When is it Time to Outsource Your Payroll Operations? Look for These 4 Signs

Companies spend, on average, between 40 and 60 percent of their total revenues on payroll – making it the largest expense across the organization. That means that if the paycheck were a product line it would rank as one of the largest products at most organizations.

So why isn’t it subject to the same scrutiny and analysis as any other product? After all, few concerns take greater priority for any company than the efficiency, effectiveness, or productivity of their product or service line. From research, design, and testing to development, delivery, and maintenance, global companies continually invest in improving how they produce their saleable goods and services.

One germane component of that investment is the outsourcing of costly and time-consuming areas of product operations. By doing the same in Payroll, growing companies can achieve valuable savings and cultivate stronger intelligence on their global workforce. The only problem? Knowing when it is the right time to pursue an outsourced approach to global payroll.

Outsourcing as a Long-Term Solution

Despite its many advantages, payroll outsourcing remains a touchy subject for many business leaders today. Stakeholders often cling to in-house operations across many areas of their businesses. Many perceive outsourcing certain functions as giving up ‘control’ over them, and taking on more risk. 

That perception is especially strong in enterprise administration. Due to the vast amount of personal employee data and sensitive transaction information involved in HR, benefits, time-and-attendance, and payroll – and the deep and lasting consequences of noncompliance with payroll tax requirements or statutory guidelines – organizations often keep as much of their administration in-house as they can, for as long as they can.

Yet as ideal as organizations may perceive in-house administration to be, it’s a short-term solution – and a costly one, at that. Consider the fact that recent research has shown that organizations maintaining an in-house team for tasks such as payroll, time and attendance, workforce administration, and benefits administration spend 20 percent more than those that outsource the same functions. As companies grow, so too does the dollar value of that 20 percent total… and so does the opportunity for the percentage to tick up even higher.

It’s not just the costs that are unsustainable, it’s the approach. When a company’s payroll needs begin to grow and expand into international locations, the efficiency, effectiveness, and productivity of an in-house payroll model becomes compromised by the sheer challenge of understanding new withholding requirements, satisfying new compliance obligations, and meeting country- or jurisdiction-specific payroll norms. Rising to that challenge demands significant resource use and management bandwidth, which can be highly wasteful (as we’ll explain below) from an operational perspective.

Four Key Signs that the Time has Come

For most organizations, there comes a tipping point when conducting global payroll in-house is no longer feasible. Where that tipping point is can be different for every company, however, depending on their growth phase, expansion plans, and business objectives. Here are several signs that now may be the time. 

1. You Hear Rancor in the Ranks

When the timeliness and accuracy of your payroll function starts to slip, it may not be the Payroll team leaders that let you know. Rather, your employees – the ones affected by late paychecks, over- or underpayments, or inaccurate withholding totals – may be the first to raise their voices.

Listening to staff member complaints about Payroll is important, especially in times of expansion. As an organization grows, its payroll and payment needs become more sophisticated and subject to greater employee and regulatory scrutiny.

For example, an expanding global business development function will demand more and more sales people in more geographies; with that will come a variety of unique, country-specific constraints around bonuses, compensation, and reporting. A well-functioning payroll operation should be able to meet all of those obligations without delays or errors.

If internal personnel are unsatisfied with an in-house Payroll team’s ability to pay their salaries or bonuses on-time and accurately, it’s a warning sign that regulatory bodies and tax authorities may soon be unsatisfied with their ability to meet reporting or payment obligations, as well – placing your organization at risk of incurring costly noncompliance penalties or legal fees that could be avoided by using a trusted outsourcing provider.

2. Your Training Budget is Tapped Out

When organizations experience higher-than usual rates of payroll errors, compliance issues, or spiking costs (due to reprocessing, supplementary runs, or other corrective efforts), they often respond in one of two ways: hiring more team members, or conducting more staff education.

In the short-term, those measures are highly valuable. With the right amount of training, payroll professionals – new or experienced – can perform their jobs more effectively, period. So, if most payroll errors an organization experiences are related to one-off mistakes or periodic staffing shortages, hiring and training may be the appropriate resolution.

Yet rarely is that the case. If you see skyrocketing training (and recruiting) costs taking over your administrative budget at a pace, it can be a sign of turnover and deep resourcing availability issues. As an organization expands to new locations, which typically require employees to acquire local or regional knowledge to execute payroll successfully, turnover and heavy training obligations can stagnate your organization’s ability to maintain accuracy and compliance in the payroll function.

With an outsourced model, you can enjoy stronger stability and reliability while lessening the burden of training and recruiting on your overall budget.

3. Your Payroll Team is Top-Heavy

As companies hire up (and train up) within the payroll function, their most experienced, long-term employees become ever more valuable. To avoid the turnover troubles mentioned above, executives may promote many of their most trusted team members up the ranks – making them payroll managers, senior team leads, directors, and so on.

Along the way, an organization’s payroll function may grow top-heavy without stakeholders even realizing it. Not only does the injection of more and more management-level salaries into the Payroll function raise overall payroll costs, it may not improve productivity or effectiveness in any meaningful way.

Ostensibly, managers and supervisors most valuable contributions come from ‘true’ management – motivating and encouraging employees, setting and meeting departmental objectives, handling exceptions to the norm, and so on. Yet according to insights in the Harvard Business Review, most administrative departments (particularly those with more than 20 employees) use as much as 20 percent of their budgets to supervise and coordinate their own activities.

If you’re promoting more and more individuals into senior roles only to see them concentrate more and more time on coordinating and corrective measures, you’re spending payroll dollars less efficiently than you would with an outsourced approach.

4. Your Global Plans Are Getting Piecemeal

As companies expand internationally (and all the above challenges begin to rear their ugly heads), they start to embrace a hybrid approach to payroll – opting to outsource certain payroll processes to meet their needs in new locations, while continuing to maintain in-house processing where they already have it.

Just like in-house processing, however, a hybrid model is a short-term solution. By engaging new providers in a piecemeal manner to meet their needs as they go, organizations lose the sense of accountability and ‘control’ they value from keeping payroll operations in-house. They also lose the ability to manage Payroll with any sense of global strategy, since they typically lack any holistic visibility into the payroll performance of a disjointed selection of local payroll vendors.

As more countries and more vendors are absorbed into a company’s global payroll footprint, the decentralized and fragmented nature of the hybrid model can create unnecessary costs, inefficiencies, and opportunities for error. Plus, it places an even greater burden on in-house managers to coordinate activities among so many payroll providers. 

If you see a piecemeal strategy becoming the status quo at your organization, it’s time to consider how outsourcing to a comprehensive global payroll solution may be a smart long-term investment in the efficiency and effectiveness of your payroll ‘product line.’

may be a smart long-term investment in the efficiency and effectiveness of your payroll ‘product line.’