The pros and cons of outsourcing your payroll

Running payroll is often a thankless task. When you do it right no one notices, but when it goes wrong everyone up to the CIO knows about it. Many companies outsource payroll, but is it the right thing to do? The answer often depends on your company’s specifics, so here are some pros and cons to consider as you debate the question.

Outsourced payroll pros

1. Experience and knowledge

Payroll outsourcers are experts in everything related to paying employees, taxes and government compliance. Complexity increases greatly when you operate across multiple states and countries. Are you taking advantage of all possible tax breaks? Penalties are high even when mistakes are honest. A payroll outsourcer bases their business on knowing all the intricate details and stays up to date on the new and upcoming legislative changes. Payroll outsourcing agreements usually have a liability aspect that protects you in the event of an audit, if the taxman comes back with questions about what has been declared and filed.

Use this guide to HRMS payroll management to figure out how to manage payroll in-house 

2. Cost

Smaller companies in particular may struggle with the costs of doing payroll. Training internal staff, procuring the necessary equipment like check stock and printers plus arranging contracts for things like direct deposit transfer all add up. An outsourcer is able to offer an affordable cost as they are doing payrolls for a number of companies so you’re getting a volume discount. As you consider an outsourced payroll vendor, compare their prices to all of your internal staffing and hardware costs to get a true picture.

Outsourced payroll cons

1. Loss of control

One of the major concerns of companies who move from internal to outsourced payroll is the loss of control. It is no longer possible to run downstairs and catch a payroll employee just after 5 o’clock and to convince them to immediately input an employee and to delay payroll processing for 10 minutes. Outsourced providers work toward your SLAs (service level agreements) but they depend on you to uphold your side of the bargain in relation to timing and deadlines.

2. Security and data privacy breaches

Every company’s nightmare when it comes to outsourcing payroll is a data breach and identity theft. When you’re sending all of your sensitive employee data off-site it can cause concerns as you’re depending on a third party to protect your data. Potentially you’re putting your employees’ personal data at risk as hackers know that payroll outsourcers are a rich source of interesting data so they are often targeted. Many companies choose to keep payroll in house as they are assured that they can implement stringent protection methods.

The benefits of using HRMS for payroll

Using an HRMS for payroll reduces mistakes due to compatibility errors outsourcing. When your HRMS payroll module needs to draw on the employee database and lift out names, numbers, bank accounts and so on, there’s less likely to be a glitch or a problem with the access and therefore a reduced likelihood of over- or underpayment (or no payment at all!). When it comes to payroll, that’s a pretty fundamental performance indicator.

On the front end, you have the user experience. Whether it’s the payroll administrator accessing the system to run that month’s salary, the shop floor employee who wants to check their online payslip, or the CFO running a report for a board meeting, the interface should be intuitive and easy to use. There is no 'middle man', so to speak, running the payroll that needs to be contacted to find out information that the department or employee needs. Part of that ease comes from being accessed via a single portal and having a similar feel and functionality to any other self-service operations. This is, of course, much easier to achieve when the payroll software is part of a larger uniform whole.

HRMS or a standalone payroll system?

One of the big advantages of a payroll module that is an integral element of your larger HRMS, is the connection and access to the HR data being gathered on a daily basis. Especially, the time and attendance, workforce scheduling and leave management functions. At the very least, this means your payroll is calculated based on the same data collected as employees punch in and out, or arrange take paid time off. In this respect, HRMS payroll is consistent and holistic in its approach. This consistency reduces the likelihood of payroll errors. Not totally, of course. But at least you’re no longer at risk of simple and understandable human errors, such as transposed figures.

Standalone payroll systems can be exactly what you need – in fact, many people prefer to keep their payroll data separate to their other people-related information and accept the risks associated with data migration, errors and inconsistency. That said, an integrated HRMS can offer opportunities for more sophisticated human resource management: accessing performance data and statistics and moving into the world of predictive analytics. By combining payroll and HR data, your HRMS may be able to compare performance and rewards, accurately identify your top performers, and even carry out profiling for skills and traits that can be used in your recruitment campaigns.

Other advantages that can be realized by choosing HRMS payroll include:

• Data compatibility and consistency – Two systems can ‘talk’ to each other, but a single system only needs to talk to itself. If everything, including payroll, is within the HRMS, all your data is in the same place and employees are responsible for keeping their own information up to date (in this respect, data quality is delegated to those with most motivation to keep it up to date). Consistent data reduces the chances of under or overpayment.
• A single point of access – Everything is accessible through the same HRMS portal. In this respect, simple is definitely better.
• Data security – Again, when all your data is in one place, it is less at risk of cyber attack or loss. Which is not to say you can’t be hacked, just that your security policy, ‘defensive measures’ and backup/recovery plan are all dealing with a single location.
• Lower cost – In terms of total cost of ownership, one all-encompassing HRMS will almost certainly be less costly than an HRMS plus standalone payroll software.

Potential risks of using HRMS for payroll

As mentioned above, cost is a common driver for using HRMS for payroll: purchase, installation, maintenance, upgrades… the total cost of ownership of any business software is far more than the figure on the initial price tag. There’s little doubt that putting all your eggs (functions? modules?) in a single HRMS vendor’s basket usually leads to cost and process savings. The balancing risk of course is that should the basket crash then everything is at risk. From a business continuity point of view, many businesses like to keep payroll separate for just that reason.

In the end, the choice of whether to outsource your payroll, handle it in-house with standalone software, or put everything together in the HRMS basket will depend on your business needs, your wider IT strategy, your budget and your attitude to risk. If you do decide to outsource your payroll processes, you must ensure the pros outweigh the cons and fit your business model. If you decide to use your HRMS payroll function, you may find an integrated approach is the best for your organization and wonder why you didn't switch sooner.