19th January 2017
It’s the question often asked of any outsourcing decision, but in payroll, is payroll outsourcing about cutting cost?
“Can we save money by outsourcing?”
While the drive to cut costs is important for all businesses, how you decide to carry out payroll processing – in-house, using a bureau or completely outsourced – reflects your overall business priorities and can have a much greater impact on your company than just the cost of getting payslips out every month.
Here we take a look at the range of issues that can be impacted by a decision to outsource your payroll – or not.
RISK BUSINESS
In risky times, many companies very sensibly take time to consider the risk associated with all aspects of their operation, to ensure they are not blindsided by events which have the potential to undermine or even threaten the viability of their business. The current uncertainty around Brexit, that may become stronger as we prepare to exit, creates one of those times in 2017.
In the payroll arena there are a number of risks that can arise from in-house processing. These can include the costs of putting right payroll errors and the negative impact on staff morale when errors occur. Internal risks aside, a much bigger risk is posed by falling foul of the HMRC and their ever-changing reporting requirements. The penalties for non-compliance can put a serious hole in the cashflow of some businesses, not to mention the consequences of being asked to pay significant sums at short notice if HMRC have reason to believe that money is owing and the negative publicity associated with the HMRC naming and shaming ethos. With the UK tax, benefits and pension systems currently undergoing major upheaval, and more changes to come over the next few years, many companies are deciding that the cost of trying to keep in-house expertise up to date makes the costs of outsourcing look distinctly good value.
A further risk of an in-house payroll solution, especially for small and medium sized businesses, is over-dependence on a few people to keep things running smoothly. As well as carrying out day to day processing and ensuring employees get paid on time, payroll staff also have to stay on top of legislation changes, manage software updates, carry out HMRC reporting, deal with leavers, joiners and exceptions, handle queries from individual employees, and more. With little slack to spare, losing just one member from a small payroll team can put the whole system at serious risk of generating errors or becoming non-compliant.
Often overlooked is the issue of data security around payroll systems. 2016 was dogged with high profile and very public data theft. Centred as it is around the personal and financial details of employees, a payroll system needs to have adequate security to ensure confidentiality and appropriate authority to carry out data changes. This means not simply passwording all systems involved in holding or processing payroll data, but ensuring the physical security of relevant computers. Then, a secure and regular backup regime is required, along with disaster recovery plans in place in the event that data is lost. Putting all this in place to an adequate level can be a significant cost and admin headache for many companies. Moving to an outsourced solution means that this all becomes the responsibility of the provider, who will typically already have the necessary security and backup measures in place.
The antidote to risk, of course, is predictability – an increasingly prized asset when other aspects of running a business look uncertain. With an outsourced solution, budgeting for a company’s payroll costs become highly predictable and, importantly, in proportion to the actual size of its workforce.
FUTURE PROOFING:
The choice a company makes about what type of payroll software to use, the number of payroll staff to employ and the level of expertise and qualifications they will require, will be made based on some key assumptions. In particular it depends on how big your company is and whether you expect it to stay that size or change over the next few years.
The types of employees you have can also have an impact. For instance, while a fairly fixed workforce on similar contracts and rates of pay can be fairly simple to manage, the workload can increase disproportionately if this changes to a larger number of people on part-time or variable contracts. This is compounded again if there is a high turnover of employees, as might happen in a seasonal business or if the company decides to move to a system of short term contracts based around project work.
Whatever in-house payroll system is put in place needs to be able to keep up with possible future changes, without taking up valuable management time trying to constantly update payroll capability. Outsourcing payroll to somebody who already has the software and the expertise to manage any possible combination or flavour of workforce allows a company to grow in whatever way suits their business without wondering whether payroll can cope.
In 2017 legislative change continues with
- 6 April 2017
Apprenticeship levy due to take effect - April 2017
Gender pay gap reporting regulations expected to come into force (first reports likely to be due by end of April 2018). - September 2017
30 hours’ free childcare becomes available for 3 and 4-year olds in working families.
Put simply, when it comes to payroll, constant change is the new normal. Deciding whether to keep up with the change in-house, or to outsource it to experts, is a strategic decision for every company.
FOCUS ON GROWTH:
Another key strategic decision for any business is deciding how much time and effort to devote to generating new business compared to managing existing operations or cost cutting exercises. The correct decision for a particular company will depend on their market sector and the perceived opportunities for growth. But in general, outsourcing payroll or any other business function can be part of a wider commitment to reduce management time spent on non-core activities and increase effort spent on revenue generation, product innovation or other activities to promote growth. (We will look more closely at the issue of growth in our next blog article.)
MINIMISING DEBT AND CAPITAL INVESTMENT:
Updating in-house payroll systems (to cater for RTI, Auto-enrolment and future changes) often requires significant investment, with very little return to show for it. At a time when businesses generally want to avoid taking on any debt, and are finding credit hard to source, this type of investment often has to be met at the expense of immediate cashflow, which may be painful. The pain is compounded by knowing that more investment will probably be required in a few years time, either in response to further legislative or HMRC changes, or simply to upgrade the technology.
With these pressures in mind, an outsourced payroll processing solution involving a one-off setup cost followed by predictable monthly payments, is greatly appealing to companies wanting to avoid large capital investments, avoid any debt which does not produce a return, and manage costs over the long term.
