White expand arrow icon
Back to Blog

Payroll Outsourcing Advantages and Disadvantages

Monday, July 19, 2021

What is Payroll Outsourcing?

Several companies, big and small, delegate some aspect or function of their business to a third party for several reasons - access expertise & technology, save time, costs, avoid risks, etc. This is called outsourcing. Payroll outsourcing is delegating some or the entire process of managing payrolls to another business.

Why Do Companies Outsource Payroll?

The benefits of outsourcing payroll functions seem pretty obvious to many companies irrespective of the niche. Hence, the outsourcing industry is going to soar to $19 billion by the end of 2020 with a constant growth rate of 4.4% by 2023.  

Stats aside, let me tell you a story. 

It was 2006 - simpler times. British Petroleum wanted to outsource its HR functions to Exult. Analyzing all the pros and cons of payroll outsourcing, the petroleum giant signed a $600 million contract with the HR firm. 

The agreement transferred the administrative elements of compensation, benefits, payroll, organizational development, performance management, employee development, training, recruitment, and relocation to Exult.

Remember, this happened in 2006 and the agreement was one of the costliest outsourcing of the times. 

The deal endowed the following benefits for British Petroleum:

  1. 40% reduction in HR staff
  2. Saved $15 million a year
  3. Avoid $30 million in costs for expanding technology

Generally, outsourcing is one of the most powerful trends in management. And payroll outsourcing is one of the most frequently outsourced HR functions.

Great Savings

Saving time and money is one of the recurrent advantages of outsourcing payroll services. Between 2015-2019, companies partially outsourcing payroll services increased by 300%. Particularly in the banking industry, 1 in 3 jobs in the payroll and benefits administration function is outsourced as they need not work from an office.

Cost

In-house payroll processing is costly courtesy the following reasons; paying the payroll team, payroll processing, subscribing to payroll software, managing employee queries, etc.

Having an in-house payroll team can seem to be advantageous at first. However, it isn’t that rosy. 

Firstly, a payroll team may not have transferable skills to work with or on cross-functional tasks. Secondly, the cost of hiring, setting up, and maintaining a payroll team skyrockets as you scale up your staff. Many business owners and leaders make the mistake of underestimating the amount of manpower and resources spent on managing payroll. Thirdly, you must also stay abreast of tax rules, personnel, and accounting deadlines. 

Saving costs have traditionally been an advantage of payroll outsourcing. Companies that outsource payroll management save 18% more than companies that process payrolls in-house.

It saves firms money that could be invested in computer equipment, software, training, etc. By avoiding expensive mistakes in payroll processing you open more avenues to grow.

Time

Payroll processing contains a lot of intricate details. Several activities like benefit deductions, garnishments, new hires and terminations, paid time off require constant supervision and tracking. Moreover, your finance department needs to keep track of state and federal regulations. 

You need to invest a significant amount of hours in navigating these nuances. 

Outsourcing your payroll allows you to save time and better concentrate on your HR strategy, recruiting, and other administrative functions that can directly impact employee performance. 

Moreover, as the staff numbers grow you need to manage mountains of data pertaining to finances. One of the advantages of payroll outsourcing is that you can delegate these tasks with greater confidence and accuracy. Simply put, instead of sloppily swimming through muddy streams of data and figuring out how much to pay a John or a Ken, you can focus on improving the quality of your hire, improve onboarding experience, etc.

Enhanced process

One of the advantages of outsourcing payroll services is that you can gain access to specialized skills and the latest technology. Tapping into these benefits, you enhance your entire payroll process.

Expert advice

Do you have the resources with the necessary Finance and Accounting skills to manage your payroll? Most times, your staff and business owners who should handle the payroll aren’t well-positioned to stay abreast of changing regulations. 

According to Deloitte’s survey, an average payroll organization has 12 years of experience. They also work overtime of 25 hours per month.  Even while choosing payroll vendors, strategically select vendors with regional expertise. 

Acquiring expert skills is also another win in the list of pros and cons of outsourcing payroll. Particularly, when you go global, you might need to work in multiple jurisdictions. An expert with cognizance of local rules and regulations is the best if you are a company with a remote-first and global hiring culture. Such specialized skills can only be acquired through outsourcing payroll functions.

Moreover, managing payroll encompasses several functions such as:

  1. Handling the administration of benefits and deductions
  2. Worker compensation
  3. Offering 401k plans

Outsourcing your payroll can ensure seamless handling of these functions while you focus on bettering HR strategies.

New technology

Sometimes companies do not look to reduce costs by outsourcing payroll functions. They do it because of technology limitations too. Technology can relieve great stress off your payroll resources. They help you focus on strategic processes and process improvement.

Cloud technology has simply revolutionized the payroll industry. According to a Deloitte report, compliance, payroll accuracy, and integration of various technologies were rated among the top 3 advantages of outsourcing payroll functions. 

Technology has also shifted the traditional finance function to one that is shared between HR and Finance. In fact, there has been a 64% increase in this trend since 2018.

39% of employees use a cloud-based payroll solution and 6% of employees already use process automation to payroll processes.  

It would also be interesting to note that 73% of respondents use some sort of self-service platform such as Multiplier, particularly a feature that helps them view payments online. 

Cloud computing has changed the way payroll processing is done. Particularly, SaaS-based payroll solution providers are getting more creative on how they could make the platform a self-serving one to impress users.

Avoid Legal, Tax & Compliance Risks

Security risks

Security is key while managing payrolls. It is always a risky business function. Payroll processing requires securing processing of intimate details of your employers. Here, you cannot trust even your well-known honest employees. Mistakes and failures are human behavior - there is always the risk of carelessness which may lead to identity theft, embezzlement of funds, and tampering with company files.

You could circumvent these risks by using in-house payroll software. However, the machinery to set up secure servers, networks, etc. This exhaustively demands your energy and attention. 

Outsourcing your payroll function offers increasingly advanced technologies to counter threats. Particularly, global payroll providers stay abreast of various data laws and regulations like the GDPR, California Privacy laws, etc across the globe. Additionally, the use of cloud technology offers increased security for payroll services.

In addition to redundant backup and multiple server locations, a quality payroll provider invests in state-of-the-art systems for storing and protecting data, simply because it’s part of the service provided to clients.

Compliance - Payroll

One of the most important tasks that requires backbreaking research and learning is staying aware of laws, regulations, and mandatory rules, especially when hiring across the globe. 

Employers need cognizance of in-depth understanding of various regulations to avoid any risk of running into various satanic regulations such as labor, tax, immigration laws, etc. 

For example, in some countries, vacation or holiday bonuses must be paid, whereas in other countries it is optional. In addition, there can be regional and municipal variations in the law. For example, in the U.S. states of Oregon and Wisconsin, employees need only be paid every month, while in most other states workers must be paid more regularly.

Outsourcing your payroll function to a provider like Multiplier helps you stay on top of compliance and expand seamlessly without getting distracted by local, regional, and national laws and regulations.

Cons of outsourcing payroll functions

Outsourcing your payroll does open a new influx of challenges. Although the benefits far outweigh the disadvantages, we would like to give you a heads-up on a couple of disadvantages of outsourcing your payroll. 

Delays in paycheck delivery

One major trouble while outsourcing payroll is the untimely delivery of paychecks for employees. This happens when the employer has workers from around the globe. 49% of employees say that they will initiate a job hunt if the current employer makes just errors in delivering payments. 

This problem arises when employees do not receive the required information needed to process paychecks. Moreover, you should take into account disturbances such as holidays, unpredictable weather, technical glitches and plan in advance. Not working in tandem with your payroll vendor to plan and pay your employees appropriately.

Loss of control

Another damper on the list of pros and cons of outsourcing payroll is the lack of in-house personnel. The lack of face-to-face contact can inflict a soar experience on employees. 

Outsourcing your payroll will also lead to loss of control that may not be suitable for your business. To illustrate, let us bring to your notice that you are essentially allowing a third party to access your team’s private information. You must also submit to the terms of conditions of the third party when it comes to handling the data.

Another illustration is the case of emergency services. You may have to pay for the extra work done by the payroll vendor, unlike an in-house team where you can ask for a “favor” to pump in a few more hours.

Moreover, when you outsource your payroll, you are still liable to legal risks. Just because you have delegated the responsibility, does not mean that you are immune to legal risks. 

How Does Multiplier Help in Efficient Payroll Processing?

It would be relieving to know that the above cons can be managed by yourself if you have a self-serving platform like Multiplier. 

Two of the biggest pain relievers Multiplier offers are its invoicing and single-click payroll processing features. Generate and manage payments in a single invoice for all remote employees in a matter of few clicks. 

Multiplier’s SaaS-based EOR and Payroll service is super secure and self-serving. 

The intuitive interface makes it easy for you to onboard and pay employees compliantly across 100+ countries using 15+ of our local entities and several other legal partners. 


Book a demo with us now!

Tags:
No items found.
Discover how Multiplier can help you grow your global team.
Book a Demo

You might also like
these new posts

If you’re interested to view all our use cases, click here.