Outsourcing the payroll function can relieve an organization of a number of in-house headaches, but according to a 2011 survey by BPO analysts Nelson Hall, the number one reason for outsourcing payroll continues to be cost reduction; with approximately 85% of respondents citing this as their primary business goal. However, when the total cost of administering payroll includes such varied components as system installation and upgrades, direct and indirect labor, and associated costs of consultancy, facilities and other overheads, the most pressing payroll outsourcing question quickly becomes whether an outsourcing strategy can actually deliver the promised savings. What genuine budgetary impact can it have?
The short answer is that a PricewaterhouseCoopers report from 2011 (The Hidden Reality of Payroll and HR Administration Costs), found that outsourcing continues to deliver cost advantages: “organizations managing payroll… in-house using premise-based or hosted software solutions spend on average 18% more administering these functions than organizations that outsource these functions.” Although, sensibly PwC were careful to stipulate, “Of course, costs for any individual organization depend on the specific circumstances of the functions outsourced and the organization’s needs.” The following specific factors can influence the extent to which outsourcing can reduce payroll costs.
Payroll Outsourcing Cost Factor #1: Size Makes a Difference
A few years ago, an article in HRWorld magazine stated, “Big businesses can afford to maintain big payroll departments. For small businesses, however, an in-house payroll service is a money burner.” The current state of affairs is that no matter the size of an organization, payroll costs can be prohibitive. However, according to PwC, outsourcing offers savings that become more significant in larger concerns. The cost differential between ‘outsourcer’s and those using in-house payroll was 9% for mid-size organizations (100-1,000 employees) rising to an impressive 27% for large organizations (1,000+). The economies of scale available for larger businesses, enabling the service provider to spread generic costs across a wider area result in lower proportionate or ‘per capita’ fees charged. These savings are at their highest when combined with a broader outsourcing strategy in which payroll is not the only service being provided.
Payroll Outsourcing Cost Factor #2: Outsourcing More Than Payroll
Following the ‘bigger is cheaper’ argument of scale, it perhaps follows that outsourcing other HR functions in addition to payroll will leverage further savings. The PwC report noted, “For many years, the HR community has suspected that integrated payroll, workforce administration, time and attendance and health and welfare functions cost less to administer than separate point solutions. The survey empirically confirmed that conventional wisdom. This applies both to in-house solutions, and, to an even stronger degree, to organizations that outsource multiple functions.” This use of a common vendor or solution to manage multiple functions can create savings of 18% on organizations using differing (non-integrated) platforms. When outsourced functions are ‘bundled’ in this fashion, that saving was found to rise to 32%. Although any approach in which all the eggs are placed in the same basket should be subjected to a careful risk analysis, there is no denying that the potential reduction on cost is attractive to any organization.
Payroll Outsourcing Cost Factor #3: Outsourcing versus SaaS
For organizations managing payroll in-house, the current trend for payroll software deployed via the SaaS (software-as-a-service) model offers its own cost savings and flexibility. While the PwC report does not deny these SaaS advantages, it did take the opportunity to examine the SaaS approach in the context of outsourced services: “It is clear that while SaaS can reduce a mid-size organization’s total administration costs over a premise-based or traditional software model, organizations outsourcing process functions such as payroll… still demonstrate additional cost savings over organizations leveraging a SaaS model. Our analysis also showed that the benefits of SaaS models, when deployed without the added benefit of process outsourcing, taper off as organizations get larger and actually provided no TCO savings, on average, over on-premise software solutions for large organizations with more than 1,000 employees.”
The Outsourced Payroll Cost Bottom Line
Often the true cost of payroll is obscured with organizations failing to take into account various ‘hidden’ costs such as indirect labor, non-labor and system maintenance costs. Of course the service provider strategy may not be right for everyone; and a series of payroll outsourcing decision factors must be taken into account. That said, PwC’s survey found that it can deliver reductions in these hidden costs through the strong process governance framework and increased process standardization that accompanies the outsourcing model. These efficiencies appear particularly available to larger organizations that are prepared to adopt the outsourcing model more broadly than the payroll function and leverage savings through integrated services.