To Outsource or Not to Outsource Payroll: 5 Pros (and 5 Cons)

Outsourcing payroll is a common practice among many businesses and they all have their own reasons to select this option. While there are a number of benefits, including accessing technology and expertise, there can also be drawbacks like a loss of direct control.

The trend in recent years has been towards greater payroll delegation, with 8% of global organizations fully outsourcing this function in 2015 and a jump to 12% in 2019. Some businesses opt to partially keep the practice in-house, outsourcing some specific tasks.

It’s therefore important for any company weighing up this decision to address the pros and cons of payroll delegation. Here are the arguments for and against outsourcing this vital part of your business operation.

Pros

1. Time and cost savings

Resources are stretched in most companies and looking for ways to save time and money are always welcomed. Outsourcing payroll can mean staff hours are spent on other areas, and if it’s found an outside provider can carry out the function more cheaply, it presents a strong argument against keeping payroll in-house.

2. Specialist expertise

Payroll procedures are subject to specific laws and regulations that aren’t just variable depending on location but also subject to change over time. Large businesses that operate across multiple jurisdictions can particularly benefit from outsourcing payroll to a specialist provider that stays abreast of any new legislation or best practice reviews.

3. Up-to-date technology

In recent years, technologies such as the cloud, SaaS-based solutions and self-service platforms have revolutionized the way payroll is performed. New innovations will continue to enter the space and a payroll provider is more likely to invest in the latest technology as it may not seem worthwhile for an individual business.

4. Minimize the risk of errors of omissions

Payroll has a number of functions that can be very serious if errors or omissions occur such as, not paying staff or failing to meet criteria or deadlines for tax filings. Outsourcing to a dedicated firm should minimize the risk of such oversights occurring, ensuring your company can get on with its everyday business.

5. Ensuring compliance

Being compliant with your payroll practices isn’t just about filing taxes, but also adhering to other relevant laws like immigration, for example. The rules on vacation, maternity and sick pay also vary, so they need to be understood and applied to payroll functions. As an employee at a typical payroll organization has 12 years of experience, according to Deloitte, processing these elements shouldn’t pose a challenge to them.

Cons

1. Loss of control

While delegating payroll tasks to an outside company frees up resources, it also means you’re relinquishing control. That makes selecting a partner you can trust a vital decision and one that requires due diligence on the part of your business to avoid any financial or reputational loss. You may also find you no longer have instantaneous access to payroll functions, as you’re going through an outside party.

2. Handing over sensitive data

Your employees trust you with sensitive and confidential information that you’ll need to pass on to the payroll provider. Any breaches of policy, agreements or laws will impact your company, as would any potential hacks, leaving you open to vulnerabilities outside of your control.

3. Coordination issues

Getting your business systems and processes in sync with those of a payroll provider can have its challenges. Not only does your tech need to fit with that of the company you’ve outsourced to, but there needs to be checks and balances to ensure nothing gets lost between the two entities or is misaligned timewise.

4. Payroll providers can go out of business

If your payroll provider was to suddenly go out of business there can be a number of implications for you. If this happens, you’ll need to have the function performed elsewhere, and selecting a new firm can take time. You’ll also want to ensure continuity for everyone involved.

5. Costs can spiral out of control

Cost savings may be the primary reason to outsource payroll in the first place, but it’s important to ensure that remains the case. Depending on the pricing plan, businesses can find they’re paying more than they expected when they originally decided to delegate the task. The situation must also be reviewed when a provider ups its rates, as sometimes they’re no longer competitive and require renegotiating or for the company to go elsewhere.