In-house payroll vs managed service

This article is intended to give a balanced view of payroll software versus payroll services. In the UK, the markets for payroll software and service co-exist and will continue to do so for the foreseeable future.

The key difference between them is that a software-only service requires the customer to maintain payroll processing expertise and resources. Whereas, with a managed service, the risk and accountability moves to the service provider (e.g. SD Worx) in terms of processing, compliance, service levels and scalability.

We have observed the following reasons for customers to choose a managed payroll service from SD Worx:

• Increasing concern about legislative and tax compliance – using a managed service specialist means the customer relies on the service providers ISAE 3402 financial compliance controls, plus investment in ongoing payroll training and payroll career development. 
• The decision that running payroll is not core to the customer’s primary business. It supports the business in a similar way to facilities management/security, i.e. needs to be done well but not necessarily by consuming your own headcount.
• Resource constraints and absences mean that maintaining an in-house payroll team is not economically viable. Payroll teams face risks from sickness, holidays and attrition. 
• The customer operates in an industry typified as highly distributed, high turnover, fluctuating in employee numbers and large peaks in activity where a variable payroll cost base would be more cost efficient than carrying a fixed cost.

In comparison, we see customers choosing to remain with an in-house payroll team where:

• Payroll relies on significant tacit knowledge and discretionary practices, i.e. unwritten rules and ability to operate outside of standard policies. 
• The customer has secured the ongoing headcount budget for an in-house payroll team.
• The business case (or Total Cost of Ownership) compared with a managed service contract period doesn’t show significant cost saving – This can sometimes be true where payroll teams are located in lower cost areas of the country or are offshored to a subsidiary. 
• The customer operates in an industry typified as stable with salaried employees and low turnover where a fixed cost for a payroll team is representative of a fixed workload processing cycle.

In summary, both solutions work. The choice is the customer’s to make. SD Worx are keen to make sure our customers make an informed decision and are happy to support with business case modelling or facilitating discussions with other customers about their chosen paths.

Should you consider outsourcing?

Within most organisations, support organisations such as Payroll are regarded as an overhead. They are not directly productive in the sense of earning revenue but, like many other support functions, they can significantly influence the productivity of the organisation if done badly. Therefore, the impact of outsourcing part or all of a support function needs to be carefully considered.

What can you outsource?

Outsourcing can be applied to service delivery and software. The former refers to contractually agreeing with a Service Provider that they will provide you with one or more HR or Payroll services in accordance with defined service levels and volumes of work. The latter refers to a System Provider implementing, hosting and maintaining an HR system on your behalf, i.e. Software-as-a-Service (SaaS), often described these days as in the Cloud.

Why consider outsourcing?

The three main outsourcing drivers quoted by customers are:

• Quality/Compliance
• Cost reduction
• Standardisation

Typically, customers are looking for a cost-effective way of making a change in delivery. This may be due to the prohibitive cost of re-implementing, maintaining and upgrading HR & Payroll systems, or the customer may see outsourcing as the best way in which to dismantle localised processes and procedures so that they can take advantage of simplified, standardised and automated workflows. It also changes the discussion from:

How many HR/Payroll/Finance FTEs do I need to provide services?

to:

What am I prepared to pay for volume-based services and guaranteed service levels?

The economic challenges in recent years have also forced companies to find effective ways to reduce internal overheads, therefore a ‘pay-per-use’ or ‘pay-per-employee’ solution can look economically attractive.

Outsourced service providers can generally offer you advantages such as:

• More competitive costs than internal functions due to economies of scale across multiple customers
• Focus on their core business and invest in subject matter skills and qualifications
• Independently audited compliance against ISAE 3402/SAS70/SOX
• Ongoing investment in HR or Payroll information technology
• Scalable services – can be demand-driven to cope with peaks and troughs

Balanced against this, in-house services can offer you:

• Total end-to-end control over the process
• Domain knowledge and intelligence about how the company works
• Proprietary processes specific to the company needs
• Dedicated resources

Depending on how these criteria apply to your situation, you should explore what outsourcing can offer your business and how it can make a difference to your overall HR & Payroll service delivery model.

One point to note is that it is not as simple as splitting the transactional work from the business partnering/policy work and throwing it over the wall to a low cost off-shore provider. Unlike highly commoditised Finance & Accounting processes with compliant procedural steps, HR & Payroll consists of a number of inherently joined-up processes where there is a fair amount of interaction between employees, line managers, administrators, HR Business Partners and Centres of Expertise. The effectiveness of outsourcing one or more components of HR and/or Payroll has a high dependency on both parties understanding and mapping these interactions.

Cloud-based software (Software as a Service)

The cost of implementing, maintaining, patching and upgrading HR software has become challenging recent years. What would have made sense five to seven years ago in terms of upfront costs can now be a significant constraint to the effective delivery of HR services?

In the locally installed world you have to cope with the ownership or leasing of servers, installation and rollout of client software, provision of local IT/IS support, on-going licensing and potential outages associated with upgrades and patches. There are situations where you can find yourself held hostage to expensive and forced upgrades to maintain legislative compliance, due to your current version “not being supported from next year.”

Software-as-a-Service (SaaS) has removed a lot of these obstacles. You gain access to a maintained platform on a subscription basis. As and when new functionality is released by the SaaS provider, you have the opportunity to evaluate the benefits and decide whether to extend the service.

One major advantage is that the SaaS provider takes responsibility for the availability and reliability of the system. Both the functional software and your data are store on physically and logically secure servers in the Cloud normally certified to ISO 27001 security standards. Fully data redundancy is normally offered so that, if one source goes down, the backup is immediately available. The cost of creating such a level of reliability in-house is normally prohibitive except for large multi-nationals with their own global IS infrastructure.

There are variations in practice among SaaS providers as to whether upgrades are forced or optional. You need to understand the impact of this and decide which works best for you.

Forced upgrades tend to occur where the SaaS provider uses a single version of the source code that all customers have to use. Typically you will see new or tweaked functionality pushed out between 2 and 6 times a year. You will be responsible for understanding the impact and changes to your HR processes.

Optional upgrades tend to occur where the SaaS provider provides configured instances for each of its customers. As long as your ‘instance’ does what you require you will not be forced to take upgrades unless you believe they add value to your business. This can be advantageous where you have some bespoke elements in your solution.