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Risk or reward? The pros and cons of payroll outsourcing

Published March 17, 2022

Ask any entrepreneur about their biggest irritation and nine times out of ten you’ll get the answer ‘admin’. As your business grows, and takes on more staff, managing all the admin involved with handling payroll can become a massive headache. The more you grow, the more time you spend on it. Suddenly you find yourself spending all your time with your head buried in numbers and spreadsheets and none of it is doing what you love and what you’re best at – dealing with customers and growing your business.

This can be much more than an irritation. As a growing business, you need to take care of your most valuable assets — those things which will be crucial in determining the future success of your business. You may not have realized it yet, but the biggest and most important of these assets is you, the business owner.

As the founder of the business, you are the person who shaped the business model, you are the person who developed the strategy, and you are the main person responsible for finding more customers and making your business grow.

The problem is that many entrepreneurs fail to understand their own importance to their enterprise. They spend all their time bogged down in the administration side of things that they forget the very things which helped the business get this far in the first place.

This is not much fun — and it can kill your love for the business. But more importantly it under-utilizes the one resource which will be more important than anything else in determining the future of the company.

One option can be to take on new staff, to build out an HR department and have people handle this for you. However, this involves a significant investment in staffing costs, as well as much more administration headaches. You’re simply adding to the complexity of your business and adding more distractions for yourself and your staff.

The move to payroll outsourcing

The alternative is to simply outsource the whole thing — and many businesses are choosing to do that by turning to payroll outsourcing. This is a thriving and growing market. According to the latest report from Technavio, the global payroll outsourcing services market is expected to grow by $6.15bn between 2020 and 2025 at a year-on-year rate of 5.73%.

Fifty-four percent of that growth will come from North America, which leads the way in corporate outsourcing services.

Such growth is unsurprising. Managing payroll is not only a headache which consumes time and resources it is also a major risk. With rules becoming more complicated and demanding it’s easy for companies to make basic mistakes when managing their payroll which in turn could lead to substantial fines.

For small businesses such as retailers, restaurants, bars or other enterprises, which have been struggling to manage the business challenges of the pandemic, that is one risk which could be too much.

Instead, many businesses decide to bring in the experts and hand over their payroll operations to an outsourced company.

Related: Good or bad, 7 legislative changes that may impact your payroll

What is payroll outsourcing?

First, let's get a handle on what it is. As the name implies, it involves outsourcing some or all of your payroll operations to a third-party company. You will hand over all your critical information and they will manage the day-to-day issues of dotting every I and crossing every T. As well as freeing up yourself and your staff from a major administrative burden, it reduces the chances of a mistake which could bring the wrath of the taxman down upon you.

Companies come in many shapes and forms and will work in different ways. In general, though, using one of these services will mean transferring all the relevant information to their servers. Their team will manage your payroll using their computers and their software. Most will offer the ability to scale up and down the level of service you have and have a self-service option so you can make changes to operations as and when you need.

In theory, it should be like having a full HR department at your disposal, but at a more affordable price. They are specialists, operating in a highly efficient way which means they can generally offer outstanding quality of service more cheaply than if you were to choose a company. 

Benefits include:

  • The latest technology: Enterprise technology is transforming business admin in many ways including  payroll. However, purchasing this technology can be expensive and it can takes time to familiarize yourself with how the software works. Many of the latest software applications come with advanced functions which can improve operations in many ways. However, to use them you may need a high degree of familiarity in how these systems work. With a payroll outsourcing company, you get a business which not only uses the latest tech but has people who know how to wring every last piece of value out of it.
  • Reduced administrative burden: As a small and growing business, every penny will count. Time spent doing the payroll can distract you and your staff from activities which could drive revenue for a company. It’s a choice between nickel and dime tasks which might not produce much direct revenue compared to the hours worked, to those which could produce so much more. As a business, you want yourself and your people to be spending more time on $100 per hour jobs than on $10 per hour.
  • Access trained experts: If you run a restaurant, store or any other small business, there’s a good chance that you handle most of the admin yourself. Alternatively, you may assign someone from your existing staff — such as a bar manager — to do it. The problem is you and your team are unlikely to be real experts in this. As such, you may make mistakes especially if you’re overworked. For example, if you run a restaurant and find yourself up at 2am doing the books long after everyone else has gone home, there’s a much higher chance that you may make an error which could cause problems down the line.
  • More affordable: Payroll outsourcing companies may come with a cost, but this is generally less than hiring in-house staff. Although managing it yourself will come with no upfront cost, you will be paying in terms of how this distracts you from more revenue generating activities. In other words, freeing up your staff will improve your business performance and lead to much more revenue than you will spend with the outsourcing service.
  • Using self-service: Features vary depending on your choice of vendor, but most will offer self-service options. This means you can make any changes you like to payroll operations which gives you high level control. Their internal team will handle the detail which means you only need to concern yourself with high level issues. 

Payroll outsourcing, therefore, serves many purposes. You may have chosen it to reduce the time you spend on administrative operations, or to access a high level of expertise for a reduced cost. Either way, having a team in place managing these operations can be an enormous benefit to your business. It can help you to become more agile, focusing more of your employees on your key business goals.

It can also level the playing field, by offering small and medium sized businesses access to the specialist skills and latest technologies enjoyed by some of the largest enterprises in the world. This can lead to smaller companies being able to offer the speed, efficiency and performance advantages normally enjoyed by much larger entities.

Risks versus reward

Even so, payroll outsourcing does not come without its drawbacks and issues. There are many things to consider, not least of which is whether a vendor can provide a decent service for your company. Outsourcing companies vary in the way they work, the prices they charge and the features they offer.

Companies can operate at varying levels including:

  • Fully outsourced services: in which the provider handles all your payroll requirements.
  • Self service payroll: software which helps you manage payroll in-house.
  • Managed payroll: a more stand back service in which they are there to provide advice and support when needed to help your in-house efforts.

Costs will also depend on the size of your business and the complexity of your payroll. For example, simple salaried payroll in which everyone is working the same number of hours and are paid at the same time will be easier than those including different types of employees, on different contracts, working different sets of hours.

One of the key questions hospitality businesses will be asking themselves will be how they can make payroll outsourcing work for the payslip generation — those working part time, casual and varying hours.

Equally, those businesses who use freelancers will also consider how these should be managed. They will not be part of the regular payroll as they will not be included in any employee tax calculations. However, their work still needs to be recorded and paid for.

Some companies adopt a piecemeal approach, treating freelancers as service providers and paying them as and when they deliver on assigned jobs. Others will include them in payroll ensuring their monthly bills are paid at a certain time each month. All the information about their work, and their individual tax situations, would have to be recorded in the system and managed.

The payroll industry is evolving. As more businesses in the US start using outsourced services, providers are becoming more competitive in delivering a wider range of features and services. These in turn make payroll outsourcing more appealing and encourage further adoption. Even so, some of the more complicated payroll situations will not be covered by all payroll outsourcing companies which means that before you make a buying decision, you’ll need to make sure you can cover all those bases.

Some providers may also specialize in certain industries such as hospitality, catering or retail. Each sector will have different characteristics which may need something different from the payroll department.

Other factors which may influence a decision to use a payroll outsourcing company will involve the risks of working with third parties. Processing this information will require them to handle the personal data of your employees and contractors. You will have to ensure their systems are safe and secure as you will be held responsible for any loss of data which occurs as a result.

For all these risks and problems though, payroll outsourcing remains an extremely compelling proposition — one which can help businesses reduce the burden on their internal systems, avoid the risks of fines, and make your daily working life more interesting and fulfilling. Outsourcing an important but burdensome and technical task frees you up to do what you do best: focusing on making your business bigger, stronger and better.

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