There’s a reason why the world is embracing the subscription economy.
That new business landscape in which traditional ways of paying for products and services has changed to subscriptions. And that’s because it is more efficient, cost-effective and the responsibility for keeping up to date with the technology, legislation and other compliance issues are handled by the provider.
In a subscription economy, it is now easier than ever to outsource the responsibilities of payroll to achieve better services and to free up human resources (and capital).
Payroll is a key part of any business, with lots of sensitivities, and until recently few CEOs would dream of handing that job over to a third party fearing that too many things could go wrong, not to mention that salary packages often include sensitive and confidential information.
On the other hand, payroll is an inherently unbalanced job because most of the work is done on one or two days each month. It generally sits awkwardly between HR and finance — with payroll administrators often helping out between pay days.
As a result, payroll outsourcing is growing in popularity and costs are going down — which some might say is a broad statement. In reality, what are the upsides and downsides of managed payroll and how might your company go about it? Let’s start with some definitions.
In-house vs managed payroll
In-house payroll is a process managed by a full-time worker employed by a company or a team of full-time payroll administrators. Managed payroll is when a third-party provider handles employee pay (including taxes and regulatory compliance) for a fee.
(It is important to note that hybrid models are possible, in which some payroll functions happen within a company while others are carried out by a third party. This is called ‘payroll co-sourcing’.)
Over the past ten years, as more payroll software was introduced on the market to facilitate business operations, managed payroll has become one of the most common forms of business process outsourcing.
The job is just too big for a small team
A major reason more companies are choosing to outsource payroll is because in-house payroll teams have no real way of knowing if they’re doing the job right. Optimising efficiency is almost impossible if companies don’t really know what best practice looks like.
But the biggest challenge for in-house payroll teams is that payroll used to be a big job in the 1990s, and it’s much bigger now. Although smarter technology has made it possible to automate many payroll tasks, an ever-evolving workforce and new government regulations complicate the role in different ways.
Today, payroll is a group of activities: employee setup, payment methods, withholding of all applicable income and payroll taxes, remitting payroll taxes, managing employee allowances and deductions, and organising any end-of year forms and declarations.
Because the job is so broad, plenty of payroll professionals learn skills such as interpretation, data entry, quality control, answering support queries, supporting HR, and basic finance and accounting. They can become valuable members of the team.
Payroll technology has certainly helped with this workload, but the job has also become more complex in other ways.
New ways of working add complexity
Changes in workforce arrangements have created fresh sub-categories for classifying workers. Arrangements like flexitime, a compressed work week, job sharing, expanded leave, phased retirement, partial retirement, work and family programmes, overseas workers, casual work and part-time work.
Add to this the many new government workplace regulations introduced in recent decades, along with the introduction of new pension schemes and different tax options. All these changes have complicated payroll and have also increased the costs associated with the task.
As a result, employers often consider payroll to be a cost centre and struggle to justify investing money in it or hiring people to spread the workload.
This means a typical payroll team won’t have the resources it needs to function efficiently. Mistakes can happen, which frustrates CEOs even more, feeding a vicious cycle of neglect for the in-house payroll team.
The ‘peaky’ nature of payroll adds to the stress
Because payroll work is ‘peaky’, much of the work happens in the days just before pay day. Payroll teams go from cruising to stressing every month or fortnight (depending on the pay cycle), which makes the payroll department a prime target for any CEO aiming for greater efficiencies.
Of course, if a payroll team’s workload was properly balanced, a four-person payroll team would likely function just as well with three people. However, to get all the right expertise, that payroll team should probably consist of about six people — logic that is tough to justify for all but the largest of companies.
And yet, with all these changes, companies still want payroll staff to do 50% more work than they used to do 20 years ago, all without offering a formal career path or training.
It often seems the challenges of modern payroll are too great to keep in-house, and it can make a lot of sense to consider pushing it to a third-party outsource provider.
What are the trade-offs of managed payroll?
Outsourcing your payroll to a partner will solve some of the key issues but, as with everything, there will always be trade-offs. There’s no such thing as a free lunch!
For instance, about 3-5 hours each month could be saved immediately by outsourcing manual payroll processes, according to Technology Advice.
The automation of tasks like tracking attendance, clocking the hours worked, approving or denying leave requests, withholding tax, and calculating proper pay can free up a good chunk of time for whoever is responsible for payroll so they can perform more important tasks.
But since many in-house payroll processes can be… unique, shall we say, setting up an outsourced payroll system can take a bit of time — especially at the beginning.
How to set up an outsourced payroll system
Setup will require collaborating tightly with the third-party provider, collating and standardising all the company’s information, then training staff to use the payroll service. It will take a while to do all this, but once the initial time investment is spent, you’ll wonder how you survived without an automated payroll for so long.
Outsourcing payroll can also significantly lower the costs of the payroll process. Statistics from US-based talent acquisition company Greenhouse show that the average company saves about $97,180 each year by outsourcing both HR and payroll services. That’s enough to hire another staff member.
Outsourcing can achieve these savings by staying on top of compliance, tax and other regulations. It will also avoid costly errors.
However, every third-party payroll service comes with a price tag.
Most options on the market will be available for a base price. But a common way of reaching the final drive-home cost is calculated on a per-employee per-month (PEPM) structure which will vary from business to business. Other set up costs, such as integrating your company’s data into the third-party’s systems, along with any optional solutions or services, will also increase the cost.
But what if the decision to outsource payroll has been made. What’s the next step?
How to get best results from your outsourced payroll provider
1. Choose your time wisely
As already mentioned, the initial process of outsourcing payroll can be expensive due to the one-off set up costs and time spent on getting it up and running, especially for small businesses.
And since time is money, it’s a good idea to find a time during the year that won’t conflict with your company’s major revenue generation periods.
Pick your moment: Seasonal businesses such as retail, agriculture, entertainment and horticulture generally cannot risk downtime or hiccups in their processes during the months when they make the most cash. Pick your moment to switch to an outsourced payroll platform wisely.
For a similar reason, it’s also worth considering whether bringing payroll back in-house during certain times of the year, while pushing it onto the outsourcing system at other times is a good strategic move. The answer will depend on the specific dynamics of the company.
2. Be transparent
Another point to consider is that since payroll is such a ‘peaky’ job which, unless you are a multinational corporate, means there is a low likelihood the business can afford their own full-time payroll staff. Instead, someone will be booked to pop in every week for a day or once a month for a few consecutive days to perform payroll tasks.
Communicate: When you transition to an outsourced payroll provider, make sure to keep this person in the loop so they can help with the switch. The contracted in-house payroll administrator will have all the relevant knowledge about the company and know where all the files are stored.
3. Work with experts
When choosing a provider, cost will be the leading factor for most companies. But after that, the key requirement for picking the right payroll provider is the quality of its customer service. After all, you will likely be talking often to the provider as employment changes happen to your company over the years.
Evaluate expertise: Judge the expertise of the people working for the payroll provider.
Not only should they leave you feeling comfortable that they know what to do, these experts must understand all the relevant details of your company’s legal and regulatory landscape. They will be dealing with taxes and compliance, so they should know what is expected of a company like yours.
Business leaders like yourself understand that payroll management is not just a complex and increasingly overwhelming activity, it is also a sensitive issue that is critical to the overall wellbeing of your business. Remember however, the best solution comes from partnering with a well-resourced expert who can help solve problems and get it right the first time.
For over thirty years, Affinity has been a trusted partner for mid-market and enterprise businesses in Australia and New Zealand, empowering them to transform their payroll operations. With a focus on turning payroll from a cost into an asset, we have established ourselves as industry leaders in delivering innovative cloud-based payroll software and exceptional payroll services.