Payroll Outsourcing Costs

Payroll Outsourcing Costs: An Overview of Outsourced Payroll Expenses

In this article we’ll examine the variable factors associated with payroll outsourcing costs. When evaluating the value to your business and assessing whether payroll outsourcing costs provide a good return on investment, you’ll need to understand the advantages and pitfalls associated with the whole issue of outsourced payroll.

Payroll Outsourcing Costs

A common error in assessing options for running payroll services is to assume that the basic cost of processing the pay-run is the most significant element. It is more realistic to look at the whole business process, which includes record-keeping by managers throughout the business, whose job often includes supplying data on hours worked, and so on.

Payroll Outsourcing Costs: The Common Pitfalls

One of the biggest pitfalls in outsourcing is to focus almost exclusively on transaction costs and not enough on reliability and compliance. Mistakes in payroll can be hugely damaging for any business; not just in terms of cost but on major operational issues such as employee engagement, organizational reputation and retention of skilled people.

If a business’s most important salespeople leave for the competitor because their commissions are frequently wrong or paid late, that can be devastating. So one of the most important lessons on outsourcing payroll as well as evaluating the true ROI vs outsourcing payroll costs is to pay attention to all the issues listed above – not just the cost-per-payslip. A surprisingly common event is an over-payment to an employee who has recently left the organization. Needless to say, this is extremely difficult to retrieve!

In addition to paying attention to hidden payroll outsourcing costs, such as poor morale and management time, that may be incurred by payroll errors, some of the more recent developments in HR/payroll technology give management reports indicating the extent of such problems – not just concerning business processes like payroll, but throughout the organization.

Management reports, or human capital reports, often consist of ‘dashboards’ that monitor and match employee information such as sales training, bonuses, staff turnover and so on, compared with business performance. This can help senior managers tailor their recruitment, training and pay policies to best help the business.

The True Calculation When Assessing Payroll Outsourcing Costs

At the most basic level, the payroll system has to have the correct basic details of every employee: name, address, National Insurance number, date of birth and so on. It is very important to have an accurate starting date in the case of new employees, and to know any previous earnings and tax paid in the tax-year to date from a previous employers. A further complication is when people have more than one part-time job, typically with a different employer but sometimes with the same one, in the case of a large and diverse organization like a local authority.

Employers have their own ways of paying people, and often an array of non-cash benefits, such as childcare vouchers, company cars and health insurance. Some of these have attracted tax exemptions, but the situation on this is continually changing.

Organizations’ own pay policies create further complexities. Generally speaking, the more complex the system or systems for paying different categories of employees, and the wider the range of benefits, the higher the total organization-wide cost in data gathering and running the payroll. With this in mind, your particular business may face payroll outsourcing costs that could be very fluid when measured against ‘standard’ outsourced payroll pricing offered/advertised by individual payroll service providers.

Employers may pay weekly, fortnightly, four-weekly, or calendar month. Sometimes there is more than one pay frequency at the same organization. And in some cases there is hourly pay; this often is accompanied by deductions for those who turn up late. There are also sick pay policies, guaranteeing and other company-specific policies.

Those with experience of running payrolls, both in-house and in outsourcing arrangements, stress that the whole process is what counts.

Nick Laird Ceridian UK chief commercial officer, observes:

‘We find that, if you look at it, the cost of what we do is one third of the total cost of the end-to-end process of the average payroll. If we are handling poor quality data, that process cost will multiply by ten.’

Moreover, most tax authorities levy fines for late or incorrect filing of information relating to income tax. In the UK, for example, there are automatic fines related to compulsory electronic filing of data on earnings and related information on all employees to HM Revenue & Customs. By 19 April each year, all outstanding PAYE for employees must be paid, and by 19 May all tax-related information on employees must be sent on the P35 form. Failure to do so results in automatic fines. And beginning with a pilot scheme involving 300 employers from April 2012, the Revenue is moving to a system of ‘Real Time Information’, to replace the year-end process. Again, this will in due course become compulsory.

From October 2012, employers will have to automatically enroll staff into pension schemes, in a phased programme, starting with the largest organizations. Obviously this will have implications on outsourcing payroll costs for your own company and you should work with a payroll service provider who fully understands UK payroll legislation.

Other significant pieces of legislation include rights to the minimum wage, and entitlement to statutory leave in the case of maternity, paternity and adoption.

This constantly changing legislative background, with statutory deadlines often policed by fines, means that payroll software providers and all those involved in processing the payroll have to be constantly updating their own knowledge and the payroll system.

Payroll Outsourcing Costs: Resources

National Outsourcing Association. This is a trade association comprising users, providers and independent experts.

Payroll World Linked-In Group:

Payroll World

HM Revenue & Customs, Real Time Information

Pensions auto-enrolment

Summarising, when assessing the true value of outsourcing your payroll you should look beyond the surface. Payroll outsourcing costs are dependent on factors over and above a simple monthly fee. You need to choose from quality suppliers of outsourced payroll services. You should factor in your current time commitment versus the time gained through outsourcing your payroll. You should look at your internal / current payroll processes and concentrate on issues such as scalability and trust.

Is price the most important factor for you when deciding to outsource your payroll?

Or, for example, is freeing up your staff’s time to work on other core areas of your business driving you to look into it?

An article in Payroll World recently caught my eye, I wonder if it rings true for you – I’ve copied some of it below.

Bureaux are reporting a surge of enquiries as companies look to beat, or at least survive, the recession by outsourcing payroll. But saving costs is only part of the story: continuity of service and freeing management time can be other attractions of the bureau. Nic Paton reports

When you are in a recession, explains André Roux, HR director at Heathrow-based freight forwarding company DB Schenker, you have two choices: ‘The priority is 1) win more business and 2) keep costs down. What the recession has done is made businesses look and see if people like me can keep costs down, so it is a way of really contributing to the business,’ he says. In his case, the ‘it’ is his company’s decision last year to move its

payroll to bureau provider Bond Payroll Services, a move that Mr Roux estimates has already saved the firm, which employs around 1,000 people in the UK, some £15,000.

‘These days you don’t want to be duplicating your HR and payroll systems – there is no point having two lots of staff doing the same job,’ says Mr Roux. ‘What it has meant is that we have had to become more professional about it. We now have a much tighter ship for audit purposes. We have a very good audit trail, but also customer satisfaction.

And the best thing is that we are not as responsible for it anymore – it used to be that if our computers crashed then the payroll crashed too. But now it all goes out to Bond,’ he adds.

Mr Roux is by no means the only HR or payroll specialist to have come to this conclusion of late. This recession may be the deepest since the 1930s, but payroll bureaux are arguably having a good one, with many reporting a sharp increase in enquiries. Olive Price, sales manager at Sage concurs with this and, says Declan McGrath, operations director at MidlandHR:‘We have seen over a 20% increase in the number of customers choosing to take on payroll outsourcing services and also in hosted software agreements. This trend emerged in 2008 and into 2009, and may be because of the recession.’

Even bigger firms, which often used to decide against using bureaux because of an assumption they would not be able to cope with the size and complexity of what was required, have become more about quality and access to suitable people,’ he says.

I think that one of the most important factors these days is compliance and I would consider it more important than price.

Taking the burden of keeping up with complex tax legislation and the possibility of falling foul of HMRC away from whoever is doing payroll internally and into the hands of a specialist team seems like a good idea to me.

What do you think? What drives your thoughts on outsourcing – price or something else?

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