Managed Payroll Services

Managed Payroll Services: The Right Choice For Your Business?

Managed payroll services refers to the practice of an organization outsourcing its payroll function entirely to an external specialist (a managed payroll services provider), whose payroll specialist staff run the client’s payroll entirely: receiving data on pay rates, hours worked and so on, calculating the deductions, and paying staff the net amount due.

Managed Payroll Services

Specialist providers of managed payroll services can often offer economies of scale resulting in lower transaction costs. But while cost should always be a central factor, it should never the sole one – especially with such a business-critical function as payroll. An outsourcing decision is a strategic one, and should be based on a view of the business direction as a whole. So the decision to entrust the payment of your staff to an external supplier, by contracting for a fully managed payroll service, is a major one.

A Choice: Managed Payroll Services vs In-House Payroll Management

Whether it is the right choice for your business depends on a full understanding of the merits of the case, the expertise in-house and an understanding of the core strengths and weaknesses in the business. Martyn Hart, chairman of the National Outsourcing Association, a trade association comprising users, suppliers and independent experts, says the business has to take a strategic view on this. A fairly simple 2 x 2 grid of the type popularized by business schools helps enormously on this:

What you are not good at & is important; What you are good at & is important

What you are not good at & is unimportant What you are good at & is unimportant.

The top right of the 2 x 2 box is the area most likely to be kept in-house; the top left is most likely to be a candidate for outsourcing, while the bottom two should be subject to analysis for scaling down or divestment.

‘If you are a web design company you wouldn’t outsource the intellectual property of your web design [process and expertise], but you might outsource looking after the servers and the desk-tops,’ he says.

In the case of payroll and managed payroll services, it may appear that the payroll function itself is not a centre of expertise or competitive advantage in an organization primarily dedicated to other services. However, some larger local authorities and some businesses have maintained and grown their in-house payroll functions, and offered payroll services to other organizations, typically small voluntary agencies or businesses.

Managed Payroll Services: A Decision Not to be Taken Lightly

Inappropriate outsourcing decisions still get made, however. Often this is because the salespeople at the outsource provider have gone over the head of normal decision-makers and won over the finance director or even the chairman. The decision to outsource is then directed ‘top-down’ to the organization, in some cases by people with little detailed knowledge of the market or the existing in-house operation.

Another common pitfall is to close an internal payroll function down, make internal staff redundant, which may include significant redundancy payments, and contract with a managed payroll provider – only to find that the closed internal department carried out more functions than pure payroll. For example, they may have helped the Human Resources function with starter and leaver documentation or processing of visas or work permits. Or they may have helped the Finance function with other aspects of financial processing. In other words, it may have been more cost-effective than it appeared.

Senior managers considering outsourcing to a managed payroll provider should therefore exercise considerable due diligence with their own teams as well as with the provider. It may save considerable amounts in terms of efficiency savings to identify all the tasks currently handled by the internal function, and to ask the internal staff how processes could be made more efficient.

Some companies carry out a market testing operation. They define the service that they want, and invite the internal team to bid for it, as well as the external teams. The internal team often produces some cost savings.

Managed Payroll Services Agreements

All outsourcing contracts offered by managed payroll services providers should be supported by a Service Level Agreement. However, no agreement can guarantee to cover every scenario, and a good contract is only a platform for strong relationship management, and close understanding of the business by the managed service provider. For more information on SLAs, see Payroll Outsourcing Services: What You Need to Know Before Selecting an Outsourced Payroll Service

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