from IBM and reduce operational costs by automating complex payroll tasks.
The initial budget for the project was estimated at 309 million CAD, and it was expected to save 70 million CAD per year by eliminating inefficiencies and trimming down payroll staff. However, when the Phoenix system went live in early 2016, it quickly became clear that this transition was anything but smooth.
Today Is Pay Day… Maybe
Almost immediately, Phoenix began to unravel. Civil servants across various government sectors found themselves grappling with pay issues. The fallout included:
Incorrect Pay: Some civil servants received less than they were owed, while others received substantially more. In some cases, people who were promoted or who took leave were not paid at the proper rates.
No Pay at All: Some civil servants reported receiving no salary for extended periods, forcing many to dip into savings or take on loans to cover living expenses.
Tax Issues: Civil servants who received overpayments faced complicated tax obligations, being taxed on money they never intended to keep and then having to repay those amounts.
By the end of 2016, as many as 82,000 government workers were experiencing some form of payroll issue. The scale of the disaster was staggering, as errors continued to pile up with no immediate solution in sight.
Winding Down the Ostrich Policy
The human toll of the Phoenix disaster was immense. Federal civil servants endured months and sometimes years of financial instability, creating stress and anxiety There are numerous stories of people unable to pay bills, forced to take on second jobs, or falling into debt due to inconsistent payments.
The Phoenix payroll crisis became a political firestorm. While the project began under the Harper administration, it was the Liberal government of Prime Minister Justin Trudeau that inherited the chaos when it went live. This led to a fierce game of political blame, with both parties under fire from public sector unions, affected employees, and opposition parties.
The failure of Phoenix also strained relations between the federal government and its workforce. Unions like the Public Service Alliance of Canada (PSAC) launched legal battles to seek compensation for the thousands of affected civil servants. In 2019, PSAC negotiated a deal to compensate federal workers with financial settlements and extra leave days for the hardship endured during the Phoenix crisis.
By 2018, the federal government acknowledged that Phoenix was beyond repair and began searching for an alternative payroll system. This led to the announcement of a "NextGen" pay system, designed to replace Phoenix entirely. The government pledged that the new system would be rigorously tested and introduced gradually, with lessons learnt from the Phoenix disaster shaping its development.
Cutting Corners At Every Turn
Both the scope and the scale of this failure are difficult to grasp. How could it even come to this? How is such a textbook debacle even possible? It can be broken down into the seven cardinal sins of payroll projects.
1. Technical and Design Failures
Phoenix was based on generic software that failed to meet the specific needs of the Canadian federal government, leading to a system that was ill-equipped for the complexities of federal payroll.
2. Underestimation of Complexity
The Canadian federal payroll system is notoriously intricate, governed by myriad collective agreements and compensation structures. Phoenix wasn’t designed to handle this complexity, leading to frequent miscalculations in pay.
3. Poor Project Management
From the get-go, mismanagement plagued the project. Insufficient communication between government departments and contractors like IBM meant key stakeholders were often left out of critical discussions.
4. Poor Change Management
The system launched without adequate training for staff, leaving them unprepared to tackle the complexities and errors that arose. Effective change management was sorely lacking.
5. Inadequate Testing
Phoenix underwent insufficient testing before its launch. Warnings about potential issues were overlooked, leading to a system that struggled under real-world conditions.
6. Loss of Expertise
To cut costs, the government laid off nearly 700 experienced payroll specialists before Phoenix was fully implemented. Their absence left the system vulnerable to errors that could have been corrected with their knowledge.
7. Failure to Address Early Warnings
Numerous employees, unions, and payroll experts flagged concerns during the early rollout stages. These warnings were either ignored or dismissed by project leaders.
Let’s Make Savings… At All Costs
Together, these factors created a perfect storm, resulting in a system that was underprepared, underfunded, and unable to deliver on its promises. Yet, at the heart of this disaster lies a singular truth: the relentless drive to cut costs triggered a cascade of poor decisions that led to Phoenix’s demise.
The system was promoted as a means to save 70 million CAD annually, but in the end, costs skyrocketed to over 1.2 billion CAD by 2018 and reached a shocking 2.6 billion CAD by 2020. This included the hiring of additional payroll staff, development of temporary fixes, and direct assistance to affected employees. Even with these measures, thousands continued to grapple with pay issues long after Phoenix’s rollout.
As of 2024, the federal government anticipates needing another 1 billion CAD to transition to a new payroll solution. In total, the cost of Phoenix is likely to balloon to 3.6 billion CAD — a staggering twelve times its original estimate of 309 million CAD. This saga serves as a harsh reminder of the perils of cutting corners in payroll management. ROI means “Return On Investment”, not “additional cash now”: in order to have a return, one first need to make an investment.
Want to know more about Phoenix?
Check out the Global Payroll Association’s 6-part podcast “Phoenixed: Inside Canada’s Payroll Disaster”. I highly recommend listening to this thorough journalistic investigation (here).
There are multiple publications online. Here are some examples:
GPA: “Cost of Phoenix Payroll System Debacle Hits CAD 1.2bn” (here)
GPA: “Ottawa Hopes To Clear Phoenix Backlog by 2025 At A Cost of Nearly CAD 1b” (here)
Government of Canada Publications: “Building and implementing the Phoenix pay system, of the 2018 Spring reports of the Auditor General of Canada” (here).