Considerations When Outsourcing Payroll: Pros, Cons, and Costs

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Table of Contents

1. Introduction
2. How To Know If Payroll Outsourcing Is Right For You?
3. Benefits Of Outsourcing Payroll
4. How To Implement An Outsourced Payroll System
5. Top Ten Tips When Outsourcing Payroll
6. Final Remarks

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Introduction to Outsourcing Payroll

Globalisation is a hot topic in 2017. Its dramatic rise to prominence has been aided by a rapid improvement in technology, which has changed the business landscape forever.

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To stay competitive in this dynamic business world, managers are increasingly turning to outsourcing to help drive down costs while simultaneously delivering numerous other secondary benefits.

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Forward thinking business executives are tinkering with their business structures to make them more fluid and lean. For many, there has been a clear shift from vertical integration to specialised providers of a specific skillset or, more bluntly, focusing on the key strengths of the business profit drivers.

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Outsourcing to a payroll specialist is one such example of where managers can gain a competitive advantage by handballing operations off to an independent consultant.

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That decision may be made for a variety of reasons. The majority of the time payroll outsourcing solutions are implemented to save costs. In the 2016 Deloitte Global Outsourcing Survey 59% of managers cited that their main motivation to outsource was as a cost cutting tool. That was closely followed by 57% of survey respondents also claiming that they had outsourced because it enabled their business to focus on its core functions. Other driving factors to outsource were to solve capability issues (47%), enhance service quality (31%) and provide access to intellectual capital (28%).

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In this article, we’ll discuss why outsourcing payroll in the 21st century economy is a developing trend and lay out a strategic platform on how to implement your own payroll outsourcing strategy.  

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How To Know If Payroll Outsourcing Is Right For You?

For businesses with multiple staff, completing the payroll functions can be a costly and time-consuming exercise. At the very minimum, completing payroll internally requires dedicated payroll staff with in depth knowledge of tax regulations and expensive IT software and hardware.

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Payroll outsourcing models come in all shapes and sizes. They range from the local small business that needs simple payslip calculations to that of a multi national organisation that requires full end-to-end payroll services.

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In a 2014 Payroll Outsourcing survey conducted by Ernst & Young it was found that 47% of respondents took a hybrid approach to outsourcing payroll. This meant that they outsourced payroll as well as having in-house payroll services. Only 25% had no payroll outsourcing at all and 28% had fully outsourced payroll functions.

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The main question that the organisation needs to face as a company is, are you ready for outsourcing? How does payroll outsourcing fit into the company culture? Are the leaders within the organisation supporting outsourcing as a key business strategy?  

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Benefits of Outsourcing Payroll

Securing a talented, specialised consultant to outsource payroll functions could have dramatic benefits for your business. Some of the benefits are included below.

No Requirement for Specialised Payroll Staff

Arguably the biggest advantage to outsourcing payroll staff is that there is less need to employ dedicated payroll staff. The rigorous process needed to recruit, employ and retain highly trained payroll talent within your organisation is often an expensive and time consuming effort. By outsourcing the payroll function, it can free up key personnel and capital within the business, allowing it to be transferred to core areas of the business.  

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Focus on the Core Activities of the Business

While payroll functions aren’t a key driver of revenue within the business, done incorrectly it can cause major headaches. When issues arise it can divert critical energy, time and focus away from the core activities of the business to the point where it may hurt the bottom line. Managers who are looking to create greater efficiencies in their business may find that real productivity gains can be sought by shifting payroll services to an outside provider. These productivity gains will save you time and money as the need for expensive payroll software, labour and overhead costs are reduced.

Access to Leading Talent, Expertise and Technology

Outsourcing payroll will give you access to specialised professionals for a range of solutions. One of the main functions of the payroll team is to remain compliant with the latest payroll legislation and award rates. Given the complexity of tax and legal systems across the globe, this can be a time consuming job of the payroll team.

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Using a specialised provider the payroll functions are completed using best practice principles where the latest tax regulations are adhered to and award rates can be adjusted in a timely manner. Furthermore, by outsourcing it will reduce the need for regular intensive internal training sessions that can additionally alleviate costing pressures.

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When dealing with payroll services, access to high-class technology is just as critical as access to industry leading talent and expertise. In the digital age, advancements in payroll software are providing increasing functionality for the employee. When that technology isn’t made available to employees it can be a hindrance when scaling the business.

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When payroll is outsourced it can deliver improved functionality to your business and employees. Self service capabilities is often one such example. Online dashboards can be accessed from anywhere, on any device, securely and often through the cloud. By having this online capability, complex tasks are streamlined, providing ultimate efficiency and reliability for the user.

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The 2016 Deloitte Global Outsourcing Survey noted that cloud computing was having a dramatic impact on the businesses of respondents. A clear majority (61%) said that it was lowering their cost of delivering, while 45% recognised that it was speeding up the rate of change within their businesses.

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Employees can check their latest pay slip, request leave or add in hours to time sheets. Not only is new payroll technology a winner for the employee, it also delivers real benefits to the employer. Access to apps on mobile make it a simple process to check reports and look for information regarding how much money they need available in the bank to process the pay run for example.

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Another key benefit on the technology side is that payroll outsourcing companies often provide data backup and disaster recovery tools in the event of unforeseen circumstances. The sensitive nature of payroll means that key information is often duplicated and stored for safe keeping on secure servers and cloud based systems.  

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Reduce Risks and Errors

Outsourcing to a specialist provider will often not only result in long term productivity gains but also lead to reduced errors by crafting a payroll system that fits your business needs.

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Although rare, payroll fraud is also something that a can occur when the payroll functions occur internally. By outsourcing this function, steps can be put in place to place to minimise the risks of it occurring. This fraud can exist in several forms such as time theft, rate manipulation, leave theft and inflated expense claims just to name a few.

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As such, it’s important that as the business scales that there are safeguards that are in place to minimise any risks of fraud. Several steps can be taken:

1. Reduce a reliance on any one person – never put all your eggs in one basket. Make sure duties are segregated.
2. Use a secure system. Make sure passwords are regularly changed and place tight control over who can view what.
3. Introduce policies. Using a cloud based system can improve the audit trail. Eliminating paper based systems will ensure that different business units can easily be tracked and monitored.
4. Maintain consistent audits. This can be as simple as reconciling hours worked against hours paid or changes in salary or bank account details.

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How to Implement an Outsourced Payroll System

1. Define What You Need From an Outsourced Payroll Service

Once you’ve defined above what you need by drawing on the benefits listed above for guidance you can than start to prioritise them. It is a common approach to pick and choose which processes you would like to outsource and those that make more sense to keep internally to improve efficiency and effectiveness.

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This process then defines a key selection criterion for you to go out into the market to find from a service provider.  

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2014 Payroll Outsourcing Optimisation Study

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2. Conduct Market Research

After finalising what your priorities are when it comes to outsourcing payroll, it’s then time to head out into the market to scope out service providers. At this initial stage you will need to make it clear what functions are essential and those that are non-essential. It’s also important to give a guide as to how you could see things changing as your business grows.  

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3. Evaluate Providers

Following on from engaging in talks with several service providers, you can then evaluate the strengths and weaknesses of the proposals that they have put forward.

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Potentially using a rating system like that below may help clearly outline who is the preferred candidate.

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It’s important to understand the depth of services offered by the provider. This can provide you with a clear understanding of what processes will be kept internally, if any, and what will be outsourced. The chart below from the 2014 Deloitte Payroll Operations Survey shows self-service transactions are offered online by payroll outsourcing companies.

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‍Source: Deloitte Payroll Operations Survey, 2014

4. Product Demonstration

Before selecting your preferred candidates it’s critical that you see their product in action. They should be able to give you a visual and practical introduction to their solutions. It may even give you ideas on additional processes that can be picked up by the service provider.  

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5. Provider Selection

Hopefully one or several of the providers have hit several key metrics which will help you make the decision on what payroll company to choose. The key metrics may look like the following:

• Did they understand the current payroll situation and procedure?
• Provide a detailed proposal outline that met your selections criteria?
• What benefits are there to using this particular provider?
• Are they transparent on pricing?
• Are there a number of guarantees around service quality?
• Did they provide an overview of other products that may be needed when your company undergoes a period of growth and the payroll function may change? Service Provider Evaluation Checklist  

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Checklist for engaging outsourcing companies

6. Implementation and Transition

After selecting which project provider you would like to progress with through a rigorous selection process, the next step is to transition payroll over to the outsourcing company. This will most likely be the most demanding and critical stage of the process so it’s important to be organised and have a thorough plan in place.

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Communication is a vital piece of this phase. The service provider should supply a detailed plan on how and when they plan to shift duties from internally based to that of the service provider. Ensure there is clarity around how the responsibilities are split. Don’t be afraid to ask questions on how outsourcing payroll works, and any of the processes that will be undertaken going forward.

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Making sure you have the correct structures in place to provide resolutions to future payroll issues is critical. More than half (58%) of respondents in a 2013 Global Payroll survey completed by Ernst & Young indicated that they used a knowledge based database or tracking system to facilitate the resolution of payroll issues. This kind of system is vital to track, review and resolve potential errors in a timely fashion. Of those that didn’t have such a process in place, 75% indicated that they were planning to within the next 12 months. If you don’t have a thorough knowledge based system database or tracking system in place than risks can be elevated due to the lack of detailed, consistent auditing mechanism.

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Every transition is going to differ due to the unique nature of businesses but one key tip is to run both the internal and outsourced payroll in parallel for at least one pay cycle to find any discrepancies that may arise.

Top Ten Tips When Outsourcing Payroll

1. Make sure you have a clear idea of the functions you want to outsource. What’s most important to the company? What are other similar businesses outsourcing?
2. Begin the project well before the due date. These things take time and the earlier you engage a potential provider, the easier it will be for all parties involved.
3. When selecting the provider make sure you see the product in action. That may be as simple as getting them to run through a demo payroll run so you can get a feel for the capabilities of their product and experience of their team. If possible, organise face to face meetings.
4. Try to align company cultures. Clashes due to a difference in organisation cultures can be detrimental. As a business if you prefer things to be structured, methodical and standardised than that is what you should seek in an outsourced payroll provider.
5. Make sure you’re active in the process of selecting a provider. Ask questions so that you’re clear on what they can offer your company.
6. Have realistic expectations about what your provider can bring to the table. Don’t risk quality of service by simply going with the cheapest provider.
7. Allow time for any unforeseen changes from management. Things often pop up and if you haven’t given enough time the lack of flexibility at your disposal can become an issue.
8. Design a detailed service management process. There should be simple, clear yet effective reports, consistent meeting frequencies and communication standards.
9. If any staff are retained in Human Resource roles, it’s important that they know what their ongoing roles will involve and that they have all the necessary skills for the outsourcing transition process.
10. To make sure the outsourcing project is a success over the long term it is going to take sustained effort from both sides to make it happen. Improvement is a responsibility that should be shouldered by both parties.

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Final Remarks

You should now have a clear understanding of how payroll outsourcing could help improve your business by potentially easing cost pressures, boosting productivity and levels of service.

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Implementing payroll outsourcing should not be a stressful and complex transition. By engaging a reputable outsourcing company or an Expert360 HR consultant and following the key actionable steps above it will significantly enhance the ease of the process on your path to success. What do you think of this article? Please let us know your thoughts in the comments below.

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