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Dave Foxall 6 Decision Factors When Outsourcing Payroll

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 By Dave Foxall

The Pros & Cons of Payroll Outsourcing Technology

Of all the potential areas of operations to leverage HR outsourcing technology, payroll remains one of the most popular choices for organizations of all sizes; an option that, in the eyes of many analysts, will be increasingly leveraged in the near future. In fact, according to Martyn Hart, chairman of the UK's National Outsourcing Association, "What we are seeing now is the growing maturity in users of outsourcing, while those that haven't considered it before are also getting in on the act." With a host of potential cost savings as well as significant relief from the compliance burden, it's not surprising that the choice appears an easy one to make; however, payroll outsourcing isn't for everybody, and is a process that must be entered into carefully to avoid missteps that cause frustration for staff and embarrassment for employers. Unfortunately, with associations and service providers on one side (praising Payroll outsourcing technology's virtues) and software vendors on the other (attempting to sell businesses in-house HR software automation applications), it can be difficult to discern the right path to take through the weighted pros and cons to reach a decision. As such, we've highlighted what we think are just some of the critical issues that form the payroll outsourcing decision framework.

Payroll Outsourcing Factor #1: Accuracy & Accountability

If there is one area in which employees demand 100% accuracy, it's their paycheck. Yet, as with any regular and repeated process, inevitable mistakes will be made—especially for those organizations with multiple processes and/or global workforces. The cost of these errors for an in-house payroll team can be significant; not only in just time and money, but also in employee satisfaction (or dissatisfaction as it were). The Resource Group, in an article in support of managing payroll using Microsoft Dynamics GP software, suggests that this in-house approach offers greater control with the option to review and catch errors before paychecks actually go out to employees. However, as an article from HRWorld points out, when utilizing payroll outsourcing technology, "If paychecks are delayed or paperwork is mishandled, it's the payroll services provider's responsibility to fix things." Add to this the fact that: a) payroll outsourcing generally has a lower error rate (and thus fewer problems to fix); and b) a payroll outsourcing vendor can provide a level of engagement protection if mistakes do happen, and the potential efficiencies truly start to add up. Ultimately though, when it comes to accuracy and accountability, organization's need to take a hard look at the capabilities payroll software and/or an in-house payroll team can draw upon; and juxtapose those elements against what the payroll outsourcing vendor can provide.

Payroll Outsourcing Factor #2: Service Consistency

While an advantage of in-house payroll can be that the organization recruits and directly manages the performance of the payroll team, these activities do come with a price-tag in both time and money for supervisors. Equally, the resource available for managing the payroll schedule will inevitably vary with vacations, absence due to ill-health and just general turnover of personnel. Outsourcing places these people management issues with the provider. As HRWorld says, "You also won't have to spend time helping new hires understand your business's payroll system". That's not to say that HR outsourcing questions such as these won't be encountered by the payroll service provider, but the onus for service continuity will be on the vendor and not the organization.

Payroll Outsourcing Factor #3: Workforce Peculiarities and Variations

Workforces don't stand still; they evolve and change over time in response to the needs of the business and the state of the economy. Some organizations may have regular influxes of seasonal workers, requiring a temporary increase in payroll resources. For an in-house function, sourcing temporary yet expert personnel may be problematic, but for a payroll outsourcing provider it's merely an issue of workload allocation. Furthermore, different businesses may require different and specialized payroll knowledge and the cost of developing and – more importantly – maintaining that knowledge in-house can be prohibitive. ResourceNation's Buyer Guide to Payroll elaborates on this point, stating, "Some businesses offer flexible savings accounts, cafeteria plans, or retirement account contributions. Many industries require specific types of insurance payments or taxes. A payroll company has the necessary experience to guide you through what could be a complicated process."

Payroll Outsourcing Factor #4: Data Location

Payroll data management involves the use and storage of employees' personal data, including social security numbers, salary information and banking details—elements that can make even the most staunch outsourcing advocate balk. As the Resource Group notes, "Many businesses simply feel more comfortable using an in-house payroll solution because of the sensitivity of payroll data." Likewise, many employees may be uncomfortable with the concept of their personal information leaving the building and being stored in external facilities. Couple this discomfort with cases such as Ceridian's well-reported 2009 data breach, and proving the case for payroll outsourcing data security becomes that much harder. As such, in any payroll outsourcing strategy, there must be a degree of due diligence with regard to determining the service provider's information security policies, the vendor's safeguard tools, and any applicable certifications or 3rd-party attestations that the outsourcer has achieved.

Payroll Outsourcing Factor #5: Compliance

Any country's labor laws will have an impact on payroll management. For example, in the U.S., legislation such as the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) place mandatory record-keeping and reporting requirements on employers; and state labor laws mandate additional compliance areas—sizeable responsibilities that should not be taken lightly. In a 2010 AccountancyAge survey, over 30% of organizations cited, "Maintaining sufficient expertise in payroll legislation and system knowledge," as the greatest risk to the administration of payroll. This expert knowledge can be a time-consuming burden for any in-house payroll team (though an increasing amount of payroll software vendors are increasing their compliance functionalities). An outsourced payroll service provider however should be up to date with all relevant payroll-related statutes and regulations.

Payroll Outsourcing Factor #6: Cost

The same AccountancyAge survey listed above found that the "most important benefits of outsourcing payroll were perceived to be increased cost-effectiveness at 42.4%" and that over half of the survey's respondents already outsourcing their payroll had leveraged headcount reductions as a result. In addition, a PricewaterhouseCoopers report, The Hidden Reality of Payroll and HR Administration Costs, noted that, "organizations using in-house solutions for payroll… spend on average 9% more (for mid-size organizations 100–1,000 employees) and 27% more (for large organizations over 1,000 employees) than those that use outsourced [payroll] solutions."

Deciding Whether to Outsource Payroll – The Bottom Line

Recent surveys on the topic of payroll outsourcing have uncovered that 80+% of respondents were open or even enthusiastic about the idea of outsourcing payroll and 60% had already outsourced the function to an external provider. With these figures in mind, for most organizations (almost regardless of size) the consensus seems to be that outsourcing payroll can be a cheaper and less burdensome option. Weighing against cost on the decision-making scales is the degree of control and security over the payroll process which some organizations may simply be unwilling or unable to relinquish. End

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According to a PricewaterhouseCoopers report, "organizations using in-house solutions for payroll… spend on average 9% more (for mid-size organizations 100–1,000 employees) and 27% more (for large organizations over 1,000 employees) than those that use outsourced [payroll] solutions."


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