Five clear signs you should consider outsourcing payroll
7 minute read
There are many reasons why organisations might consider outsourcing payroll. An obvious one is to free up more time for in-house HR or payroll teams, which can also generate savings on new recruits, administration, and training.
Making use of a payroll outsourcing company also leads to a better service, with fewer errors, and removes the headache that comes with legal compliance around tax, pensions and employment regulations. It also provides greater flexibility, with the ability to expand or contract service levels as needed, and you’ll always benefit from the latest software.
In-house provision, on the other hand, can be costly to maintain and many companies wrestle with out-of-date payroll software that cannot deliver the accurate and compliant information that is required, and that may not be integrated with your HR system.
But while organisations know they would benefit from choosing an outsourced payroll provider, it can be hard to find the right moment to make the change. The realities of day-to-day operations often take priority, and having the time and headspace to think about alternatives can also be a barrier.
Yet there are clear signs that should act as warning bells that it’s time to make the change. Here, we take a look at some of the indications that suggest you’re ready to make the move to an outsourced payroll company.
Five clear signs you should consider outsourcing payroll
- You’re spending too much time on payroll-related tasks
- You don’t have the necessary expertise handle payroll in-house
- Your current system is inefficient and causing problems
- The cost of maintaining an in-house system is too high
- You’re facing significant changes within the organisation
1. You’re spending too much time on payroll-related tasks
This is a clear sign that things are not working. If you’re constrained by old software packages that can’t share information with other systems, or using manual processes and spreadsheets to calculate wages, then there’s a better solution for you. Opting for outsourced payroll means you’ll have access to the latest software – including future updates – so you can benefit from a fully automated payroll process.
Not only will this perform tasks which currently take hours or days in a matter of seconds, it also significantly reduces the potential for errors which can cause even more administrative work and lead to disgruntled employees.
Data can flow freely from HR systems to the payroll outsourced company’s software and back again, meaning employees can access online payslips through your existing HR software. Other software packages can be updated too, such as time-and-attendance systems or pension records. The outsourced payroll company can also act as an agent for HMRC on your behalf, and pay employees directly if required.
Freeing up time from cumbersome and unnecessary processes brings obvious benefits for organisations. HR and payroll professionals will have more time available to focus on more strategic work, including analysing payroll data to identify trends or inefficiencies. Other departments will also benefit from accurate and easy-to-extract information, such as accounts for year-end reporting or HR teams looking for information around issues such as the gender pay gap.
In the longer-term, this could mean avoiding recruiting more people or not replacing those who leave, as much of the legwork will be undertaken by the outsourced payroll company. With payroll professionals notoriously hard to recruit for, this can significantly reduce the pressure on HR to find and upskill staff.
2. You don’t have the necessary expertise handle payroll in-house
The recruitment challenge also means you may simply not have the required expertise in-house any more. It’s not uncommon to see an experienced payroll professional who has been with a business for a long time retire, when they were the one person who really understood how everything worked. That’s the point when you’ll start making errors, and in a payroll setting that means people being paid the wrong amount, or even not getting paid at all. This scenario can be the perfect time to make a change, as previous employees may also have resisted any move away from what they saw as tried and trusted methods.
Other companies have the resources they need but struggle to cope with periods of staff absence due to sickness, parental leave or holiday. In smaller companies, it’s often HR teams that end up running payroll operations, and this just isn’t something they want to spend their time doing. If this sounds like your business, now could be the right time to consider outsourcing payroll.
Staying on top of requirements in a constantly changing landscape is hugely challenging for in-house payroll teams and HR professionals. Rules around HMRC reporting, auto-enrolment, the gender pay gap and the national minimum wage (NMW) are constantly changing, and keeping up to date with these requires ongoing training and development for in-house payroll teams.
There’s also the threat of fines for non-compliance should you be unable to meet your obligations, and, in the case of data security breaches, these can be devastating – notwithstanding the accompanying reputational damage.
Working with a payroll outsourcing company means you have access to a dedicated team of skilled payroll professionals, who have received the latest training and are fully up to speed with the latest software functionality and reporting requirements. Ideally these will be CIPP-qualified and able to evidence ongoing professional development.
Having this expertise on tap not only removes the staffing headache but also guarantees compliance and reduces the risk of receiving penalties as a result of failing to file the correct information. You can also rest assured that should you need additional expertise, perhaps as a result of an acquisition or expansion into a new country, that will also be available when required.
3. Your current system is inefficient and causing problems
An old and inefficient payroll software package is often the factor that pushes organisations to make the move over to an outsourced payroll set-up. Not only can these outdated systems result in many wasted hours and huge inefficiencies, they can also cause real issues by being unable to cope with the complexities of modern working.
New rules come into force all the time around HMRC compliance, minimum wage legislation or pensions auto-enrolment, while many companies are making changes to their overtime arrangements or providing one-off payments to help staff with the cost of living crisis. If your existing payroll system isn’t flexible enough to cope with these – or you’re spending your time creating spreadsheets to reflect new requirements, or manually feeding information from one system to another – then that’s a clear sign that a move to outsourced payroll should be on the cards.
Even more concerning is the possibility that your system is leaving you exposed to legal risks. The GDPR requires every organisation to take steps to ensure its data is secure, but older software systems or manual processes significantly increase the chances of a breach. When working with the right partner, outsourcing payroll means you can drastically reduce this risk. Make sure you ask any potential provider about its data security processes, and ideally look for one that has ISO 27001 accreditation.
An outsourced payroll company will also be able to take care of all your reporting requirements, acting as your agent for HMRC. This means they can receive tax notices and make payroll submissions on your behalf. If they are BACS-approved1, they will also be able to pay employees or HMRC for you, removing that workload from in-house teams.
4. The cost of maintaining an in-house system is too high
Outsourcing payroll will usually work out cheaper overall than running an in-house set-up. A payroll outsourcing company will typically charge a set fee per employee, based on the number of payment runs that need to be made, so you know exactly what you will be paying for the service each month.
Running a system in-house, on the other hand, can be extremely expensive. Implementing a software package has upfront costs as well as ongoing maintenance costs. But there are other costs too, in the form of the people whose time is taken up focusing on payroll rather than other more value-adding activities, training people in how to use systems and staying up to speed with the latest regulatory requirements, and the added administrative cost that comes from remedying errors.
There’s also the potential to receive significant fines – particularly should there be a breach of GDPR regulations but also as a result of non-compliance with HMRC or other reporting obligations – as well as hefty recruitment and training costs when someone moves on. Employing people in-house to do a solely payroll role also has hidden costs, in the form of pension contributions, holiday and sick pay and National Insurance Contributions (NICs), none of which apply when using an outsourced payroll provider.
5. You’re facing significant changes within the organisation
Sometimes an existing system has worked for a number of years, albeit inefficiently, but a major change in organisational structure or focus means the payroll elephant in the room can no longer be ignored.
A rapid period of growth – perhaps on the back of a new contract win – can mean significant numbers of employees may need to be onboarded quickly, and this could be too much for an antiquated payroll set-up or overstretched HR or payroll team to deliver.
A merger or acquisition – or a re-organisation of a group of companies – can also prove a catalyst for change. Merging organisations can see a need for different payroll systems, teams and processes to come together, and continuing with multiple existing setups in such circumstances would not make sense.
Bringing all payroll into a shared services environment and partnering with an outsourced payroll company means the various businesses can take advantage of all the benefits of an outsourced arrangement and free up the time of those working in the individual HR and payroll teams to focus on other matters arising from the change in structure. Significant cost savings can be realised from such scenarios, as existing setups are likely to be inefficient and not benefiting from the kind of innovation that can come from outsourcing payroll.
For many organisations, the only thing stopping them from making the decision to outsource payroll is the time – and space – required to think about it. But when circumstances change or something happens that illustrates the fragility of existing ways of working – such as someone leaving or yet another piece of legislation coming in that will require more training – it can be the catalyst that’s required to take the plunge.
For most organisations, outsourcing payroll makes sense; it provides them with access to the latest software, up-to-date knowledge, and years of expertise, and significantly reduces the risk of mistakes or inaccuracies. And with it often representing a cheaper overall solution than maintaining or growing an in-house provision, now is the perfect time to have your payroll outsourced to a payroll outsourcing company.