Outsourcing payroll continues to appeal

The demands of IT and legal issues can make payroll outsourcing attractive, says Kirstie Redford

For many businesses, the payroll function is essentially seen as an overhead which provides little hard financial return. To combat this, many firms are now choosing to outsource the task. In fact, just over a third of UK firms are now estimated to outsource their payroll. This trend, however, only really began to take off in the 1980s, despite payroll outsourcing dating back to the 1950s.

In addition to fully outsourcing payroll, where the entire function is operated by a third party, most providers also offer varying degrees of outsourced service. One option offered by Northgate HR, for example, enables data inputting to remain in-house but deals with statutory responsibilities on behalf of the client. Chris Budd, payroll services consultancy manager at Northgate HR, explains: “Providers can tailor solutions to clients’ needs.”

Although outsourcing generates another overhead, employers often save money on administration and costly software upgrades. “If you’re looking to refresh your system, [outsourcing] is a good opportunity to do so without picking up the full bill,” adds Budd.

Outsourcing can also make budgeting easier because providers usually charge a set amount per payslip, allowing employers to calculate exactly what outsourcing their payroll will cost. Charges do vary but, as a guide, some providers charge around £3 per payslip produced each month.

Deferred savings
John Keegan, sales and marketing director at Capita HR and Payroll Services, explains that around 95% of firms outsource because they believe it will save them money. However, he warns that this is not always the case. “Some organisations may not see cost savings until 18 months down the line. Seeing cost savings from day one is not unachievable if you are running payroll very inefficiently but it is unusual.”

Keegan says employers can expect to save an average of 20% per year after an initial period of about seven years. However, he adds that Capita has one client which has seen a 49% reduction in costs in just four years. “This firm had 10,000 employees, four different payroll departments and used three different pieces of software. If we hadn’t saved them upwards of 30%, I’d have been disappointed,” he explains.

Outsourcing payroll can also help to solve the recruitment problems that organisations are increasingly encountering within their in-house payroll departments.

Smaller employers may find that they have the most to gain from outsourcing because they tend to have fewer in-house payroll experts. “They have a greater exposure to risk if someone in payroll is off sick and no one else knows how the software works,” explains Keegan.

Large employers, which outsource their payroll, may find that it means reducing the number of existing staff in this department. In these cases, it is important to treat staff fairly and perhaps help them to look for positions elsewhere in the organisation.

However, with payroll experts in high demand, some providers may be willing to take on employees who are made redundant as a result of the outsourcing contract. “We welcome transfers [as] it’s an easy way to recruit experienced staff,” explains Northgate HR’s Budd.

Keeping on the right side of the law can be enough to persuade some employers to outsource their payroll function. In fact, some firms may choose to outsource to keep up with changing legislation and to ensure that they have access to the right back up.

If an employer does choose to outsource, it is important to check what would happen in a disaster situation. The importance of this was highlighted in December 2005 when the blasts at the Buncefield oil refinery in Hemel Hempstead sent Northgate’s systems up in flames. The HR services company used remote data centres and company offices around the country to maintain services. “Amazingly, all our clients’ payrolls were run on time. We had all our data backed up and teams of people worked through the night to make sure everyone was paid,” says Budd.

As long as suppliers have adequate disaster recovery plans, the only way outsourcing can negatively impact on staff is through a lack of communication. When the decision is made to outsource, staff should be made aware of the new arrangements so that they know where to direct queries about pay.

Capita, for example, uses emails and in-house presentations to tell clients’ staff about the move away from in-house admin and spell out what the change will mean for employees. It also offers a range of ways for staff to communicate with it after it takes over a firm’s payroll admin. “In larger companies, we have Capita staff working in their offices. In other firms, we provide a phone line for staff. We also provide an email service that their staff can use,” says Keegan.

Employers should also tell employees when they should go to the outsourcing company with queries and when these should be dealt with in-house. “With time sheets, for example, pay queries are often caused by form-filling errors or late submissions. [In this case] the first port of call should be the line manager,” adds Keegan.

To help prevent problems arising, companies opting for a full outsourcing service should hand over control in stages. Some providers state that this can take between two and three months.

Many firms also opt to have an internal point of contact, usually in HR, who can manage the relationship with the provider.

As beneficial as outsourcing payroll sounds, it is not suitable for all organisations. In fact, if a payroll department is running efficiently the cost savings may be negligible, and for multi-national companies outsourcing payroll can be complex.

If organisations have staff working outside the UK, using an outsourcing company local to them can make sense. With the differences in legislative requirements, tax systems and language, employers may find that they need the local expertise.

Capita has one client with staff based in 11 different countries, but Keegan explains that if too much risk is involved, it won’t take the business on. “The biggest issue is tax regimes and the different legislative requirements,” he adds.

Northgate HR steers clear of firms with international workforces, choosing the UK, Ireland, Channel Islands and the Isle of Man as its key operational territories.

If international outsourcing is required, firms such as Ceridian Multinational Services and ADP operate globally. Bill Thomas, president of Ceridian Multinational Services, says: “The complexity grows with each extra country you operate in. You need to keep the authorities in each country happy [and] ensure your internal corporate governance is more than compliant.”

So while outsourcing payroll can have its benefits, employers should not see it as an easy money-saving solution, and must act with caution.

Key questions to ask an outsourcing providern

  • Track record: Have they worked with an organisation of a similar size and type before? What cost savings were achieved?
  • Fees: What is included?
  • Protection: What back-up system and disaster recovery plans are in place?
  • Control: How will responsibility be shared between the provider and the company?
  • Flexibility: How easily scalable is the service?
  • Software: Are systems HM Revenue & Customs-accredited and compatible with those of the organisation?

CASE STUDY: Guard over pay solutions

G4S Cash Services, part of security firm Group 4 Securicor, outsourced its payroll in 1997 while running complex admin for 9,000 staff.

When the company decided to outsource, it opted to use a provider it had previously worked with. Gavin Carter, former payroll services manager at G4S Cash Services and now a consultant for the firm, explains: “Statutory maintenance is ever-increasing and, with this service, we know it’s done for us. It has also reduced development costs and we can be confident that Northgate will keep up with any hardware or technological advances.”

Another advantage is that the technology used can deal with the complexity of the organisation’s payroll, while the front-end has been tailored to look like G4S’s previous system to keep long-serving employees happy. “Between 7,000 and 8,000 of our staff operate by the hour and any one of them could be paid at 17 different hourly rates, so it is important that the system is accessible to these feeds. It now just takes a flick of a switch at our end,” adds Carter.