Payroll Outsourcing Services What You Should Know

Payroll Outsourcing Services: What You Need to Know Before Selecting an Outsourced Payroll Service

Most business leaders prefer to concentrate on their area of expertise – whether it is producing luxury cars, new fashions or designing websites – than spend time on internal business processes such as invoicing or payroll. New technology has enabled these internal administrative tasks to be delivered with very high levels of efficiency and low transaction costs. They have become niche specialisms in themselves, that can often be best provided by specialist centres that service numerous different companies simultaneously.

Outsourcing Payroll Services

These are known as payroll outsourcing services or outsourced payroll providers, and there is now a mature industry providing reliable and cost-effective payroll outsourcing services. For many businesses, it makes more sense to purchase their payroll processing services, rather than build an internal department. It can mean access to a degree of specialised skill and advanced technology, including disaster recovery, that is unlikely to be available or affordable in the shape of internal personnel.

It is strongly advisable to ensure that outsourcing payroll fits with the business strategy, based on an understanding of the organization’s strengths, weaknesses and overall direction (Managed Payroll Services).

Once the decision is made to take advantage of payroll outsourcing services, selection of provider depends on many factors: reliability, risk management and access to skills, and not only lower transaction cost. Operating costs naturally remain an important consideration, but the best decisions incorporate a range of factors, which may be summarised as:

  • Reliability
  • Risk management
  • Access to skills
  • Cost

Payroll Outsourcing Services: Avoid The Pitfalls

There are, however, pitfalls when selecting an outsource payroll provider and, generally, opting for payroll outsourcing services as a function of how you run your business. Chief among these is a tendency to focus mostly upon transaction cost and to overlook other factors. Offshoring can be attractive, but also requires careful consideration. For example, a UK-based company may select a specialist payroll outsource company in India that has cheaper operating costs and good track record, but does not take into account the impact of time difference in offering payroll queries. On the other hand, there can be some advantages of time differences when dealing with technical matters – changes can be made to systems during ‘down time’, without incurring overtime costs.

Variables When Outsourcing Payroll Services

Other variables with offshoring are that wage rates can rise in different locations, and exchange rates can have a huge impact on operational costs, so the cost analysis made at any point in time can be overtaken by external factors within a few years.

Most of the pitfalls in outsourcing can be avoided by adhering to two time-honoured business principles: due diligence and contracting. So users should research the potential providers before signing the contract, and draw up a comprehensive contract – known in outsourcing as the Service Level Agreement (SLA)

Reliability of Outsourcing Payroll Services

A specialist provider will have a bank of experienced payroll legislation experts and software support specialists to call upon, and it is likely that their ability to recruit such individuals to cope with staff turnover will be stronger than that of an in-house payroll team, especially at a smaller firm. Hence the crucial monthly pay-run and its accuracy is not going to be jeopardized by a senior individual falling sick or leaving for a rival firm.

Risk Management When Outsourcing Payroll

In addition, specialist payroll providers are likely to have the latest cloud-based storage and disaster-recovery systems, so can offer more comprehensive and/or less costly security and back-up arrangements than an internal department. Some companies make outsourcing decisions based primarily on the risk-management advantages. As with all such matters, of course, great care must be taken in assessment and due diligence.

Access to Skills

Payroll legislation changes frequently; at least every year with the Budget. In recent years key processes have been subject to mandatory automation, with fines imposed by HM Revenue & Customs for failure to comply. This is set to intensify further with the introduction from 2013 of new reforms ensuring that employers update the Revenue continually with information on employees and their earnings. From October 2012 employers with more than 50 staff will have to ensure that their employees are auto-enrolled into pension schemes.

Payroll outsource providers have dedicated specialists who monitor legislative requirements and who are experienced at dealing with the Revenue.

Payroll Outsourcing Services Costs

Most providers can produce a ‘cost-per-payslip’ indicator, and this can be cheaper than in-house costs. It is important, however, to check what is and is not included, so request as much detail on individual processes, so that a precise like-for-like comparison can be made. For example, the client will retain at least some finance and payroll expertise in-house, so check which processes are expected to be completed internally.

The most significant costs, however, come in poor service quality, so it is essential to get references from other users of a potential provider. Payroll errors can result in loss of talent, damaged morale, and fines levied by tax authorities. For more information on the full costs, see Payroll Outsourcing Costs: An Overview of Outsourced Payroll Expenses [add link]

Two other important considerations are worth listing: the Service Level Agreement, and the importance of

Payroll Outsourcing Service Level Agreement

Another common failure historically is inadequate contracting: all outsource relationships must be backed by comprehensive Service Level Agreements, ideally drafted by individuals with direct experience of the process. A Service Level Agreement (often referred to as the SLA), should cover:

  • Respective responsibilities of the provider and the client,
  • An process for resolving disagreements,
  • Clarity over accountability and lines of responsibility in the case of payroll errors,
  • An agreed process for identifying the source of errors – for example assessing whether it was by the provider, or owing to wrong information from a line manager,
  • Clear time limits on the contract and scheduled renegotiation.

There has been much comment on the importance of SLAs in discussion on outsourcing in the past decade. However, there has also been a backlash against excessively long and detailed agreements. ‘What you found was: the supplier had a staff of thousands producing it, and the client a cast of thousands checking it,’ says Martyn Hart, chairman of the National Outsourcing Association [NOA]. ‘What the NOA says now is you should move towards relationship management. Part of that, apart from the personal things, is whether the supplier understands your business. There should be only around 10-20 KPIs [Key Performance Indicators].’

Sort the processes first – don’t outsource a mess

One of the most common errors in outsourcing is to hand a poorly run process and expect the outsource provider to sort all the problems out. This rarely works in practice, in large part because the processes run throughout the organization, and do not reside wholly within the payroll provider. For example, it is essential to have methods of providing accurate information from business units on the precise amount of hours worked, or hours of overtime worked. If the methods of producing this essential data for the payroll are erratic, they will continue to be so after the outsourcing process.

It is essential, therefore to streamline and improve processes before outsourcing. Preparing and negotiating the Service Level Agreement can help identify the key processes involved.

Payroll Outsourcing Services Resources

National Outsourcing Association

Payroll World Linked-In Group:

Payroll World

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