Which is better - a hosted payroll solution or keeping it all in-house? Many organizations struggle with this decision. There are reasons to consider both.

Companies that outsource critical payroll applications have traditionally done so for a number of solid reasons, including to reduce and control operating costs, free internal resources to work on core business tasks, get access to better capabilities, and manage the payroll process more efficiently.

Conversely, some companies keep some or all of their applications in-house, for equally compelling reasons, such as better internal control, ability to respond faster to changes in the business and market, and to minimize difficulties with vendor accountability.

Levels of payroll outsourcing

Certainly, the choices available to a company that's wrestling with the "to host or not to host" question are wide. Payroll solutions can be characterized as tiered levels of service.

• No outsourcing - A company develops and uses its own payroll systems and has the right internal IT resources.
• Tier 1 - A company contracts with a payroll vendor to provide technology hosted in-house, with outsourced services (payroll checks and tax filing, for example).
• Tier 2 - An Application Service Provider (ASP) provides customers with payroll technology that is hosted at the vendor's site and provides payroll processing services.
• Tier 3 - An External Service Provider (ESP) plays a more active role in the business process; the ESP not only hosts technology for the customer, it also performs and manages certain functions, such as the payroll.
• Tier 4 - A business processing partnership takes the relationship even further, with the payroll vendor taking responsibility for inputs and outputs, with the customer responsible for strategies, policies and vendor management.

So, which payroll service model is best for your organization?

Payroll outsourcing considerations

According to a 2005 report from Gartner, Inc. "Neither outsourcing nor insourcing should be viewed as an 'all or nothing' proposition. Sourcing strategies should be dynamic, helping the organization reach new or validated sourcing decisions when business conditions change."

"No hard and fast rules apply," agrees Steve McClenon, Ceridian product manager. "The situation will be different for each company, and each must apply its own litmus test to determine the right way to go."

He offered perspectives on just a few of the many issues that need to be addressed.

• Return on investment. A fundamental benefit of payroll vendor hosting (any tier) is return on investment, assuming an organization can envision a reduction of employees or equipment. "You typically may pay more per month compared to self-hosting, but when all the costs are compared, tiers of payroll vendor hosting offers the best savings advantage," McClenon says.
• Internet security. It's a perception that keeping critical payroll information internal is more secure than accessing information on the Web. "In this case, customer hosting might be the best solution," McClenon says. "The security issue then becomes moot. But many payroll vendors have security and backup processes that are stronger than what customers may have. So an organization uncertain about vendor security can gain confidence by easing into the Web world for HR and payroll. An ancillary product such as recruiting solutions can be used to test the waters."
• Direct database access. Self-hosting a payroll application allows a company to access a database in real-time instead of connecting to a backup. This provides more current payroll data and reduction of cost, as distribution of backups are usually an add-on service. "One situation where customer hosting holds the advantage is the need to tie the payroll database directly to a report writing engine or a financial application," McClenon says. "Physically hosting the SQL database on-site will facilitate ease of use for getting to and manipulating payroll data and/or taking advantage of fundamental services of MS SQL Server®."
• Custom reports. When it comes to creating and implementing custom reports, vendor or customer hosting both have strengths and weaknesses. McClenon notes. "Ceridian offers a variety of solutions that provide custom reporting capabilities. However, if standard reports fit the bill, or on-site resources regularly produce custom reports, a customer-hosted solution may do the job."
• Application security. Customer-hosted solutions can meet security expectations because very specific "view" scenarios can be established. "However, vendor-hosted application security will generally meet or exceed expectations as well," McClenon explains.

Looking ahead, Gartner reports that, "Organizations will have to deal with a dynamic combination of internal sources and external service providers as IT organizations achieve a higher level of maturity in their internal capabilities and sourcing strategies, they will establish a better balance between insourcing and outsourcing. A mature organization will know its core competencies and the cost of service delivery. Moreover, it will be more strategic in deciding what to keep in-house."

"Ceridian is well-positioned to help companies meet their current and future expectations for payroll processing," McClenon says. "We offer solutions including traditional payroll outsourcing, ASP, ESP and business process partnership and we work with you to develop whatever mix of hosting strategies works best for your organization."

Find out more about Ceridian payroll solutions

Call us at 1-800-PAYROLL or contact us online.

Adapted from the May 2006 issue of Ceridian Connection.