Internalize or outsource payroll?

More often than not, payroll is viewed as an unattractive and boring process. Only very rarely is it part of a company’s core business and thus it usually gets relegated to the category of support functions.

PAYROLL AS A STRATEGIC FUNCTION

Payroll is indeed a crucial process, we can go as far as stating it’s the glue holding together the employer-employee relationship within organizations worldwide. That’s because it deals with a sensitive matter – the financial remuneration for one’s carried out work – a fundamental element in recognizing their efforts and the very basis of the social contract within any company. Therefore, payroll systems should be established with a clear imperative of consistently producing highest quality pay-slips, meaning they should be accurate to the last cent and delivered in a timely manner.

As important as it may be, the payroll function presents nevertheless a set of challenges: it is resource-consuming, implying a considerable cost, it is a risk factor, exposing the company to the complexities of the payroll environment and, under these circumstances, it doesn’t even constitute a competitive advantage.

Faced with this dilemma, managers need to carefully choose between the two possible paths when it comes to payroll: “do-it-yourself” in-house or “have-it-done” by another specialized entity.

“DO-IT-YOURSELF” – INTERNALISED PAYROLL

The major prerequisite to internalizing payroll is possessing the internal know-how. Moreover, doing payroll implies using a specific IT tool, like a payroll software program, which at its turn it is a part of a larger operational unit – the ERP (enterprise resource planning). This is usually a suite of integrated financial and accounting applications which can be purchased from a specialized vendor under license.

The suite can be hosted by the company’s IT infrastructure or by that of a third party when outsourced. This is a long proven business model, which triggers not only an initial investment, but also associated services such as maintenance, training or assistance in migrating from the old to the new product. The tool can be rented as a service on the basis of a lump sum defined periodically, therefore we are talking about “Software as a service” or SaaS. The cloud is nowadays broadening the range of associated possibilities, and so it is expected that purchasing and installing specialized programs on a local computer or network will eventually become obsolete.

The estimated cost must be considered over a long period (5 to7 years), as this is the average lifespan of payroll solutions.

“HAVE-IT-DONE” – OUTSOURCED/SUBCONTRCTED PAYROLL

Outsourcing or subcontracting may represent the reconciling solution when it comes to payroll, a function fairly distant from a business’ core activity, but of strategic importance nonetheless.

Depending on the company’s specific needs, outsourcing presents a couple of distinctions:

  • Total Payroll Outsourcing: when the entire payroll function is outsourced we are talking about “business process outsourcing” or BPO; in this case, all payroll-related operations fall under the provider’s responsibility, from data acquisition to financial statements, providing after-sale services and social counselling.
  • Partial Payroll Outsourcing: the provider’s responsibility is limited only to tasks that are absolutely mandatory for producing and editing pay-slips and financial statements; in this case, for example, gathering data or answering employees or welfare agencies questions remains the responsibility of the client organization.

In practice, there are many nuances between these two clear-cut possibilities. The defined SLA (service level agreement) permits a large degree of customization, so that the service pack is adapted to the real needs of the client companies, the different organizational models or HR management policies.

The outsourced payroll function can be performed in the same country/ in a state of the European Community (“nearshore”) or in a service center located in one of the emerging countries (“offshore”).

Last but not least, the cost assessment in case of an outsourced payroll function is generally more straight-forward and easier done, as it is often indexed to the number of employees within the client company.

For more information and solutions to help you choose between internalized or outsourcing payroll, we invite you to download our white paper (in French).

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