How do you break the deadlock in the in-house payroll versus outsourcing debate?
There’s no shortage of case studies sponsored by payroll software providers demonstrating ROI from in-house payroll. On the other side of the coin, you’ll find plenty of detailed surveys and whitepapers showing you outsourcing is the best value proposition. Adding it up, it’s easy to be puzzled by the stalemate. There’s compelling points from both camps, but also the same frustrating tendency toward all-or-nothing conclusions.
The reality is this: There are instances where the best option is outsourcing and there are others where it is software. It simply depends on your unique situation.
Figuring out which approach is right for you, therefore, isn’t about divining whether payroll software or payroll outsourcing providers have the most credible overall position. It’s simply a matter of working logically through how each of the core elements of the decision relates to your specific context.
There are 3 critical angles you need to consider when choosing between in-house, software-based payroll and outsourcing: your skillset, your risk tolerance, and the unique cost calculation for your situation.
If you don’t have payroll processing skills on staff already, that can be a pretty compelling reason to start your evaluation leaning toward outsourcing.
Payroll processing involves a number of different discrete tasks. It’s more complicated than simply making base calculations and cutting checks. While employees involved in payroll processing might not need a Harvard business degree, at minimum they will need to know how to:
- file quarterly reports,
- ensure withholding payments are made,
- keep up with state and federal deadlines,
- issue W-2 forms,
- manage federal unemployment tax, and
- submit I-9 employment eligibility verification forms.
At many companies, payroll processing can be even more complex. PTO accruals, pension and health care deductions, wage garnishments, overtime or commission calculations, and direct deposit enrollments are all common elements of managing payroll.
While the list of payroll tasks can be intimidating, it’s definitely not insurmountable for an organization considering training a new employee on using software in-house. Today’s software options are more sophisticated than ever. Automatic electronic filing functionality, deadline reminders and alerts, and interactive, pre-defined processes for things like adding new employees can minimize much of the pain of the learning process. Nevertheless, time will need to be budgeted to training and that is an expense worth both considering and quantifying.
It’s also worth thinking about whether or not your organization has the technical resources for deploying the software, integrating it with any software it will need to communicate with (time & attendance or job cost software, for instance), and managing software version updates. If you need to rely on a software provider for these services, that can add another line item to the bill. That being said, there is another option. One of the reasons that software-as-a-service (SaaS) solutions are gaining in popularity is because they transfer the management of the hardware and software maintenance to the provider.
Every business wants to minimize risk. The risk management element of determining whether to outsource payroll is an important part of the decision.
One of the more attractive features that some payroll services advertise are tax accuracy guarantees. But it’s always important to qualify exactly what is stipulated in the contractual details with regards to the guarantee. What percentage of any penalties will be covered? Are there conditions that nullify the guarantee? Who is responsible for making up the difference in underpayments?
There’s also an actuarial angle to consider when it comes to tax accuracy guarantees. When risk is spread across the entire portfolio of a payroll services client base, each client pays a small percentage as part of their regular fee—essentially taking an inexpensive insurance policy out against the possibility of penalties. Choosing to manage payroll in-house instead eliminates this cost driver, but also means the risk is entirely owned by the company.
Another element of risk to consider is related to data security. How comfortable are you with sensitive payroll data leaving your company and being transferred to a 3rd party? There’s not one wrong or right answer to that question. Again, it will depend. If you have strong data security and internal accounting controls, keeping data in-house likely represents your best approach for minimizing the possibility of fraud. If on the other hand, your IT and accounting security is lax, leveraging a services provider who can supply a strong level of control can represent a positive in terms of risk management.
As with any outsourcing decision, it’s critical to apply the real dollar value of your time to the calculation. In fact, there’s no way you can make an educated cost decision on whether to opt for software or services without first quantifying the value of your time and the amount each solution will save you.
The first step is consider who would be handling the payroll work. Is it an office manager getting paid $25/hr or the head partner at a law firm who could be billing $200/hr? Obviously, the calculation is different for every situation.
Another thing that will vary is the raw amount of time that can be saved via outsourcing. For example, an organization that pays a handful of salaried employees every couple of weeks may have minimal opportunities for time saving on an on-going basis. Once the initial payroll settings are established, the bi-weekly payments can be made automatically without further data input. Contrast that with a situation where a larger number of employees are manually reporting hours, overtime and commissions need to be calculated, or turnover leads to a significant amount of employee enrollment setup work.
Working with both outsourcing providers and software providers you should be able to leverage their input to help qualify your estimates on the amount of time you would spend on payroll with each respective solution. With a solid estimate on time savings and a quantification of the dollar value of your time, you have the fundamental information to make an educated cost comparison.