We are often asked by clients or potential clients if they should outsource their payroll. The answer, as you might imagine, is not an easy one. In this article we examine some of the key reasons why employers should outsource their payroll and the circumstances in which keeping it in-house might be better. We also take a look at the reasons often used for changing payroll, but which are misleading as they can be achieved no matter where your payroll is processed.
Ultimately, the key reasons for outsourcing your payroll are cost and risk, but the nature of the system, access to trained staff and reporting considerations also play a part.
Cost
Cost is usually the deciding factor for an employer looking to outsource payroll. However, in some situations an outsourced solution may not reduce cost. For example, a large company may be able to build the necessary skills in-house to provide a professional payroll solution at a reasonable cost. On the other end of the scale, very small companies may find their payroll is simple enough for an office manager or accountant to run (and seeing as they are also doing other jobs, the cost is already sunk – but be aware of the risk.) Where we see many employers getting this decision-making process wrong, is when they don’t consider the full cost of running payroll. Keep in mind that you need to include the following:
- Payroll software licensing costs (including ESS)
- Payroll software support costs
- Payroll staff salary and admin costs (including overheads for laptops etc.)
- Payroll staff training
- Transaction costs for making payroll payments
- Despatch and printing
- Costs of getting finance involved in payroll for reporting and reconciliations
- The cost of getting it wrong – penalties and audit costs from SARS, the Department of Labour and the Compensation Fund, as well as employee unhappiness when paid incorrectly
Risk
Often seen as an intangible, this is the biggest reason we advocate for outsourcing your payroll. Employers often decide to outsource their payroll because they are already facing one of these risks (such as an audit or key person leaving). In theory, the outsourced service provider should be better able to manage these risks because of their scale (depending on the outsourcer).
Risk falls into a number of buckets:
- South African legislation and practice (how it is implemented by government entities) is complex. In-house personnel are expected to keep up to speed with software changes and legislation and practical implementation for:
- The Income Tax Act and SARS practice notes
- Both UIF acts
- The Basic Conditions of Employment Act and Labour Relations Act
- The Employment Equity Act
- The Skills Development Act
- DTI guidance as it relates to BEE
- Court cases and decisions by CCMA, the Labour Court and other court decisions
- Compensation for Occupational Injuries and Diseases Act
- Protection of Personal Information Act
- Over-reliance on key staff: Often employers are heavily reliant on one key payroll person. This can be for many legacy reasons. Irrespective, the employer faces significant risk should something happen to this person or if they leave or retire. Payroll staff are also usually under significant pressure and stress and not always highly paid. This leads to an increased turnover risk for the employer.
- Over-reliance on a system: Should something happen to the system on which your payroll is processed, you will have to make some tough decisions to make a change at short notice. While potentially a low probability event, this has significant repercussions for your business.
- Processors vs those who actually understand payroll: In our experience, payroll processing staff generally fall into two categories. 1) Those who are process orientated and take input each month and process it through the system to generate payslips, but who are reliant on external consultants to make changes to the payroll, and 2) those who actually know how the system calculates things and can make changes to fix problems. If you are in the second category, great. But if you are in the former, then be careful. Processors don’t know what is under the hood of the car and what makes it run. This also means they don’t know what can go wrong and would not be able to recognise an error and fix it without external support.
- Confidentiality: It is easier to maintain confidentiality if less people in your organisation see payroll data.
- Controls: Through scale, outsourcers are usually better able to implement important internal controls, but this should always be tested as it is not a given.
Reporting
Many employers are not optimising their reporting from their payroll system. Outsourcing might not necessarily solve this unless the employer makes this a key component of the outsource solution.
We usually see problems in the following reporting areas:
- Payroll is processed by one staff member and they are the only person with access/knowledge of the payroll system. This creates a bottleneck and a situation where non-standard yet vital reports are sometimes not requested by management because they know it will take too long to get.
- Payroll checking: The payroll is signed off by a manager, but the reports they are given are too long or don’t focus on the key issues, making it very difficult to check payroll properly. This increases the risk of mistakes.
- Data for decision making: Payroll is a significant cost for most businesses, yet we seldom see employers using the valuable time and attendance and payroll data to identify areas where efficiencies can be found and value added.
Access to good staff
The ability to source good staff is dependent on the system you are on (payroll candidates tend to have experience on specific systems), your budget for training and your willingness to send staff on training courses. If you have the right formula with a great team behind you, then outsourcing would not necessarily add anything to this. The best way to test this is to do a payroll review and see whether there are any gaps. If you are happy with your team’s performance (meeting deadlines, accuracy in processing and reporting), and the payroll review doesn’t identify any major problems, then you are in a great position.
Payroll system
Moving to the right system is sometimes used as a reason for changing payroll. This is a bit misleading because in practice an employer can change system without outsourcing. It is also a common mistake to think the right system can fix anything. A successful tool requires three things: the right system, the right people using it and the right process.
The key considerations when looking at a system (excluding cost) should be:
- Which is the right system for us? This can often be a difficult question in its own right. When you are being sold the system, it will seem like it can do no wrong. However, often the reality is a bit different. Implementation is key and it is important for an employer to do a walk-through to identify where internal processes will need to adapt to the new system, and where the system may not be able to cater for a specific requirement.
- Training of staff: Whoever is going to run the payroll needs to be trained on the new system. Provided your staff are capable, there is no reason they cannot be trained on it. However, there will be risk for the first six months as they are likely to make mistakes. This is natural in a change process.
- Functionality: If you are not going to use the functionality a system offers, then paying a premium for it might not be worth the cost. That said, if you aren’t using the best parts of the system you should be asking yourself why. They are there for a reason, and your business will potentially gain a lot if used effectively.
As can be seen, the considerations above are quite comprehensive, with numerous issues to consider. HRTorQue can help you make the right decision of whether to outsource or not with a number of our services:
- Payroll review: We can review your existing payroll and team to identify any risk areas
- Payroll support: If you are worried about continuity of staff, we can provide payroll support services to get to know your business in case of any loss of key personnel
- System assessment: HRTorQue works on multiple systems. We would be happy to showcase the merits of different systems to help you decide which would be best for your business
- System change management: Our trained staff can help you implement a system change including setting up the payroll and training your staff
- Our finance and payroll teams are able to work with you to optimise your reporting and reconciliations (HR, payroll and finance)
Should you decide to take the outsource route, we would be more than happy to partner with you. Contact us on [email protected] if you would like to chat about your options.