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The Benefits of Outsourcing Payroll

by Ian D'Cunha, Product Marketing and Development Director, ADP

Payroll is one of those business functions that, while absolutely crucial, lacks some of the glamour and excitement that gets the attention of CEOs and the board, until it goes wrong that is. Few businesses question the importance of paying employees correctly – just think about the reaction of otherwise placid employees when their monthly pay is late or incorrect – but few think about how the process runs; how behind the scenes complexity is managed to ensure employees are paid, tax is calculated correctly and HMRC regulations are adhered to. 

It’s because of its almost Cinderella like role that questions such as how payroll is managed, where it sits within an organisation, whether it is outsourced or not and how much a company should spend administering it are often neglected.  Indeed, a study by ADP found that over 55% of companies fail to measure the true cost of payroll. Meanwhile, there is disagreement amongst HR and finance professionals as to who should have responsibility for payroll, the research has found that a quarter (25%) of finance professionals in charge of payroll would actually rather it was part of HR and almost that many (22%) of their HR counterparts say they would rather it was part of finance.

Despite being somewhat unloved, payroll is far from a process driven back office function that can be ignored. Whilst the roles and responsibilities of payroll haven’t changed much, businesses are demanding more strategic support from their teams and many are finding great value in the people data that payroll teams hold.

It’s for this reason that an increasing number of companies, led by HR and finance directors, have outsourced some or all of their payroll management to a third party. Companies want access to the rich information that payroll holds but don’t necessarily want to manage the administration needed behind the scenes themselves, preferring to task HR teams with far more strategic, value added activity: from retaining top employees and developing skills to employee engagement and culture change projects.

The options available for organisations looking to outsource have increased dramatically in the past ten years, as technology has developed to allow real flexibility in the offerings available. In the past the choice was fairly simple, manage payroll in house via ‘off the shelf’ payroll software or outsource entirely to a third party.  Now the range of options available are more nuanced, with cloud based solutions supporting a software and service mix that provides real flexibility, depending on what an organisation is trying to achieve through outsourcing.

A common fear when considering outsourcing is that a company will lose control over a function and important data. However, cloud based solutions mean that an HR or finance director and their management team can actually get more, not less control over their data by outsourcing.

Both HR and finance teams, as well as line managers, can interact much more closely with the system through a user friendly interface than they would previously have been able to. As systems are cloud based they are also accessible from anywhere and at any time, something that is useful for companies with a large geographic footprint or with part time, flexible or mobile workers. Modern systems also allow for manager and employee self-service, enabling employees to access online payslips and tax information as well as request annual leave or change their address or contact details.  Because of these factors, the positive visibility of payroll within an organisation can increase substantially.

There are strong risk-management and cost control arguments in favour of outsourcing too. An organisation’s IT risks and costs can be significantly reduced by using a third-party to host the payroll on its behalf - eliminating the need for servers to support payroll software and store data or costly upgrades. Relying on busy in-house teams to keep up-to-date with ever-changing legislation and HMRC regulations is also a risk for organisations that outsourcing can help them manage, as well as saving costs on staff training in this regard.

There is also inbuilt scalability when outsourcing using the cloud, as the subscription model creates predictable cost modelling - as costs are calculated per employee. Therefore, if headcount rises, the business is aware of cost implications. Likewise, if headcount reduces, costs also reduce – a major benefit for businesses of all sizes.

So, while the cloud delivers system interaction that is comparable to an ‘off the shelf’ solution, administration and compliance complexities are outsourced, delivering multiple benefits.

ADP undertook research to find out the true cost of payroll software as opposed to using cloud based outsourcing solutions. It estimated that based on managing a payroll for approximately 1,000 payslips a month, the average annual cost of maintaining software, combined with the cost of administration, is as much as £104,280.

Perhaps most importantly of all, outsourcing payroll can have a positive impact on people within the organisation by freeing them up to carry out value-added activities that have a positive effect on the business, such as analysing employee data and providing management information to the organisation. Modern payroll solutions allow in-house teams access to a rich seam of information that is available throughout the month allowing managers to keep constant track of payroll costs, absence data, holiday entitlement, employee working etc as the month progresses and take appropriate remedial action. Again, in this way, outsourcing is actually giving organisations more control, not less. 
Despite these benefits, there are a number of important considerations when outsourcing payroll.  Organisations should be absolutely clear from the start what they are trying to achieve. Whether it is cost savings, redeploying staff or a combination of factors, there needs to be clarity.

Once this is clear, finding the right outsourcing partner is key to ensuring a smooth running payroll function. Organisations need to consider the outsourcer’s track record and whether they are financially stable. The HR team should ensure they have seen case studies from other satisfied clients to prove this. Organisations should also check the outsourcer thoroughly understands their business and is able to integrate well with established in house systems. It is vitally important, for example, that organisations check their outsourcer has the infrastructure and resources to support future growth as well as offer a multinational solution if global expansion is key.

HR teams looking to outsource also need to make sure that their outsourcer has effective change management procedures in place to help drive the transition and keep costs firmly under control. Clarifying these points early on in the process ensures the outsourcer is an expert in the field and understands the specific requirements of the HR team.

Conclusion

Not many people think about what goes on behind the scenes to make sure they are paid on time. However, all organisations need to have a system in place to make sure this happens; otherwise they may find they have staff shortage issues! Companies looking at how they manage their payroll now have more options than ever available to them, thanks in large part to technological advances that now making complex payroll software available to businesses of all sizes through the cloud. This technology is likely to progress still further allowing for ever more flexible and bespoke approach to payroll outsourcing. 


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