The People Bulletin

Organisations have ongoing pressures to reduce costs in their totality and at the same time get some flexibility into a fixed cost base by exchanging some fixed costs (headcount) for variable ones. A review of the way your payroll is processed – whether that is using in-house software or an external provider is very sensible as part of your budget process for a new financial year.

An important consideration is whether your organisation could regard paying your employees in-house is an integral part of your overall core-competencies, or whether like other business processes, there is some advantage in an external provider’s economies of scale reflected in a per employee cost, rather than sunk costs of equipment and payroll salaries.

If you outsource your payroll to a third party; the question you have to ask is what are you outsourcing? By this I mean are you outsourcing the entire process or elements of the process? Some employers have made the mistake in thinking that they have outsourced their payroll but in fact have only outsourced the calculations and the rest of the actual process remains their responsibility.

Where to start

Let’s start with some basic principles of outsourcing then build on them as the process that you would go through to actually outsource the payroll function. The first thing to recognise with outsourcing is that it is a different way of operating and you have to look at why you are considering it in the first place. The three criteria you need for its evaluation are:

1. What is the exact reason for outsourcing in your organisation? Is it to remove the process in its entirety or an element of it (i.e. the calculations of PAYE, NI and other deductions)?
2. What specific processes or parts of a process do you want to outsource? For example do you want the employees to interface directly with the third party provider or will there be processes within the organisation prior to the interaction with the provider? And how will these processes be delivered?
3. How well is the function being considered for outsourcing currently performing? If the benchmarks indicate an outperformance of the industry standard, the best bet might not be to do anything, but if the data points to a less than average performance, outsourcing may be the best option. For example in an outsourced environment a payroll processor would be expected to process over 1,500 employees per month.

Turning to item 1 above, there may only be one main driver for outsourcing. That is to say you can have ‘cost savings’ but not ‘cost savings and expertise’. To have the latter you would have to give up some of the cost savings to have the expertise. An outsourcer wants to understand your objective to be able to provide you with a solution that meets your criteria, but without a clear objective it is difficult to evaluate at a later date the success or failure of the outsourcing relationship.

At the same time as setting the primary objective you also need to look at what impact that outsourcing might have on what you are looking to achieve – see item 2. If you are looking to specify the processes that are to be used to the outsourcer or how the organisation will be involved in the processes then you are now entering the area of bespoke outsourcing which will determine a certain level of cost for the outsourcer (who will be unable to apply their own economies of scale to get the best price for you and ultimately for your organisation). The less involved you are in the process the lower the cost; but that does not mean no involvement at all – and if you want to control the whole process, outsourcing is unlikely to be for you in the first place.

What needs to be included?

As with setting your objective you also need to consider what you want the third provider to do, just saying ‘the payroll’ doesn’t really help as each provider has different levels of and depths of services. Figure 1 forms a basic list of what you need to consider:

You must check what is and is not included in the cost per month per employee – you can be surprised at the number of things that are not included in the process that you thought you are buying (for example telephone helpline support to employees with queries).

Managing the relationship

Once you have selected and implemented a provider for payroll remember there is now a relationship that you need to manage and without management through regular communication it is likely that the relationship will at some point hit the rocks. Outsourcing is not for everyone but for those that follow the principles and manage the relationship it can deliver more than originally anticipated from the initial arrangements. Remember the main benefits of outsourcing include:

• the potential to increase service quality, whilst lowering costs;
• with the ability to gain capabilities from their supplier not available internally, charities gain access to valuable know-how;
• outsourcing provides an organisation with the ability to focus on distinctive core competencies which will help yield long-term benefits;
• through the contract development of any outsourcing contract, organisations have the ability to determine and better anticipate any future costs; and
• transfer of risk to the outsourcer related to staff recruitment, retention, management and development.