Payroll outsourcing: the pros and cons

Ask any HR department what their biggest headache is, and payroll is very likely to come up. So, it makes sense that payroll outsourcing is such a common business practice. It is most prevalent in small to medium sized businesses where it’s simply not feasible to employ a dedicated member of staff. 

What are payroll outsourcing services?

Outsourcing, or subcontracting, is when a company uses another company to handle certain tasks. Payroll outsourcing, therefore, is using a third party to manage the process of paying employee salaries. 

Completing staff payroll requires very specific expertise which often is not economical to have within the organisation. It can therefore be more cost-effective to contract an external specialist in the area. 

Why should you use outsourced payroll processing services?

To outsource or not to outsource.  The decision to subcontract payroll will depend on the interests and requirements of each organisation. However, the primary aim is usually to optimise the HR department and rid them of this routine headache.

Payroll must be done monthly and can vary from month to month, due to several different factors. A good understanding of certain legal requirements is needed to ensure the process is completed on time and error free. 

Without a dedicated employee at the company with very specific expertise, it can often be a challenge to make sure employees are paid the salary they are due on time. 

The advantages of outsourcing payroll services

As well as relieving the HR team of this burden, outsourcing payroll offers many worthwhile benefits for organisations. 

• Time savings: processing payroll takes a great deal of time, which, thanks to outsourcing, HR can dedicate to more valuable tasks. 
• Streamlined processes: payroll management is not a simple task. Hiring experts speeds up the process and reduces complications in the department. 
• Avoiding errors: not knowing, or not taking into account, certain aspects of payroll management can result in errors that impact negatively on both company and employee. This risk can be reduced or even eliminated by placing it in the hands of the experts. 
• Obtaining more information: payroll management firms will keep you up to date with all relevant developments, helping you understand payroll better and gain valuable insight.

The disadvantages of outsourcing payroll services

While outsourcing your payroll certainly brings vast benefits for the organisation, there can be disadvantages if the relationship between the two parties (company and provider) does not work:

• Spiralling costs: it is important to scrutinise and understand which services are included in the contract. If many of the habitual tasks are extra, it may be that outsourcing ends up being more expensive than employing a dedicated person internally. 
• Lack of communication: although the goal of outsourcing is for the company to free themselves from payroll management, it is essential for them to remain up to date with everything that goes on. Lack of communication from both sides can affect performance.
• Security: when you outsource payroll you are placing very sensitive information in the hands of others. The information must not be used for any other purposes and that it is handled appropriately. 

What size companies should outsource their payroll?

According to Statista, small organisations are more likely to contract payroll services than large ones. In 2019, 15% of companies with less than 2,500 employees decided to delegate this task to experts. On the other hand, only 8% of companies with more than 10,000 employees did the same. 

This diagram from Deloitte, also shows that smaller companies are the ones who opt for outsourcing, while the rest invest in internal teams as the number of employees grows.

Source: Deloitte

Small companies, even if they only have one employee, must comply with payroll obligations. This involves a significant effort for the business owner, which is why the majority opt to outsource the service.  

As businesses grow, their workforce grows with them, and so do the complications for the HR department. Medium-sized businesses may have an accounts specialist, but it is rare for them to have a payroll expert among their staff. These types of businesses, therefore, continue to outsource payroll.

How technology can help you with payroll outsourcing

The Deloitte report shares some interesting data about the use of technology for payroll management. And from what we can see in the diagrams below, almost half of the survey respondents use, or intend to use, payroll software. 

Source: Deloitte

This software gives companies a huge amount of independence and allows them to manage their payroll easily without relying on third parties. 

Kenjo’s payroll software also includes other useful functions for the HR team. An all in one solution: payroll management and monitoring, holiday and absence tracking, performance reviews, recruitment, organograms, etc.

How much does it cost when outsourcing payroll?

Most payroll companies charge a monthly fee that depends on the level of payroll services required. The cost will therefore vary according to your company’s size and its needs. The good thing is that you will only pay for the services you use, and if your staff grows or reduces, the tariff will too. 

3 tips for choosing a payroll outsourcing company 

Have you decided to subcontract your company’s payroll management? If the answer’s yes, bear in mind these tips for finding the right provider. 

1. Establish your requirements: before you start looking for a provider, try to understand what your needs are to find a company that is able to fulfil them adequately.
2. Look into the providers’ reputation: reading reviews from other clients is a good way to discover valuable information about companies. Ask your colleagues in the sector too. And above all, make sure they have a good professional record.
3. Weigh up the cost: find out the costs involved in outsourcing payroll from each provider. This is critical, especially for small companies that need more basic services than large ones.