Outsource payroll?

Makes sense, says Heather Erickson

When I started working in payroll 15 years ago, mentioning “outsourcing” sent chills through human resources and accounting departments. It meant that there was a crisis processing cheques and no one was smart enough to resolve it. Calling for outside help was admitting failure and threatened the job security of payroll staff.

In the past few years, the perception of payroll outsourcing has changed dramatically — along with its use and value to human resources managers and accounting departments. No longer the dark angel of failure, it has become a cost-effective management tool that carries with it specific benefits in specific situations.

MULTIPLE USES

For some companies, entirely outsourcing payroll increasingly makes sense. For others that want to keep the function in-house, there are specific reasons why turning responsibility for getting cheques out every pay period fits specific situations. Moreover, with growing demands on HR as a result of employee population growth, mergers, acquisitions, spin-offs, consolidations, downsizing and other challenges, being able to outsource some payroll functions is a relief.

Today, outsourcing often is being used to help in special or unique circumstances:

•In a merger, payroll during consolidation is outsourced so that HR and accounting stay focused on making changes that reflect the pay and benefit policies of the new corporation.
•A foreign buyer acquires a Canadian company. The unique nature of tax laws and benefit requirements here may not mesh well with the new parent company’s payroll system, so outsourcing the Canadian subsidiary makes business and financial sense.
•A company is winding down a division and complex severance packages are paid over an extended period of time to a diverse group of former employees. Often, elements of these packages change each month or quarter during the pay-out. Frequently, no two packages are identical. The constant changes distract the company from ensuring that payroll for employees of the remaining divisions is done accurately.
•Year-end reporting requirements or bonus payments make processing many payrolls very complex. Outsourcing incentive cheques and payroll reporting allows the people responsible for turning out the regular payroll to stay focused on their primary job and responsibilities.
•While salary is always a sensitive issue requiring high security, in some organizations a higher degree of confidentiality must surround specific employees. For example, senior executives on performance and incentive compensation plans may feel more comfortable with no one in the organization other than the board knowing details of how, and how much, they are paid. Outsourcing adds a level of security.
•When a small company grows rapidly, adding large numbers of employees in a short period of time, outsourcing is often a fast, cost-effective way to handle payroll. It allows resources to be directed at the growth of the business, not the growth in the number of paycheques.

AMPLE EVIDENCE

Three examples cite the flexibility and new acceptability outsourcing brings to today’s business environment.

A European manufacturer has a large Canadian operation in one corporate entity, plus a handful of other, small divisions. Salaries and benefits vary widely and the small divisions were creating processing problems for the centralized payroll department. The HR vice-president in Toronto found that it took as long to process payroll for 100 employees working in three divisions as it did for the rest of the Canadian operation. The primary payroll system simply lacked the flexibility to accommodate the unique compensation structure in the subsidiaries. The payroll people were overly distracted by the work needed to pay a small number of employees. By outsourcing the three small divisions, the v-p solved a management headache and actually reduced processing costs.

When two sizeable companies merged recently, the consolidation resulted in several hundred employees being terminated. Severance packages were given to unionized hourly workers, commissioned sales people, support staff and executives. No two packages were identical, and some were very complex. Especially among executives, payoffs changed each quarter.
By outsourcing the entire severance scheme, the company ensured that employees who remained — and were still unsettled by the merger and downsizing — at least received an accurate cheque on time every pay period.

Finally, after struggling for two years, a dot-com went from three employees to 150 in 12 months. When there were only the three founders to pay, writing cheques was easy. At 150 employees, the newly appointed CFO realized that taking three days to prepare a payroll twice each month was madness. By outsourcing, he avoided hiring a full-time payroll person, and the fees paid were considerably less than the cost of salary and benefits for a new hire. At the same time, a constantly changing employee base was accommodated with an e-mail to the outsource provider.

MAKING SENSE

At many organizations, payroll outsourcing may never replace the in-house function. But for many, outsourcing a complex, technical and very visible activity can save time, money and needless headaches.

Over the years, numerous trends have rolled through payroll. Some trends survived, but many disappeared. One reason outsourcing grows rather than goes is because in so many situations it makes practical and financial sense.

Business gurus and prognosticators see nothing to indicate that the constant change of the past decade will settle down or that we will return to life as it once was.

As a result, there will be an increasing number of applications where payroll outsourcing makes everyone’s life easier: the people running payroll, the person they report to, and the people receiving the paycheques.

Heather Erickson is vice-president of The Paysource Group, Inc., in Oakville, Ont., which supplies payroll outsourcing and consulting services to organizations with five to 500 employees. She can be reached at (905)465-2393.

Makes no sense, says Ian Turnbull

My learned colleague tells us that there is a growing perception in general management ranks that outsourcing payroll is a cost-effective management tool. Outsourcing payroll, she says, is particularly useful for difficult payroll circumstances: mergers, downsizing/severance, rapid growth, and year-end bonuses. Unfortunately I couldn’t disagree more.

Regular day-to-day payroll processing should be routine. If it isn’t — for whatever reason, then the first priority should be to make it routine.
What are the elements of routine payroll?

•Employment contracts — unionized or salaried — define regular and additional rates of pay and benefits for all employee categories.
•Hours worked, or not worked, are the catalyst for payroll. Whether detailed time captured for manufacturing workers, or vacation or sick time for salaried workers, hours worked/not worked are applied against rates of pay.
•Gross pay is calculated by applying employment contracts and rates of pay, and almost always are determined by organizations before any data is sent to the outsourcer.
•Benefit deductions are defined by the employment contract (as developed by human resources, remember) and, where variable, are usually variable because of hours worked/not worked.
•Taxes are defined by federal and provincial legislative authorities, and are provided to anyone who requests them.
•Net pay is determined by applying benefit and tax deductions against the gross pay. It is this activity which is most often the core of an outsourced payroll service. The outsourcer applies with government-supplied tax deductions to an organization’s own data.

YOU STILL COLLECT THE DATA

Why don’t those elements easily come together to form routine payroll? The most frequent problem lies with time and attendance problems.

Many organizations, even very large ones, still collect time manually. Where automation does exist, it is often implemented and/or managed badly. Further, many organizations have multiple collection processes and automated systems.

Time collection originates with every employee and supervisor, so it’s pretty hard to outsource.

Payroll is a cursed job. If you are not 100 per cent right, you are 100 per cent wrong. If you are proficient, no one wants to know how you do your job — they’re just very glad that you do. If you are not proficient, you are rarely given much time to become so. So why outsource payroll?

“We’re outsourcing to reduce payroll costs.”

Not likely; most assessments of outsourcing — payroll or anything else — don’t reveal hard savings. At least not unless outsourcing were combined with automation of the time-capture process or some business process engineering of human resources and payroll together.

Or, “payroll isn’t our core business.”

It is tempting to accept this one, but reason prevails. If non-core activities shouldn’t be done internally, then let’s not stop with payroll. Away with finance, purchasing, reception, human resources, etc. Who shall be left to supervise the outsourcers?

I am prepared to make one concession. The example my colleague has given of an organization growing from three to 150 employees represents the best argument I have seen for outsourcing. Rapid growth places significantly increased processing demands on payroll without providing time to re-engineer processes and select an automated system. In that circumstance outsourcing makes sense — temporarily.

The fact that organizations of that size don’t require a full-time resource is not an argument for total outsourcing in my opinion. In organizations of that size, payroll is the responsibility of an office manager or the bookkeeper, or a combined HR/payroll person.

I must assume that one unstated reason for outsourcing is a lack of confidence in an organization’s own payroll staff. There are at least two difficulties with that perspective. First, every payroll operation continues to be responsible for manual cheques and payroll reconciliation. Second, even if the CEO will forgive the payroll manager for errors committed by the outsourcer, the government will not. In short, the organization is still dependent on its own payroll staff.

Why should you pay an outsourcer to take all of your data — the accuracy, completeness and timeliness of which you are still responsible for — and process it, only to give it back to you in less usable forms? Read the papers folks; processing power is a commodity that is growing cheaper by the day. Access to information about your own payroll is a necessary resource that shouldn’t suffer from delays.

Every organization needs a payroll resource that is capable of dealing with those special situations: mergers, downsizing/severance, rapid growth, and year-end bonuses. It is exactly these special cases that require internal knowledge of the organization.

Outsourcing payroll is a trend whose time is past.

Ian Turnbull is president of Laird & Greer Management Consultants. He specializes in the selection, implementation and strategic and operational integration of HR information management systems within organizations. He is also is president of the International Association for Human Resource Information Management (IHRIM), and president-elect of the Canadian Council of Human Resource Associations. He can be contacted at (416) 618-0052 or [email protected].

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