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The Pros and Cons of Insourced, Outsourced and Hybrid Payroll Options

Topics: HR & Payroll Technology Solutions, HR Automation Technology, Payroll Strategies

December 6, 2016 /
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Recent growth in the number of companies providing outsourced payroll and HR services testifies to two things: the ever-changing complexity of payroll management, and a burgeoning demand for the specialized skills and software as a service (SaaS) that payroll vendors provide.

Startup companies that have yet to develop a payroll system may have the easiest time determining whether to process payroll in-house, outsource it, or partner with a vendor and split the duties. Mid- and large-sized organizations must carefully think through the options, though, as changing an existing payroll system will, necessarily, entail operational disruption.

Why It's Time To Dump Your Payroll Provider -  READ IT NOW!

Whether your company is considering keeping payroll insourced, outsourcing it entirely or developing a hybrid partnership with a payroll service vendor, these points should help you as you contemplate the best approach for your firm:

Insourced

Pros

  • Data and processing methods are under your complete control. You can develop your own proprietary software program to fit your company's specific needs.
  • For large or growing organizations, insourcing costs less over time. Rather than paying a per-employee rate, you pay the same staff to handle several employees at once. Your overall costs decrease as your number of employees increases.
  • Large enterprises with hefty IT budgets can develop proprietary software that integrates nearly all business operation records and activity, including the entire HR department, so that one fundamental platform permits interactive data between all departments. 
  • You have no general ledger downtime while a vendor processes your payroll.
  • Employees have immediate recourse to the payroll staff when something goes wrong.

Cons

  • Processing payroll in-house requires an educated and experienced staff in order to comply with every tax change and regulatory burden from every jurisdiction impacting the organization. Such skill doesn't come cheap and can hit the budgets of small and intermediary companies.
  • You'll be paying employment costs for lower-skilled labor for data entry and standardized tasks that could be automated.
  • You bear the cost of infrastructure purchase and ownership, both at start-up and as replacement hardware and software upgrades are needed.
  • Errors and late filings/tax remittances can cost you a bundle in fines.

Outsourced

Pros

  • Possible cost savings could be 10 - 40 percent. Smaller companies won't be paying managerial or skilled labor salaries for data entry and standardized work.
  • HR staff is liberated for more important strategic functions, such as recruiting, morale development, training and employee development.
  • The company can focus on core competencies rather than bogging down in administrative functions.
  • Outsourcing relieves the bureaucratic burden of routine transactional task administration and oversight.
  • Your staff need not become experts in tax and regulatory minutia. 
  • Small and mid-sized businesses can realize cost savings by not developing payroll software and purchasing the IT hardware to host it.
  • By choosing the right payroll partner, the business buys dedicated customer support for inquiries and changes.
  • Errors due to ignorance of payroll requirements become a thing of the past.

Cons

  • It takes substantial time to research and select the right payroll partner. The get-what-you-pay-for rule applies, so you'll need to perform careful due diligence. You don't want to pay more than you need to, but cut-rate vendors are sure to disappoint.
  • Outsourcing may be more work and expense than some mid to large companies can handle efficiently. Unless the data exchange is in the cloud and non-disruptive, it may be easier to keep payroll in-house.
  • Keeping private data secure may be a concern, especially if the service provider is new and unproven in the market.
  • Outsourcing may remove and isolate payroll functions from a company-wide integrated business operations platform.

[Considerations for choosing a payroll provider]  READ IT NOW!

Hybrid 

Pros

  • You keep control of what you desire to remain in-house while outsourcing administrative tasks that eat time and productivity.
  • You can have the confidence in regulatory compliance while not having to stay on top of it yourself.
  • A mix of vendor and insourced services would be scalable to your enterprise's changing needs. Grow or downsize as needed, and your payroll system will always be the right size.
  • A hybrid partner will offer flexible service options tailored to cover where your inside talent lacks and permit you to save vendor costs where you do have in-house skills.
  • Most payroll services provide specialized software applications that automate processes, further reducing in-house staff levels and costs.
  • The vendor's service should always provide cloud availability, whether hosted on your site or theirs, to access your payroll information from anywhere on any web-connected device.

Cons

  • A hybrid payroll service may be unsuitable for large organizations and be too much for very small companies with only a few employees.
  • It will take some time to integrate the software application and train users. Some mistakes will likely occur in the early stages.

Since every business, non-profit and mega corporation has different resources and payroll requirements, contemplating the need or desire to outsource some or all of your payroll eventually rests on the the value potential from the above three options. Insourced payroll equals total control. Outsourced payroll equals possible benefits to the bottom line, and a hybrid could mean the best of both worlds.

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