Knowing when to outsource a business function can be tricky. We explore the top benefits of outsourcing payroll and how to know if it’s right for your organization.
Operating costs are at record highs due to inflation and disruptions to the global supply chain, affecting everything from oil to agriculture to construction and production materials. As a result, many organizations are already operating with thin margins, and that’s likely to continue.
The pandemic’s squeeze on budgets has spiked demand for outsourcing. Organizations in manufacturing, and finance sectors are turning to service providers for flexible payroll operations to streamline their core processes. Why is this?
McKinsey notes that in some industries such as manufacturing, it can be more advantageous to outsource business functions such as payroll to divert resources to more strategic objectives. Processing payroll internally isn’t always the most cost-effective option. Your organization needs to stay up to date on personnel changes, tax and legislative requirements, deadlines, and GAAP or IFRS standards – all of which require expertise and time.
As businesses grow, outsourcing can be an attractive option for efficiency and to allow the team to focus on core business activities. More leaders are turning to managed services to reduce the time spent on payroll and focus more on growth and strategy.
Here we’ll cover some of the key indicators that your organization should consider payroll outsourcing.
Plans to expand to new regions
The pressure to transform payroll into a more strategic function is increasing. At the same time, businesses are contending with a borderless workforce that requires a globalized pay strategy.
Rapid growth and geographic expansion can place new pressures on the payroll team, and may require technology upgrades to manage global payroll. Often payroll practitioners are certified at the regional or national level, so they may feel unequipped to take on new legislative environments. Adding payroll headcount in each new region can be a costly endeavor. On the other hand, choosing managed payroll services can give you the freedom to expand without worrying about tracking legislation in new regions yourself.
With the flexibility of managed services, you can scale more easily, tackling acquisitions, adding remote workers, and expanding into new operating regions while supporting business continuity.
Lack of staff
Running payroll in-house requires a skilled finance and administration team. Without the right talent or a succession plan in place, you could face vacancies for extended periods as payroll practitioners move on or retire. Hiring for specialized roles has become even more of a challenge during the current labor shortage. Outsourcing payroll means you don’t need to worry about the impact to payroll during staffing shortages.
Another benefit is that your existing team can focus on strategic work beyond manual admin tasks. Outsourcing frees up time and resources for them to work on business development instead of spending time calculating pay deductions, accounting for missing hours, and determining information for taxes.
Increasing payroll complexity
Did you know that the IRS charged U.S. businesses an estimated $4.5 billion dollars in penalties for payroll errors in a single year? The American Payroll Association reported that the IRS charged $7 billion in civil penalties for employment tax requirements. These are not small fines.
Not all teams have the time to dedicate to researching, understanding, and applying applicable payroll tax laws. Each pay cycle, incorrect tax filing and late payroll can lead to costly fines.
Many organizations struggle with the time commitment of keeping up with ever-changing compliance regulations. Technology can help automate legislative changes to help you stay in compliance with variable payroll tax laws, union policies, and employment legislation across all your operating regions.
Best practices of payroll outsourcing
Limited resources, unclear requirements, and unflexible processes have enterprises in search of a sustainable solution. Read more about getting it right.
Workforce size and location
Are the costs of running payroll functions proportional to the size of your workforce? It can be more strategic for some companies to outsource their payroll based on the number of people performing payroll internally. The average ratio is 1.4 HR staff members per 100 employees, according to Bloomberg BNA’s HR Department Benchmarks and Analysis report. Organizations operating in multiple regions may struggle to add headcount to meet this ratio or and may not have payroll management experts in every region. Relying on an expert off-site team allows your organization to eliminate the need to train in-house payroll staff.
Remote payroll delivery is also essential for a borderless workforce. An outsourced cloud solution ensures that payroll operations and delivery can run from anywhere at any time.
Accurate and efficient reporting
Even when organizations have dedicated staff or a system in place, they are always looking for better ways to increase accuracy and efficiency. Deloitte’s 2020 PR Benchmarking Survey found that 89% of companies track payroll error rate as a KPI. Coincidentally, many also report spending significant amounts of time processing, auditing, and reconciling pay.
There’s a lot of preparation leading up to payroll processing cycles, especially for more complex workforces. Calculating hours and absences is more difficult for teams with hourly, full-time, and contracted employees. And payroll inaccuracy becomes more likely as organizations continue operating with siloed solutions. Reconciling reports adds even more time and resources onto the administrative load.
Payroll accuracy and efficiency is difficult to achieve when your organizations lacks the right people with specialized expertise. Partnering with a managed payroll expert allows you to offload the work of processing and monitoring payroll, and gives you the confidence that your employees are being paid accurately and on time.
There are a lot of factors to consider when deciding which approach to payroll is best for your organization. Outsourcing payroll can help your organization reduce risk, improve visibility into pay activities, and refocus your team’s time and effort on strategic initiatives that generate value. Learn more about how managed payroll can support your business continuity plan and create space for your next opportunity to grow.