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Ask Alight: What does outsourcing payroll mean?

Payroll services (also known as payroll outsourcing) provide the means to streamline operations and control costs. While HR has used managed services for some time, the payroll back office has typically been left to run as-is.

Why do companies outsource payroll?

Outsourced payroll solutions are operationally resilient, resource-efficient, and deliver rapid return on investment (ROI). By outsourcing payroll administration, leaders can maintain tight cost controls, reduce costs and leakage, and streamline processes between all departments.

Why do companies outsource payroll?

Outsourced payroll solutions are operationally resilient, resource-efficient, and deliver rapid return on investment (ROI). By outsourcing payroll administration, leaders can maintain tight cost controls, reduce costs and leakage, and streamline processes between all departments.

In the clearest terms, it’s the money an organization forfeits through antiquated payroll processes. Poor governance and lack of transparency results in overpayments, underpayments, regulatory non-compliance, and a basic failure to deliver on obligations to a workforce. 

This, in turn, risks long-term repercussions, including lost productivity, a tarnished brand reputation, and revenue loss.

Source: Payroll leakage: Start by cutting preventable losses

How does outsourcing payroll benefit the CFO’s finance organization?

Ultimately, if a firm doesn’t invest in modern payroll technology, it can’t achieve optimum profits. Inaccurate payroll data is expensive and high risk. Anomalies that would be detected by artificial intelligence and other technologies, including robotic process automation (RPA), are inherent in the best payroll partners’ infrastructures. Other pros of outsourcing payroll include:

  • Reduce costly failures and leakage risks. Payroll can account for 70% of total business costs. Unchecked payroll processing errors can hit profits hard until detected. Manual payroll admin that is inefficient, mundane, repetitive, and prone to human error is ideal for automation. This will reduce costs, and the risk of fraud, and data theft. and help ensure correct and consistent payroll and financial information.
  • Reduce payroll technology costs – capital and operational. Outsourced payroll processing services delivered as a cloud service are agile for end-users and move the technology investment from a capital to an operational cost. A recent Gartner report revealed more than 90% of a typical IT budget goes on maintenance, leaving less than 10% for innovation and process improvement.
  • Future-proofed payroll. A key advantage of payroll delivered as a service is the built-in innovation roadmap with none of the costs of R&D and optimization but all the competitive benefits of new and evolving technologies.
  • Fill payroll skills gaps. According to Gartner, 66% of finance leaders believe the digital competency gap within their finance team is widening. ROI can only be realized with the right skills in place, which is a good reason to outsource.
  • Enhance data and analytics to cut payroll costs and increase efficiencies. According to 49% of CFOs, data management and analytics will be the keys to digital transformation and the profitability of an organization over the next three years.

What is the HR business case for outsourcing payroll?

Time to focus on people strategy. By outsourcing payroll processing and administration, HR leaders are freed to focus on core people strategy and to review and optimize the workforce for maximum return on investment and profitability. Other pros of the payroll outsourcing business case are:

  • Confidence that the payroll system is working. The role of a payroll partner is to ensure the clients can get the most value from the benefits it’s designed to deliver, effectively removing the challenge of the technology. There should be close to zero system downtime depending on KPIs agreed upon. 
  • Payroll process standardization. The payroll process is mirrored but localized in all outsourced locations. As part of this, a complex user experience is replaced with a single consumer-like interface. This makes it easy to access e-payslips, log attendance, leaves of absence, etc. A vital benefit of this and the self-service payroll capabilities is employee changes are simultaneously shared across HR admin processes and payroll for real-time accuracy.
  • Payroll compliance assurance…  in every country.  New rules and legislation are frequently introduced. Outsourced payroll administration monitors for and applies these around the clock and world, minimizing errors in pay which must be a priority with competition for talent high.
  • Expert local payroll knowledge. Avoids any skills shortages – whether short-term due to sickness or longer-term due to the talent shortage – and ensures the skills and local language needed to ensure the end-user support is efficient and high-quality.
  • Improve payroll process efficiencies and cuts costs. Standardization of payroll and integration with finance and HR systems streamlines HR and payroll processes for speed, increased productivity, and accuracy. Fixed costs are converted into variables, making it easier to budget.
  • Secure PPI data in payroll administration. Payroll is always processed in a secure environment. A single point of contact, rather than multiple contacts in different time zones, is a further advantage. The Global Payroll Complexity Index reveals that 62% of companies with six or more payroll vendors incurred payroll-related fines in the past five years. Only 27% of firms with one to five vendors did.
  • Payroll outsourcing options to suit changing business needs. There are five standard options for managed payroll services,
    • all in-house,
    • primarily in-house,
    • 50:50 in-house,
    • outsourced,
    • mostly outsourced,
    • entirely outsourced.
  • Solves payroll talent limitations. If keeping global payroll in-house is being considered, it must be determined if there are the skills, local knowledge, and capacity resilience to adapt to manage payroll in different time zones and handle different systems and reporting practices required in the different countries. Outsourcing removes this need.

How does payroll processing improve when payroll is outsourced?

  • Operational resilience. According to the Global Payroll Complexity Index (GPCI), in the past two years, 27% of employee data breaches resulted from in-house human error, and an average of 2% of a company’s total salary bill was added due to payroll leakage, the result of poor process management. Undetected, this could cost a 50,00-employee firm $30 million a year. Other pros of outsourcing payroll include,
  • Payroll innovation and futureproofing. There are six critical components to a highly efficient, compliant, accurate, and business enhancing payroll process. These are,
    • organizational structure,
    • technology and automation,
    • vendor governance and management,
    • employee experience,
    • data and system security,
    • cost management and investment protection.
  • Remove payroll compliance risks. The consensus is the greater the number of payroll vendors and mixes of payroll processes involved, the higher the overall payroll risk. 60.6% of respondents to the GPCI had outsourced some or all their payroll operations. The key drives were,
    • intense regulatory environments (42.4%),
    • overall corporate strategy for out-sourcing non-strategic activities (39.0%),
    • cost reduction (27.1%),
    • M&A activities (15.3%).
  • Address payroll talent shortage. The global payroll talent shortage is a massive risk to payroll continuity. One in five firms that outsourced some or all their payroll in the past two years said this had been a factor. The struggle to find and retain talent has impacted firms in some cases, and all respondents to the GPCI said the talent gap is an ongoing concern.
  • Best service delivery model for clean data. Typically, service models are set at a regional or country level. If poorly managed, or without the skills needed to govern the processes, the risk and complexity profile will be high, and employee engagement and satisfaction will be low.

The financial deficit this creates will hit profit margins. The clean data created in optimized local payroll processes, more so when integrated with other business processes, provides vital intelligence to business leaders about the profitability and opportunities each country and region brings.

  • Outsourced payroll is agile. The nature of the technology can ensure the payroll function is future-proofed. It’s ideal for rapid and staged payroll process modernization and delivery. New payroll locations, features, and functions can be added easily. It’s also straightforward to integrate with other business systems.
  • Outsourced payroll KPIs ensure the best payroll outcomes. Agile KPIs ensure payroll services are delivered in line with evolving needs of the business. The five most typical KPIs our clients require are payroll accuracy, timeliness, time to query resolution, number of overpayments, and number of off-cycle payments.

While there are many pros to outsourcing payroll, there are also cons, based on the wider needs of an organization. Stay tuned to "Ask Alight" for more details about payroll outsourcing, and if it is a good choice for your organization.

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