Revealing the hidden costs of in-house payroll

11 October 2020 - Reading time: 5 Minutes

Outsourcing

Many businesses remain unaware of the benefits of outsourcing payroll. Finance and payroll managers often believe that an in-house team, or one person doing everything, cuts costs and retains control. In reality, it’s likely to end up costing more, slow digital transformation and impact business continuity.

In-house payroll does benefit certain organisations. It provides end-to-end control, but with this comes great responsibility. Even a software-only service (SaaS) requires you (the customer) to maintain payroll processing, expertise and resources.

A fully managed service, however, ensures that your payroll performs without needing an in-house team to process it. Your payroll runs accurately and on time, including complex calculations, and the provider takes on risk and accountability. When you choose a reputable payroll partner, this also brings peace of mind.

Fixed costs vs. variable

Due to its fixed costs, an in-house payroll arrangement works for very predictable business models, but we should all be expecting the unexpected. For example, if you need to rapidly onboard keyworkers and pay them on a variety of pay cycles, what would be the costs in time and money for your in-house team to manage this?

Fixed cost payroll is often not economical for organisations that are highly distributed with a high staff turnover, fluctuating employee numbers and large peaks in activity. In the face of a pandemic and flexi work revolution, outsourcing payroll makes complete sense for business continuity, on-hand expertise and scalability. It offers a variable payroll cost base which is much more elastic, with a greater ROI.

Digging deeper into hidden costs

The hidden costs of in-house payroll encompass those that are ‘invisible’ as opposed to the more ‘visible’ costs of direct labour (salaries, training, L&D, benefits and recruitment of the payroll team). They include:

  • Payroll technology and the associated upgrades, licences, maintenance and security (plus IT labour and costs)
  • Poor time-to-value and service (resulting from admin-heavy manual processes, human error, answering queries etc.)
  • Troubleshooting, especially if you have a legacy or bespoke system which may cease to be supported
  • Indirect costs relating to overheads such as office space, equipment and consultancy/expertise
  • Indirect labour i.e. personnel who may support the payroll team
  • Outsourcing costs related to the payroll function such as accountants or tax filing
  • Penalties for non-compliance or errors, which can be extremely high

    Technology is a key hidden cost of in-house payroll, extending to ownership (or lease) of hardware, servers, installation and rollout of client software, provision of IT support, on-going licensing and potential outages and cyber-attacks. You may even face expensive and forced upgrades to maintain legislative compliance. A fully managed service provider absorbs these costs and risks. Whereas in-house technology may date quickly, a vendor will invest in on-going payroll software development, offering a rich digital experience for employees.

    If your processes are mostly manual, then investing in payroll technology may seem overwhelming. However, outsourced service providers can offer you more competitive costs than internal functions due to economies of scale across multiple customers. Payroll outsourcing can reduce your TCO by at least 20% when you partner with a credible supplier, leaving you with more budget to reinvest where it’s needed.

    Another technological point to consider is how in-house payroll, HR and workforce management systems can be costing more to manage individually. Organisations that outsource HR and payroll to a single provider save on average 32% more than those that don’t. What’s more, the rich data produced from integrating these functions can inform decision-making at a strategic level, showing where hidden costs (and profitability) lie.

    The cost of compliance

    Ensuring your payroll is compliant, accurate and secure takes time, money and effort when you manage it in-house.

    With ever-changing legislation, payroll teams need to be confident with complex calculations. Do you have the resources to continually upskill personnel? An outsourced solution will maintain your legislative compliance with pay, tax, RTI, NI and Pensions Auto Enrolment and also offer access to payroll subject matter experts, negating hefty consultancy fees.

    This can be provided on a global scale too, taking into account local legislation. It will be independently audited against ISAE3402/SAS70/SOX, saving you the cost and time to manage and maintain this in-house regularly, plus data security standards including GDPR and ISO20071.

    The hidden cost of failing a payroll audit (Employer Compliance Review) or submitting late to HMRC should also be highlighted here. In the event of discrepancies or failure to account for tax, HMRC will usually calculate the lost tax and NIC, and potentially penalties and interest. Avoid these risks by outsourcing accountability to the experts.

    The cost of continuity

    Resilient in-house teams will have no single point of failure, so in the case of staff sickness, pandemic or a cyberattack, payroll can continue, and people will get paid. In reality, organisations are often over-reliant on key personnel or lack sufficient back-up and disaster recovery.

    Have you evaluated the hidden cost of poor payroll and its impact on the business? Investing in fully managed payroll is the sustainable way to build resilience into your business processes, safeguarding your payroll, employees and even reporting capabilities in times of crisis.

    As an extension of your team, an expert and established payroll provider will improve your service levels and performance immediately and in the long-term. Payroll teams will have more time for strategic initiatives including succession planning, leadership and greater alignment with HR.

    Summary

    The hidden costs of in-house payroll extend beyond physical purchases and labour to incorporate compliance, service and continuity. Outsourcing is an opportunity to move to simplified and standardised processes, however complex your payroll.

    Ask yourself, would you rather pay for a contractual quality of service and peace of mind or pay for hardware, software and resources? Maintaining certainty over payroll performance with a fully managed service is the preferred option for many organisations looking to stay competitive.

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