What are the advantages in outsourcing the payroll?
Outsourcing, already well established in the UK corporate culture, is entering a new phase. Payroll outsourcing has proved a popular option for most financial directors in the US, with proponents arguing that putting the payroll function out of house allows companies to focus on core activities and boosts efficiency. Is it inevitable that payroll outsourcing will catch on in the UK - and does it always deliver positive results?
There are three options for the payroll function: keep it in-house, outsource the whole lot, or take an in-between route, inputting data and authorising payments in-house while an external bureau does the back-end processing - printing payslips, preparing reports and reconciliations. Coopers & Lybrand estimates that around 25% of the payroll market is currently outsourced, and that the proportion is steadily growing.
But companies may have misconceptions about the potential advantages of putting payroll out of house. 'Companies have a perception that payroll can be done elsewhere more cheaply,' says Deirdre Hardy, a Coopers senior manager specialising in human resources and payroll systems. 'But when we ask them what their current service costs are, they don't know.' In fact, complex payrolls could cost more to run if outsourced. And if the company's own accounting systems are out-of-date, that could push up the cost of partial outsourcing - bureaus may charge more for the inefficiency it causes them. 'If it's an old cranky payroll system, that would push up the price,' agrees Hardy.
The outsourcers themselves don't sell the service on cost. 'I don't think there would be a dramatic difference,' says Tom Hurst, sales and marketing director for Automated Data Processing, one of the largest payroll outsourcers in the UK. Hurst believes instead that companies opt for outsourcing because they want an improved service. What it does, he says, is deliver value to a company by freeing management to concentrate on the core business and strategic issues. Alan Little, partner in Price Waterhouse's outsourcing business, agrees. Management wants to 'stick to the knitting,' he says.
Outsourcing can boost management control when formerly fixed payroll administration costs become variable through a flexible outsourcing agreement. 'In the past people used to worry they would lose control (with outsourcing),' says David Courtley, managing director of the public sector business at outsourcing giant EDS. 'The paradox is that more control is gained over both cost and service. Up-front companies can specify what they expect from the service, couched in terms that are contractually binding on the supplier.'
One problem is that payroll staff will - justifiably - perceive outsourcing as a threat. Gordon Cresswell, a director of the Institute of British Payroll Management, admits that outsourcing the function will mean that 'there are job losses'. But in those situations where the old in-house staff are able to transfer directly to the new outsourced activity, there can be benefit, says Price Waterhouse's Little. 'We get employees who find when they transfer that they are joining a growth business with lots of opportunity in their area,' he says. That can come as a pleasant shock, adds Little, because 'in most organisations, support functions are seen as a necessary evil'.
Outsourcing doesn't suit all companies. Recruitment agency Best People brought its payroll processing back in house this April after the bureau it used struggled to handle the company's slightly unusual PRP scheme. 'After a couple of months of a pretty bad level of service we thought, "Why should we use the bureau when we could just do the last step in-house?"' explains finance director Andy Wickham. The company bought its own software and now processes its own payroll records each month. 'The incremental workload is negligible,' says Wickham.
Cresswell believes the jury is still out on the benefits of payroll outsourcing.
During years in the public sector Cresswell witnessed other functions being outsourced, only later to return when expectations weren't met,' he says. 'We are only at the beginning with payroll. We will need to wait a decade to see how it works out.'.