The complete guide to outsourcing your payroll in 2021 [Free 121 business case support]
The concept of outsourcing your payroll is highly appealing. Businesses effectively gain more expertise, experience and resources, and it costs them less.
However, it never feels quite as simple as it should – and there’s a good reason for that. Employee pay is a highly sensitive business function. The idea of passing responsibility for it over to a third party can make people feel anxious.
This is fuelled by doubts that niggle away and make the process seem more difficult than it is. Typical concerns include how the organisation will keep control, and whether they’ll lose internal expertise, creating a risk to the business in the long term.
Other issues raised are often centred around the need for a smooth transition, or whether businesses can ensure new payroll tech integrates seamlessly with existing HR or finance systems.
These questions are perfectly natural, and fairly common. But making the switch to work with an outsourced partner is not as complicated as people fear.
In this article, we’ll provide the answers you need and explain how a payroll partnership should work in reality. We’ll also highlight things to look out for, to ensure your payroll transition goes smoothly.
Reasons to outsource payroll
Before we address some of the doubts businesses have, it’s worth reviewing some of the reasons why people want to outsource their payroll in the first place.
The obvious driver is cost savings. From the provision of technology to training staff, dedicated specialists can commit more resources into this function. They also enjoy the economies of scale that allow them to operate more cost effectively. It’s estimated that on average this will translate to a 20% saving to the end customer.
While this is a clear incentive, it’s not the only reason businesses opt to outsource.Other reasons to outsource include:
- Lowering risk
- Data security
- Investment in technology
- Fixed costs
- Peace of mind
It will always be a challenge for internal teams to keep up with compliance regulations – it’s perhaps the single biggest driver to outsource, in addition to cost savings. New legislation and government guidance constantly changes the requirements placed on payroll – covering such things as furlough schemes, gender-based pay, and more.
While this makes life hard for internal teams, outsourced payroll specialists are often at the forefront of legal changes and are well placed to advise companies on the right course of action.
A typical prompt that encourages businesses to consider outsourcing is when an experienced team member moves on – taking with them vast amounts of knowledge and expertise.
Companies are left with a decision to make. Should they find someone new to put their trust in or take advantage of an outsourcing partner? The latter may be more cost effective, but given the added expertise, experience and resources available, it’s also often seen as presenting less risk.
Companies continue to develop their digital infrastructures, and integrate systems – and, as they do, there’s an imperative to keep sensitive information secure. In an era of remote working, with many employees operating outside the office, the need to keep data safe grows even stronger.
It's hard for internal payroll teams to stay on top of information security, as it’s not within their core skill set. Outsourcing providers, however, are also technology specialists who are used to working remotely, and they already have the tools, processes and understanding to manage these concerns.
What we want technology to do for us is evolving all the time. For example, while we want to be able to access real time data insights, we also expect tighter data controls. Meeting these demands requires ongoing investment into the latest solutions – and puts a strain on budgets as internal teams struggle to keep up.
Payroll specialists, on the other hand, are constantly investing significant resources into new technology to ensure they’re delivering the most up-to-date solutions. That’s why outsourcing is often seen as a smart way to future-proof companies against an ever-changing technological landscape.
Keeping an internal team’s knowledge and skill set up to date requires ongoing training and refresher courses. With the technology and compliance regulations (mentioned above) constantly changing, this will never go away.
If companies opt to work with a specialist, however, they can tap into a large pool of talent, feel confident that the people managing the payroll are up to speed, and no longer worry about training staff.
As well as lowering costs, outsourcing also removes unknown cost factors. For example, when someone hands in their notice, businesses no longer need to commit resources to hiring and onboarding new members of staff. Nor do they need to pay out for constant tech upgrades or legal advice.
Through outsourcing, companies can simply pay a flat amount based on the level of service they opt for.
A good night’s sleep
When you take into account all of the above, businesses have the reassurance that their payroll is not just in safe hands, but that it’s performing to the highest standard and in the most cost-effective way.
This removes unnecessary stress for people working in HR or finance who are ultimately responsible for overseeing the payroll team.
How do you implement outsourced payroll?
When people take a close look at payroll outsourcing, and see the value it offers, they start to think about the practicalities of making it happen. There’s no doubt that the idea of transitioning to a new payroll system can be daunting. Employees get very emotional, very quickly, if anything goes wrong with their pay, so it’s natural to have some anxiety when you’re handing that responsibility over.
However, the reality is that the transition process is carefully considered and designed to ensure everything is operating smoothly, before you go live. The ‘SD Worx Way’, for instance, is a five-step implementation process that focuses on people, along with the processes and technology.
The steps guarantee payroll accuracy from the outset, but they also ensure that all key stakeholders are involved, and no one is an afterthought.
The five steps include:
- Set up
- Go live
The launch phase takes place over the first two weeks, when both sides get to know each other. It’s an opportunity for your new partner to build an understanding of your current processes and a practical knowledge of your existing technology.
They’ll also want to know when key people are available and when contracts with your current tech provider are due to expire, so they can draw up a plan of action and a timeline can be laid out.
Typically taking place over weeks 2-5, the discovery phase moves beyond the initial launch. It allows your provider to gain a more detailed understanding of the workforce – how and when they get paid, etc.
While all companies have their idiosyncrasies, your provider will be looking to develop standardised, repeatable and automated processes where possible. This will all be played back to you in a workshop environment, so you can raise questions before you agree a course of action.
Once agreed, the set up takes place between weeks 3-6. This involves configuring the new system to your specific needs. It will take everything into account – including pay, pensions, benefits, etc.
At the same time, a training programme will introduce your team to the new technology platform – helping people understand what the system is capable of and where things may be different from the previous system.
Testing will usually take place between weeks 7-13 (or 7-17), depending on whether an organisation wants to run one or two parallel pay runs before going live. This will include an opportunity to review the interface and offer feedback.
In this phase, data will also be migrated into the new system, still within a staging area, where it will be assessed as if it were live. This parallel testing allows both sides to check performance and identify any data anomalies.
Typically, the ‘go-live’ takes place during weeks 14-18 of the implementation period. Once live, there will be a period of ‘hyper care’ where support will be on hand, at a moment’s notice, should you have any questions.
At the end of week 18 (or 22 if there are two parallel runs), the payroll function will then switch to business as usual.
Integration with existing HCM systems
The ability to integrate should be a priority whenever you consider a new technology platform or outsourcing partner. Effective integration will cut out huge amounts of unnecessary administration for any organisation – saving them costs, reducing the risk of error and helping to ensure compliance.
When systems are connected it also provides decision makers with access to insights and intelligence which would have previously been much harder or slower to attain. Research conducted by SD Worx, in partnership with Circal, found that 82% of HR leaders are now using this type of workforce data to inform their strategic decision making.
Given its importance, you should expect a payroll provider’s technology to work seamlessly with existing solutions in HR and Finance. If this is the case, the transition should enhance your organisation’s overall technology stack.
The alternative would be a bespoke integration project – which can cost north of six figures, given the need to pay specialists, licence software and middleware. This also creates unnecessary complexity when software updates are required.
So, to ensure that your new payroll partnership doesn’t create complications, it’s best to check a few things first.
Does the new payroll system integrate with your HR and finance systems?
Any decent payroll provider should be able to integrate with the major HR and finance software vendors, such as Workday, SAP and Oracle. It’s also worth going a little deeper here to check the type of integration available, as more advanced solutions can offer you added detail on the information passed between systems, including error and completion logs.
Can it integrate with smaller vendors?
Many innovative tech solutions are developed independently of the major vendors, and you don’t want to limit your integrations – so it’s important to check this if it applies to you. SD Worx manages this by offering SD Connect, for example, which can connect SD Worx with any third-party vendor via an API.
How long will integration take and how much will it cost?
You need to know from the start whether an integration project is going to impact timelines or add anything to the overall cost. For example, while standard integrations may be straightforward and have little impact on the implementation, requests for more advanced integrations can take weeks and might be subject to additional charges.
Can your chosen partner demonstrate successful integrations?
It’s completely justifiable to do your due diligence to ensure your payroll partner can deliver. Given the importance of the project, it’s reasonable to ask for testimonials, case studies or even request to speak to other customers.
Do they follow standardised processes?
In addition to the technology itself, you should also ensure your partner has clear interface specifications that govern the payroll data going in and out of the system. If this isn’t the case, you might find that information is missing when data is viewed in other systems. Standardised processes, however, ensure accuracy and consistency.
Occasionally concerns are raised that, by partnering with an outsourcing specialist, a business will lose the expertise they had previously built with their in-house payroll team. The reality, however, is that companies gain a more advanced payroll function, with added expertise.
It’s very difficult for an internal team to maintain the same level of knowledge, and they won’t have the same breadth of experience that you can expect from a dedicated specialist.
When things are constantly changing, having that kind of resource available on tap puts organisations in a far stronger position to deal with whatever comes along.
Businesses will notice the benefit of this in three main ways:
The need for internal teams to keep up-to-date with current legislation is a constant challenge. Each year payroll sees new regulations covering taxation, employee benefits, gender-based pay and bonuses, employee privacy, and more recently furlough schemes, etc. How new legislation should be interpreted is not always straightforward, and it regularly leads organisations to seek the advice of consultants and legal specialists.
In contrast, a dedicated payroll provider should have all the necessary knowledge when it comes to legal changes – they may even have advised government on upcoming legislation or have first-hand knowledge of government intentions. This puts them in a good position to offer clear guidance and advise on the best course of action.
Given payroll providers are the developers of their technology, they won’t just understand how to use the system but also how to get maximise value from it.
Knowledge of the tech landscape, and a constant investment in development, will also ensure that the company never falls behind the curve when it comes to accessing and utilising the latest digital solutions.
Regardless of how qualified individuals within internal payroll teams are, it’s hard to compete with the breadth of experience available from payroll specialists. They can use the knowledge gained working with many different organisations to develop standardised processes that ensure accuracy and efficiency.
This experience extends across a range of organisational structures, covering multiple ways of working and types of contract – be they fixed, zero hours, etc.
Businesses will always want to keep control of their payroll – that’s natural. And there can sometimes be a fear that, by outsourcing to a third party, the grasp on this vital business function will be lost.
This isn’t what happens though. Instead, companies gain a partner that will work closely with the point/s of contact within your business to develop the best possible payroll function.
The key here is not to look at outsourcing as buying from a supplier. It’s a partnership – a relationship that goes way beyond what you might expect from a standard software-as-a-service provider.
You won’t be doing the work, but you’ll be able to guide and direct what’s happening – and feel in control.
You can do this in three key ways:
It’s important to build a close personal relationship between the points of contact on both sides. Partnerships works best if that relationship is honest and open – and allows for frank conversations. You’re both working towards the same common goal so you should be able challenge each other.
While the provider will want to do this to develop standardised processes that support accuracy and efficiency, this also provides you with full transparency. You’ll be able to ask questions, hold your partner accountable and have doubts allayed at any time.
In forming this partnership, you’ll also agree to a governance model covering a service level agreement (SLA) with specific KPIs. This will not only ensure that everything is managed smoothly, but also that the relationship remains a healthy one.
It means you never lose sight of what’s happening, and you can keep a check on performance and standards. This includes elements such as accuracy and timelines, but also whether support tickets are being responded to within the right timeframe, etc.
Given that businesses never stay still for long, it’s important to hold regular reviews to ensure everyone is happy. If the needs of the company change, this is an opportunity to review service levels and see whether they should be scaled up or down.
The major benefit here is that you can do this quickly with a payroll partner, while it may take time to change the structure of an internal team. You actually gain much more flexibility and control over the set-up of your payroll function.
Working with a dedicated payroll provider may prove to be a better long-term decision for an organisation, but for all the reasons outlined above, you still need to do your due diligence.
You don’t want to find that the partnership has inadvertently caused complications, or that service levels fall below your expectations.
To ensure you’re getting all the gains you were promised, and you’re confident when you move forward, it’s worth keeping sight of the below checklist.
Do you feel comfortable with the team that will support you and your organisation? Will you have access to them when required? Will you receive regular reports and review meetings?
Are you satisfied with the talent that is supplementing your team? How qualified is your support team and what level of training have they received?
Legal and payroll compliance advice
Is your partner really at the forefront of legal change? Are they capable of providing the level of advice expected from a specialist?
Does your payroll provider’s technology integrate with your existing systems? How will their platform help to future-proof your company?
Can senior decision makers access key data from different systems? Can your provider guarantee that private data can’t be viewed by anyone who shouldn’t see it? What information security protocols are in place to prevent a data breach?
Can your payroll provider walk you through this process step by step and answer any questions you might have?
Can they prove it all? Can they demonstrate successful implementations, integrations and healthy ongoing relationships? What do their customers have to say?
Is managed payroll right for your business?
Making the decision to work with an outsourced payroll provider may seem complex at first. In fact, the whole process is fairly straight-forward once the decision is taken – and your company stands to benefit greatly.
The economies of scale – covering hiring, training, tech investment, security, integrations, consultants, etc. – are significant and can generate big cost savings.
The ability to future-proof against an evolving payroll landscape, including new technology, ways of working and legislation, also removes significant headaches that can eat into resources in other ways. It will ensure you’re always up to speed and following processes that guarantee the best possible performance.
A close partnership will also ensure you maintain a high level of knowledge and keep control over what’s happening – while gaining increased flexibility over the level of service provided.
Once all of your initial questions are answered, you’ll be able to move forward confidently – and you may find that making the decision is unexpectedly simple.
Building the business case for payroll outsourcing
Now is the time to consider your payroll growth strategy and identify gaps that will eventually need to be addressed. Could outsourcing help you achieve future growth?
Outsourcing your payroll may seem like a big step and met with resistance, but we are here to help you make the right decision. To thrive in a digital and people-first workplace, your organisation needs to invest in the payroll function to meet the needs of the future workforce sustainably.
There are strong commercial justifications for outsourcing your payroll with immediate and long-term benefits for not just HR and payroll teams, but for the wider business. Reducing your total cost of ownership, turning fixed costs into variables and increasing accuracy and compliance are just some of the reasons that outsourcing payroll will transform your business and lead you closer to your growth goals.
Our dedicated and friendly payrollers know everything there is to know about managed payroll. So, if you need some more advice, or you’d like to chat about your business priorities, we’ve got your back. Or if you’ve already made your mind up and have decided payroll outsourcing is for you, then we can help you create a solid business case to convince even the most sceptical of business leaders.