Outsourcing payroll: How much control do you want to give up?

A look at the three basic options in the marketplace

Payroll practitioners, like other HR professionals, are expected to provide better customer service and increased efficiency while containing costs.

The doing-more-with-less challenge has prompted many to consider alternative means for processing payroll. There are a wide range of administrative options available that not only handle the paperwork, but also provide enhancements for employees.

There are three basic options in the market, each offering progressively more involvement from the outside provider: in-house, co-sourcing and fully outsourced.

In-house solutions

In an in-house solution, the employer is responsible for employee enquiries, entering employee pay and attendance, preparing the paycheques and other documents such as T4s, and maintaining the technology necessary to run the payroll model.

An in-house solution may involve either enterprise resource planning (ERP) software or a best-of-breed solution. In the former case the goal is to integrate employee data into a central depository available to serve the needs of HR, payroll, finance and manufacturing. A single ERP vendor provides the various applications.

The other alternative, made possible by the advent of extensible markup language (XML), enables organizations to choose software from various vendors that meets the needs of individual groups within the company. With XML the various software packages can speak to each other in real time.

While an in-house solution can improve the efficiency of payroll delivery, it does not relieve personnel of inputting data or processing payroll. In addition, the software must be installed on the company’s information technology system which will inevitably require the expense of upgrading at some point.

Co-sourced payroll

In a co-sourced solution the employer is responsible for employee enquiries and entering employee pay and attendance.

The outsourcer takes care of preparing the paycheques and other documents such as T4s and maintaining the technology necessary to run the payroll model.

Fully outsourced

In the fully outsourced model the company neither inputs data nor handles customer service itself, as it would under any other payroll arrangement. All aspects of the payroll process, with the exception of data collection, are handed over to the outsourcing provider.

Choosing the right payroll solution

Company size is important in determining which payroll option is the most feasible. The larger the organization, the more options there are. A large organization’s choice of payroll model will primarily depend on its sourcing strategy. A sourcing strategy is an enterprise-wide approach to sourcing decisions. Once an organization identifies its core competencies, all functions that aren’t core to the business — that don’t drive revenue growth, profit and market share — become candidates for outsourcing.

As well, the decision to outsource any non-core task, payroll included, is dependent on finding a sourcing partner that provides a higher-quality, lower-cost service.

Lisa Crowley is a consultant in Hewitt’s client development group, specializing in payroll solutions. She may be contacted at (416) 226-8580 or [email protected].

A look at the factors that drive outsourcing

How well is the current solution working? If it isn’t broke, don’t fix it. But organizations may want to entertain other options periodically to be familiar with the advantages one solution offers over another and to confirm the current approach is still the best.

How many employees does the organization have? Due to cost considerations, fully outsourced payroll works best for larger organizations.

Is the organization growing quickly? If so it may want to consider outsourcing some payroll tasks, enabling focus on other aspects of its rapidly expanding business.

Is in-house technical support available? If not a co-sourced or outsourced solution can provide the needed expertise.

Is the technology up-to-date? If an organization has to upgrade its technology to use an installed software payroll solution, it might want to consider handing that expense over to a co-sourcing or outsourcing provider.

What is the sourcing strategy? If the corporate approach is to focus on core competencies and outsource all other activities, the organization will want to determine whether there is an outsourcing provider that can improve efficiencies and lower costs.

Is the situation complex? If the organization is going through a merger or a downsizing, it may want to call upon external providers with expertise in these areas.

Does the organization want more self service? Co-sourcing and outsourcing providers often offer state-of-the-art self-service tools.

Does the organization have the resources and expertise to select an outsourcing provider? If not it may want to consider using an outside consultant with experience in this area and in contract negotiation.

Is the organization complying with legal and technical requirements? If not, the organization may want to consider handing administration over to a dedicated provider of payroll solutions.

Trans Canada Credit opts for co-sourced solution

Trans Canada Credit, a consumer finance firm based in Toronto, recently made the decision to move to a new co-sourced solution to run the payroll for its 2,200 employees across Canada.

Trans Canada Credit was using a DOS version of a payroll solution. Its provider said it was no longer going to support this version, giving the company little choice but to find an alternate solution.

Hilja Laasen, vice-president of human resources at Trans Canada Credit, saw this sudden need for a new payroll solution as a blessing in disguise.

“The system we were using hadn’t kept up with our technical requirements and the functionality wasn’t being upgraded, so we were already considering other options,” Laasen said.

The company opted for a co-sourced application service provider (ASP) model. An ASP hosts and manages the payroll application off-site for the client, which then accesses the application over a secure Internet connection. It went that route because it did not have a lot of technical support in-house and, in addition to payroll processing, Trans Canada Credit was looking for a comprehensive solution that offered upgrades to functionality, technical support and state-of-the-art features.

Co-sourced payroll may also offer improved customer service, depending on additional features offered by the provider. Trans Canada Credit was able to take advantage of a self service tool available for both managers and employees. This technology enable managers to view their direct reports’ personal, contact and work data, and conduct employee evaluations.

Employees can check and update personal information in a secure environment. Current and historical pay information is available instantly.

“In addition to offering state-of-the-art tools to our managers and employees, the (technology) will reduce costs,” said Laasen. “We’ll no longer be distributing paper pay slips, since online pay slips will be immediately accessible at our employees’ fingertips."

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