Should you outsource payroll?

The decision to outsource payroll or manage it in-house should be influenced by more than just the size of your business. From data sovereignty to compliance, here are some of the factors to consider.

Time-consuming and complex, payroll is an obvious candidate for outsourcing – but that’s not to say it suits everyone. Here are some advantages and disadvantages to take into account when deciding whether it could work for your business.

1. Cost

Managing payroll in-house can be costly, necessitating ongoing investment in employee salaries and training, as well as technology and payroll software. It can also leave businesses vulnerable to risk, should a key payroll team member leave.

Outsourcing, on the other hand, can be a more cost-efficient and reliable option, says Nick Southcombe, chief executive officer of HR and payroll solutions provider Frontier Software.

“Outsourcing can, but not always, reduce the overall cost of the payroll function. In most cases, it does make it a predictable expense,” he explains. “It also mitigates the risk of staff turnover, as the provider has many team members able to process client payrolls correctly.”

2. Compliance

One of the main functions of payroll personnel is to ensure compliance – be it with the latest statutory legislation of the country (or countries) where employees are based, or award rates, enterprise bargaining agreements (EBAs) and other industry-specific requirements. While organisations may hesitate to entrust such duties to an external provider, Southcombe says payroll vendors have considerable experience implementing legislative changes and understand how to configure their systems accordingly.

“Organisations that don’t use compliant payroll technology risk breaching regulations and suffering not only financial penalty, but reputational damage and, of course, staff discontent,” he says. 

3. Data security

As data breaches become more common, it’s no surprise that security and privacy concerns are front of mind for businesses when contemplating their payroll options. Sending sensitive data offsite can increase susceptibility to a breach and, when data is stored offshore, the issue of data sovereignty (and the ease with which you can access your own data) also comes into play.

While quality payroll providers can offer stringent data protection measures that are often better than your own internal measures – which in itself may be a prime driver to outsource – Southcombe points out that the onus is on employers to assess the security practices of any potential vendor.

4. Flexibility 

Outsourcing may take care of payroll basics, but an in-house team can be more flexible and proactive to a company’s needs. “An internal payroll team can be more responsive to immediate requirements and able to add significant value by generating data insights that inform key business decisions,” Southcombe says.

5. Control and responsibility

Keeping payroll in-house can help businesses maintain a sense of control that they may be reluctant to relinquish once a payroll provider steps in. While the level of control offered is specific to each vendor, Southcombe says employers are ultimately responsible for the correct and compliant payment of their employees, adding: “Your outsourcing provider may offer various levels of service, but they act only on the instruction of their client.” 

Understandably, there’s not always a straightforward answer to the outsourcing debate, which is why many businesses choose a hybrid approach – with the Ernst & Young 2017 Global Payroll Survey revealing 43 per cent both outsource payroll and maintain some in-house services. 

“Although you may opt in favour of outsourcing, you may seek a model that maintains team involvement,” Southcombe says. 

“The ultimate decision will be driven by the organisation’s appetite for risk and an internal assessment as to the cost versus value of retaining an in-house payroll team over an outsourced one.”

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August 2019
August 2019

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