Disadvantages of outsourced payroll: why you need an HRMS instead

Outsourcing payroll is tempting. Let’s face it, it’s not the least complex thing to manage and the thought of handing it off to an external business that will manage the process on your behalf is attractive. However, even with the best payroll service providers, there are drawbacks for you, the client.

If you’re thinking about outsourcing your payroll, it is important to take a careful look at some of the drawbacks. That way, you can be fully prepared to handle the disadvantages of the process in order to minimize their impact, or find that keeping payroll in-house, perhaps managed by your HRMS payroll module, is the best option for your organization.

After all, Dan Madden, Head of Marketing at Carterwood Limited, has said this about outsourcing payroll:

“Outsourcing payroll can cause all sorts of problems, particularly with regards to keeping all the information about your employees up to date. It’s all too easy to forget to send across information of an agreed pay rise, expenses due, or a changed tax code, resulting in disgruntled employees and lots of time lost to resolving the error. The fewer systems and databases you rely on, the less chance for discrepancies between them all, which is why incorporating payroll within your HRMS can prove so beneficial.”

In other words, using a different company or organization to manage your payroll adds links to the communication chain. It offers more opportunities for lost or mistaken messaging that will have an impact on your workforce’s salary payments. And if there’s one error guaranteed to create complaints and problems, it’s a payroll error.

These are the most commonly cited disadvantages of outsourcing payroll that can impact both employee satisfaction and your bottom line.

1. Lack of direct control

Your contract with an outsourced payroll vendor will include various terms and conditions laying out how they store and manage your data and the extent and limits to the services that they will provide for you. Such terms and conditions are usually standardized; i.e. you are unlikely to have much room for negotiation. Service conditions tend to focus on outcomes (timely and accurate payment, etc.) and you will have practically zero control or influence over the provider’s internal processes.

Meanwhile, you are handing over sensitive employee data (names and addresses, social security numbers, salary details, etc.) and are relying on their security measures and business recovery planning to protect against cyber-attacks and other potential breaches. You are also relying on them to conduct proper background checks and apply suitable rigor in their own hiring processes when recruiting people who will have access to your workforce data.

This separation between client company (you) and provider can also affect your access to data. If your existing HR systems are cloud-based then you are already used to not having your information on-site. However, an outsourced provider’s data security measure, while a good thing in most respects, can also mean limited access for you.

Furthermore, when new legislation or changes to regulations require adjustments or calculations, you are hostage to the provider’s timing and priorities as to when these changes are ready to go live.

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2. Lack of company identity and familiarity

An outsourced provider will often be servicing a number of companies via a call center in a lower-cost location or country. Service can sometimes be uneven, often depending on the individual answering the call. There is often little shared culture or values between the provider and its clients.

Whenever one of your employees has to contact the payroll provider, they are probably dealing with a different operator each time. The experience is unlikely to feel like an exchange between colleagues or fellow workers, and more like phoning their bank with a query about their account (not to unfairly criticize banks but such calls are rarely a pleasure).

It’s worth bearing in mind that payroll is a fundamental issue (put bluntly, for most of us if we don’t get paid, our rent/mortgage payments are at risk) and if the caller has a genuine problem with their payroll, there is often no easy escalation route to resolve the issue. This can be especially frustrating for a service user if they were previously used to a payroll service that was not outsourced.

Much of this sense of disconnect can be reinforced by a lack of common branding. After all, if your company HRMS has self-service functionality, their in-house portal and transactions will likely have a very different look and feel to those carried out via your outsourced payroll provider.

3. Additional costs

Outsourced vendors often have process efficiencies, but it’s critical that you look at the total cost of the service and not just the per payslip price tag. Services such as tax filing and direct deposit should be included as standard but quarterly and year-end reporting may not be, for example.

A real-life example is that of a company looking to integrate payroll data back into a niche compensation system. Under the outsourced provider’s contract, there was a cost for each report manually created, as well as an ongoing cost for producing an integration file. In the end, the idea was scrapped due to the extra budget costs.

Then there is the question of whether there are additional costs for out-of-hours emergency support.

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4. Provider stability

Not to look on the negative side but, as with any external supplier relationship, you have to consider their business stability. Put simply, if they go out of business, you may have great difficulty in recovering your payroll data. At best, this is likely to cause a hiccup in the payroll service for your workforce. At worst, you could find yourself without any payroll records.

An in-house HRMS can handle your payroll

A decision to use your own HRMS to manage payroll services can offer its own advantages, including:

• In-house control of processes and data management.
• Easy access to all payroll, compensation, and reward information.
• Less ‘data input and preparation’ in that with an integrated HRMS & payroll setup, the payroll module will automatically access necessary information (e.g. hours worked and attendance) from other parts of the overall system; meaning the data has only been input once.
• Integrated automation still offers reductions and savings in employee time and overheads compared to a non-integrated setup.

None of this is to say that outsourcing payroll is necessarily a bad decision. It may be right for your organization. However, payroll in particular is not a process to outsource lightly. The above issues must be carefully considered and weighed against the advantages you expect to benefit from.