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When is it a good idea to outsource payroll and/or benefits?

Jane Hendricks explains how HR managers should calculate internal payroll and benefits costs, and when the scale might tip in favor of outsourcing.

When is it a good idea for HR managers to outsource payroll and/or benefits management?

Jane Hendricks Jane Hendricks

Investigating outsourcing is a good idea when the total costs of maintaining payroll and benefit functions internally are not known. While that fact alone might not be a reason to outsource payroll or benefits, it prompts the cost analysis that will help make the decision clear.

However, simply calculating the salaries of payroll and benefits administrators doesn't go far enough to assess cost. To get a full picture of what managing these functions internally is costing an organization, also consider the following:

  1. Technology spend. Look at the subscription costs or the maintenance/upgrade costs of the systems your organization is using for payroll and benefits. You may have a system in place for time keeping and approvals, another for processing and a third for benefits enrollment -- along with a helpdesk for each. Remember to account for not only the software you have purchased or are using through the cloud, but also any in-house systems that are being maintained to support your payroll and benefit needs. These could be simple file transfer programs or complex extract, transfer, load (ETL) systems. Also consider what capabilities your current technology is lacking. Direct deposit, 24/7 online access and mobile applications are features that state-of-the-art payroll and benefit technology outsourcing partners can provide.
  2. Total labor spend. When looking at labor costs, first identify which resources are involved and to what degree. You might find that payroll and benefits functions extend beyond the human resources and finance organizations. Make sure to account for all relevant time expenditures: the time spent managing vendor relationships, legal time spent on regulatory issues, time spent creating and implementing training programs for employees and time that IT resources spend troubleshooting and performing system maintenance. By taking a holistic approach to evaluating labor costs, organizations get a clearer view of what it takes to administer payroll and benefits. For a small organization of salaried employees that offers one or two benefits plans, internal labor costs will be low relative to outsourcing costs. But with increasing organizational size and complexity, the scale tips. 
  3. Regulatory risk. Payroll and benefits are subject to myriad changing regulations. Aside from the cost of researching and implementing changes, organizations handling these processes internally should be prepared to pay penalties arising from late filings and errors. According to an IRS statistic, one in three organizations receives penalties due to payroll errors. But outsourcing providers take some, most or even all of the regulatory risk out of the equation. Consider your risk tolerance and make sure you weigh the potential of liability accordingly.

About the author:
Jane Hendricks is principal analyst at Nucleus Research Inc., overseeing primary investigative research on technologies that transform human capital practices at every stage of the employee lifecycle. Follow her on Twitter @jane_hendricks and read her research at www.nucleusresearch.com.

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