Payroll Outsourcing: The Truth About Cost Reductions
The Cost Implications and Payback of Outsourcing Payroll
Outsourcing the payroll process can relieve an organization of a number of in-house headaches, but according to a survey by BPO analysts Nelson Hall, the number one reason for outsourcing payroll continues to be cost reduction, with approximately 85% of respondents citing this as their primary business goal. Among the countless other questions that surround HR outsourcing (and by proxy outsourced payroll), given the above statistic, one major query that is asked again and again is whether an outsourcing strategy can actually deliver promised savings. Specifically, what genuine budgetary impact can payroll outsourcing really have?
The short answer, according to a PricewaterhouseCoopers (PwC) report (The Hidden Reality of Payroll and HR Administration Costs), is that “organizations managing payroll…in-house using premise-based or hosted HR software solutions spend on average 18% more administering these functions than organizations that outsource these functions”. Unfortunately, PwC were careful to stipulate that, “costs for any individual organization depend on the specific circumstances of the functions outsourced and the organization’s needs”—a true statement to be sure, but little to no help to those organizations seeking a better understanding of the cost realities of payroll outsourcing. To remedy this, and perhaps shed light on some of the more nuanced factors associated with payroll outsourcing, this article attempts to showcase the major areas of influence that can drive payroll cost reductions.
Payroll Outsourcing Cost Factor #1: Size Makes a Difference
Some years ago, an article in HRWorld magazine stated, “Big businesses can afford to maintain big payroll departments. For small businesses, however, an in-house payroll service is a money burner”. While an interesting notion to be sure, the current state of affairs is such that regardless of organizational size, payroll costs can be prohibitive. The question is to what extent? As the fine print within the abovementioned PwC report states, outsourcing offers savings that become increasingly more significant the larger the company becomes. More specifically, the cost differential between companies that outsourced payroll versus those using in-house payroll was 9% for mid-size organizations (100-1,000 employees) rising to an impressive 27% for larger organizations (1,000+ employees). No doubt this gap comes from payroll service providers leveraging economies of scale; enabling the payroll outsourcing vendor to spread costs across a wider area (effectively resulting in lower proportionate or per capita fees being charged). While obviously these savings are at their highest when combined with a broader outsourcing strategy (in which payroll is not the only service being provided); nevertheless, as the company grows, so do its potential efficiency gains.
Payroll Outsourcing Cost Factor #2: Comprehensive Outsourcing
Jumping off from our earlier point (and following the “bigger is cheaper” argument of scale), it’s prudent to further explore the extent to which outsourcing other HR functions in addition to payroll will leverage savings. As the PwC report notes, “For many years, the HR community has suspected that integrated payroll, workforce administration, time and attendance and health and welfare functions cost less to administer than separate point solutions”. Also known as Comprehensive HR Business Process Outsourcing (HR BPO). bundling functions can result in measurable cost savings as the report confirmed. In fact, PwC’s research empirically confirmed that regardless of whether an organization leveraged in-house solutions, or outsourced these HR functions, cost savings could be achieved. For in-house HR software solutions, the use of a common vendor or solution to manage multiple functions created average savings of 18% as compared to those organizations using differing (non-integrated) platforms. However, when outsourced functions were similarly positioned into a bundled fashion, those savings were found to rise to an average of 32%. Although any approach in which all the eggs are placed in the same basket should be subjected to a careful risk analysis, there is no denying that the potential reduction on cost would be attractive to any organization.
Payroll Outsourcing Cost Factor #3: Deployment Model
For organizations managing payroll in-house, the current trend for payroll software deployed via the SaaS (software-as-a-service) model offers its own cost savings and flexibility. While the PwC report does not deny these SaaS advantages, it did take the opportunity to examine the SaaS approach in the context of outsourced services. More specifically, the report stated, “It is clear that while SaaS can reduce a mid-size organization’s total administration costs over a premise-based or traditional software model, organizations outsourcing process functions such as payroll… still demonstrate additional cost savings over organizations leveraging a SaaS model”. This is incredibly important, and, over much of the other information contained within the report, casts some serious doubt onto the benefits of keeping the payroll function in-house. Indeed, PwC’s analysis goes on to report that “the benefits of SaaS models, when deployed without the added benefit of process outsourcing, taper off as organizations get larger and actually provided no TCO savings, on average, over on-premise software solutions for large organizations with more than 1,000 employees”.
The Outsourced Payroll Cost Bottom Line
Often the true cost of payroll is obscured with organizations failing to take into account various hidden and labor costs, or when reading analyst reports failing to read the finer print. Although payroll outsourcing (as well as other functions) may not be the right option for all organizations, PwC’s research has delivered a compelling report that uncovered a host of cost savings associated with the outsourced model. While available to organizations of all sizes, these efficiencies appear particularly available to larger organizations prepared to adopt the outsourcing more broadly than the just the payroll function alone by leverage additional savings through integrated services.