Payroll: in-house v as a service

  • July 2021

Payroll teams come in many shapes and sizes but a key distinction splits them into two camps: in-house and outsourced. Jerome Smail, business journalist, presents the views of industry luminaries


There are many reasons why an employer might favour an internal team handling the payroll rather than a bureau – and vice versa. But what are the key considerations as well as the advantages and disadvantages of each route? And what are the professional considerations for the payroll workers in either camp?

To find out, I asked some notable members of the industry on both sides of the fence:

Andi Herrington MCIPPdip, director of payroll services at Wallis Payroll Ltd

Christina Holloway, payroll services director at Moorepay

Jackline Ogara MCIPPdip, payroll manager at River Island.

 

What are the pros and cons for  organisations to weigh when deciding whether to outsource the payroll function or to keep/bring it in-house?

Andi Herrington: Being an outsourced provider you might expect me to be all in favour of outsourcing payrolls. However, there are benefits to both bringing a payroll in-house and outsourcing, so each business needs to look at it on a case-by-case basis – just because it is right for the employer next door does not mean it is right for your employer.

We see businesses outsourcing for several reasons but for those medium-size businesses the primary reason is knowledge and that they want to draw on our skills and experience instead of having to train someone in-house. I do see businesses wanting to outsource payroll to reduce in-house headcount. However, for many employers there is still a requirement to have their own knowledge – it is still the employer’s responsibility to ensure that the payroll is processed correctly.

Unfortunately, I do think that payroll outsourcing is often commissioned within a business by those who do not entirely understand what payroll actually entails. Too often, I see a business going into the provider-change or transferring from in-house/outsourced without fully project-managing the transfer. No matter the choice of the business, the transfer must be managed properly – otherwise you will not get the best possible outcome.

One of the big reasons that I see businesses outsourcing their payroll is to free-up time for their current resources. We have had employers with seventy employees where the payroll was previously done by HR (human resources) due to limited knowledge on payroll legislation, and it ended up saving finance three days a month as well due to an improvement in the post-payroll reports that were produced.

Christina Holloway: The obvious benefit to keeping payroll in-house is that you keep the function under your control. Of course, the major drawbacks include the requirement for payroll expertise in-house, whether that’s a team of people or one person – and if it’s one person you’ve got a single point of failure which is incredibly risky. The main benefits of outsourcing include reduced costs and increased payroll expertise.

Jackline Ogara: One of the pros of outsourcing is it reduces the need to train in-house payroll staff. Outsourcing can also give you access to capabilities and facilities otherwise not accessible or affordable to the company. What’s more, it can bring in fresh perspectives as new people bring new ideas on how to do certain things.

However, there are cons when payroll is outsourced, such as no instant access to payroll – you cannot check in when you want to or add anything that is missing. Also, the contract might be too rigid to accommodate change.

Companies need to be confident in their chosen provider because they will be handing over confidential and sensitive information to a third party. They have to make sure the outsourcing company is stable because of the potential disruption of a provider going out of business.

There’s also the moral dilemma of denying your own team the opportunity of any growth as they are reduced to mere administrators.

 

What are the professional considerations of pursuing a career in either client payroll or in-house payroll? Are different skills needed?

AH: As someone who has moved from working in a large payroll bureau at the start of my payroll career and then spending eight years in the corporate world before setting up my own bureau, I would say the most important part is to get a good grounding early on in terms of training. I completed my CIPP diploma relatively early in my payroll career and have continued with training and knowledge updates since. There are so many changes in this industry that it is not possible to learn once and then know how payroll is done.

The main difference between the two are when working on in-house payroll you also become an expert on your own company, but when working on client payroll you often need to have a different hat on each day and must have detailed knowledge on a broad range of payroll as you never know what the next question will be. The skills needed are similar, but it is a constantly evolving career choice. Having worked in both bureau and been a customer on an outsourced payroll, I am aware of the benefits of both.

CH: For a payroll professional, there are lots of benefits to pursuing client payroll. Payroll providers have got to invest heavily into staff training – so there’s plenty of funded development opportunities. Plus, they will have access to more support and more resources. Further, they are exposed to more opportunities to diversify their skillset – like working in implementation, sales, support and management.

Working in-house, it can be harder to get the ongoing investment into learning and development. However, an internal payroll manager is empowered to run the payroll process and develop their own strategy, as opposed to being constrained by a client payroll’s processes. What’s more, they have more visibility of the end-to-end payroll and reward function.

Payroll managers in a bureau will gain experience on processing thousands of clients with varying requirements, whereas an in-house manager will be limited to the organisation they serve.

JO: The skills needed for running both in-house and outsourced payroll are the same and the only consideration that needs to be taken into account is our target audience.

For in-house payroll, our target audience will be the employees and the stakeholders. An additional knowledge of the system (on the tech side) used and adding on any compliance knowledge is a must.

Outsourced payroll employees tend to specialise in certain areas – for example, in administration, systems only, marketing (where negotiating skills are needed) or compliance. The target audience for outsourced payroll is represented by clients who need to be maintained at all cost, therefore the approach will be different.

 

What are the key considerations for businesses looking to outsource their payroll?

AH: For the companies that I work with, the key consideration is often cost – not just in terms of money but time that the payroll takes when in-house. The benefit of having an organisation that knows all the rules and regulations and continually updates its knowledge of both the payroll and software is essential.

CH: A starting point is for an organisation to think about the nature of their operation – do they outsource other functions or do they keep full control of them? Another top consideration for most businesses is often going to be: is it more expensive to outsource? To figure this out, it’s critical to evaluate the true cost of the in-house function. It’s not just the price of the software or the wages of the payroll team; it’s also the time spent processing payroll, the time spent fixing mistakes, the cost of bad employee experience, the risk posed by a single point of failure. For many organisations, outsourcing will be more cost-effective.

Something else to consider is where the organisation’s responsibilities stop and where the client payroll takes over – this may seem obvious but it’s not always clear! It’s vital to understand how it would work and who would do what.

JO: Productivity – look for where the business might fluctuate and not match the productivity of the internal staff.

Organisational readiness – assess the organisation’s internal systems and processes.

Costs – assess if it’s cheaper to outsource considering all hidden costs.

Return on investment – is the RoI worth outsourcing?

Compliance – most businesses assume that outsourcing will always resolve any compliance issues.

 

What are the key considerations for businesses looking to take payroll in-house from an outsourced service?

AH: The most important aspect for me if I bring a payroll in-house is do we have the skillset and, if not, can existing staff be trained up or is additional resource required. There is unfortunately still an assumption in some organisations, mostly mid-sized, that payroll is data processing, which to a certain degree it is but having the knowledge of why something should be done in a certain way is as important as how it should be processed.

If you are looking to bring your payroll in-house, make sure your team has a full understanding of all payroll rules and regulations plus the software that you will be using. It is also essential that the software you choose to use when bringing the payroll in-house is fit for the needs of your business. Speak to current users, not just those that the software house has for their referrals. How easy is it to run reports, does it have all of the functionality you would expect, don’t get oversold to, and don’t assume that just because something was possible in a previous software that the new one has the functionality. Make sure everything is in your specification document.

CH: One thing to consider is risk. For many organisations, the pandemic has highlighted just how vulnerable their payroll operations are – with many struggling to keep people paid accurately and on time last year. How will the organisation fare if the payroll manager is absent or resigns? Is there someone else with the expertise to process the payroll? And what about changing legislation – will the organisation have the funds to invest in training to keep their team up to speed and working compliantly? Of course, if you bring payroll in-house your payroll manager and team will need onboarding and you’ll also need to migrate all your data back in-house too.

JO: Lower cost – in the long run is it cheaper to have payroll specialists on site to answer questions and support employees and be beneficial to the company? The fee for running the payroll can also fluctuate with the complexities involved in the payroll runs. The payroll team can also work closely with the HR and finance teams and produce detailed analysis reports.

Reporting – with each organisation being different, the payroll department can have full control of the reports generated and customised precisely to what the business needs.

Last minute changes – having the payroll in-house gives maximum flexibility over any last minute changes while still ensuring that employees are paid on time to suit the business schedule.

Accuracy – payroll that is processed within and with an integrated system that works well will ensure few or no inaccuracies in pay. This is where an outsourced payroll provider is only as good as the information they have at hand or provided to them to process.

Control – an in-house team can effectively manage the payroll process from start to finish in an accurate and timely manner. Most in-house teams are usually focused on the payroll process in its entirety rather than the many payrolls the outsourced provider will be managing on a daily basis. 


Payroll: in-house v as a service

July 2021