Thinking of outsourcing your payroll – the pros and cons

Thinking of outsourcing your payroll – the pros and cons

Most businesses will at some time start to employ people and that means payroll.

Often you’ll hear suggestions that outsourcing is the way ahead but it’s important to bear in mind that whilst there are some great benefits to this there are also some downsides.

In this post we’ll be looking at the sort of things that make outsourcing your payroll worthwhile – and other things that make it a potential minefield.

As a starting point it is important to remember that employing your own payroll staff has an economy of scale factor attached to it. Put simply you wouldn’t want to employ a payroll specialist if you only have one or two members of staff as it would be uneconomical.

The point at which it does become worthwhile getting in a specialist staff member is of course up for debate and there are a number of factors that would change the sums. Could the person work part-time or be shared with another business for instance? Would they be able to take on other duties as well as payroll?

In general terms for smaller companies it’s more economically worthwhile to look to outsource to a specialist in the area.

Another benefit of sending your payroll work out is that it will be completed by people who work in payroll all the time. They will be up to date on the latest legislation and will probably have seen all the issues you are experiencing many times before. Often, whilst we’d all like to think that we could have someone running payroll who is appropriately skilled, in practice the temptation is to push payroll on to another member of staff who isn’t necessarily a trained professional.

Experience pays dividends in terms of speed too. If you send your payroll to a company that does the same job day in, day out then the likelihood is that they will be quicker, not only when processing standard payments but also when they have to deal with other less common payroll elements.

With the move to digital services the HMRC have almost forced employers of any size to run their payroll using commercial software. Whilst smaller employers can use the HMRC standard offering, companies with more members of staff will need to buy in software to manage employees details, process payments and submit returns to HMRC.

Employers also need to make payments to their employees also and again there are questions here about size. A business that has one employee will have no problem making a simple online banking transfer but more payments means more complexity and BACS software may be needed.

In both of these cases the cost of software, updates and IT support adds to the amount of money it will take to manage a payroll internally and these need to be offset against the cost of sending the job out. Payroll bureau are able to split the cost of these service across many clients making it much more affordable.

Despite the benefits there are some downsides though.

Employers report a feeling of lack of control with a job being handed over to an outside company and the business simply hoping that it will get done and having no hands-on responsibility.

Typically a major part of the payroll process is the gathering together of the information needed to make the payments. There is a significant amount of time needed to manage the pay elements such as salary changes, overtime, bonuses and deductions. In addition queries post payment adds to the work required to operate a payroll.

Employers need to be under no illusion that this work will need to be done by them before they send the final file over to the payroll provider for final processing. They will also need to manage most queries themselves so the option of outsourcing will only save some of the time required.

The cost of outsourcing is also a factor that needs to be borne in mind. As previously discussed there is the economy of scale but businesses need to be aware that often payroll services can vary widely in cost. Usually going directly to a company is the best option rather than putting it through your accountant as it often gets outsourced from them anyway!

Some tips when considering outsourcing;

  • Think about the cost of doing it in house against outsourcing – have you included all the costs on both sides?
  • How much work will the business have to do before sending it to the payroll company?
  • Who will process the employee payments?
  • What methods are there for ensuring quality of service levels?
  • If it remains in-house how will you ensure that your payroll staff stay up to date?
  • Work out the economy of scale question, in general for smaller companies it’s best to outsource, larger companies need to think about in-house servicing

The decision to outsource your payroll is by no means a straightforward one.

It’s important to take into consideration all the facets and whilst cost clearly is important the quality of service and control of the process are also important factors.

Businesses thinking about outsourcing their payroll need to be clear on their options and make sure they have taken into account all of the pros and cons to ensure they get the best outcome.

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