Payroll. Does one size fit all? Part 2
Risks Associated with Outsourcing Payroll
It is natural to feel some level of hesitancy about offloading certain crucial work to another organisation. Sixty percent of respondents in an Ernst and Young global payroll survey indicated that their company uses a “hybrid approach, choosing to outsource certain payroll processes while maintaining some in-house ownership.”
- Cost. While it is possible to save money by outsourcing your payroll, if your needs are not complex, you could end up paying for services that you do not need. From the outset you and your outsource partner need to outline expectations (as granular as possible) and agree on deliverables. Leave as little room (none really) for interpretation ... and importantly continually assess and evolve on those deliverables (especially in the first 6 months of the engagement).
- Difficulty Accessing Employee Data. Companies that outsource their payroll sometimes have difficulty accessing important employee data from the payroll company. This creates a problem when they want to quickly access information such as their company’s payroll tax. You should never assume, however in this day and age this should be less of a problem with the majority of systems providing manager self-service portals (which include reporting).
- Data Security Issues. Some managers have a hard time trusting another company with vital employee information. Modern security technology takes care of many of these issues, but trust is always a factor. Look for partners like NGA with SOC1 and ISO compliance as well as audited business continuity plans (BCP).
Advantages of Outsourcing Payroll
Once you exercise due diligence in selecting the organisation to which you outsource your payroll, there is a lesser chance of encountering the risks mentioned before. The following are the pros from which companies benefit when they outsource their payroll function.
- Saving on Cost. If it is determined that it is cheaper to outsource payroll look at the fine detail and ensure you and the payroll partner are aligned. Assuming all is aligned, the hard and soft costs need to be articulated and published to management. Then demonstrate how the savings can be articulated to higher value productivity which in itself can start to show a return. Make payroll a “profit” centre.
- Flexibility. As the company grows, an outsourced payroll company may be better equipped with the know-how and infrastructure to handle the increased workload. Outsourced payroll partners generally have more workforce flex. They can grow with the organisation. They also have teams of internal and external compliance advisors and access to the combined experience of engaging with multiple clients ... just like yours. Leverage their exposure.
- Cost Tracking. Outsourced companies provide one invoice so you know exactly how much your payroll function costs. It is more difficult to track this cost when payroll is done internally.
- Frees up Capital. Setting up and maintaining a payroll system can be costly. It may make more sense to outsource on a short-term basis and use the money saved to support other aspects of the business. Conversely a long term outsourcing commitment could cost your organisation much less (over time) and as time passes the outsource providers service will continue to improve and return more soft cost savings as they understand your business better.
In a recent seminar series it was demonstrated that in year one medium and larger organisations can see a cost savings kick in within the first year (smaller organisations start to see an incremental saving from year one onwards) and increasing savings as each subsequent year passes.
So is Payroll the same for everyone? Just like water the short answer is no. If you are looking for an onDemand (or SaaS) platform which you would run yourself or an outsourcing payroll partner (managed, comprehensive or white glove), then engagement and the delivery of services will vary. If employees work off time sheets or fixed schedules which vary depending on day, time of day and seniority or skill set then a whole other series of needs come into play.
As with everything, at the end of the day you need to understand your organisational needs. What are you trying to achieve?