Outsourcing your payroll function

The Chartered Institute of Personnel and Development (CIPD) strongly believes that outsourcing HR services is one route that HR functions can take to achieve a more strategic and influential role within their organisations. Michael Millar looks at the benefits and the nitty gritty of outsourcing your payroll.

A quarter of FTSE 100 firms and 30% of UK companies now outsource their payroll and this one area where HR can make its mark.

But the decision needs to be carefully considered, as it will not be right for all. Considerable effort needs to be devoted to ensure a smooth transfer of responsibilities.

Vanessa Robinson, organisation and resourcing adviser at the CIPD, says: “There are many circumstances in which outsourcing HR services can deliver tangible benefits to the organisation, for example freeing HR professionals to devote more time to a strategic role in supporting organisational performance.”

The CIPD has identified several key benefits in outsourcing:

  • Reducing costs: A key factor in many decisions to outsource, but not to be considered in isolation from other costs and benefits 
  • Increasing effectiveness of HR delivery: HR processes can often be carried out more effectively by experienced outsourcing providers, for example recruitment can be undertaken more quickly, reducing the costs of labour turnover and speeding up the pace of growth
  • Providing greater expertise: Outsourcing can secure greater levels of specialist knowledge or experience than affordably available to many organisations in-house
  • Moving HR up the value chain: By outsourcing HR admin, the focus of HR delivery can be shifted to a model driven by the desire to focus more clearly on policy and decision making
  • To aid organisational growth: Either rapid organic or acquisitive growth can leave an organisation with insufficient HR capacity to deliver business objectives, making HR outsourcing an attractive prospect.

Margaret Harvey, from the Addleshaw Goddard law firm, outlines 13 planning considerations that HR should bear in mind when choosing to outsource payroll: 

  • Identify the need: carry out due diligence tests to identify which functions are suitable for outsourcing and the options available, rather than outsourcing those functions and subsequently bringing them back in-house
  • Identify the true cost/benefits/problems of providing a payroll/HR service internally (eg compliance with legislation, accuracy and timeliness of payments), and subsequently evaluate the benefits/risks of outsourcing. Mechanisms to managed/mitigate those risks can then be built into the contract
  • Identify tasks/responsibilities that would be retained by the company 
  • Get the right internal people involved early on: not just HR/payroll, but consider whether technical (IT), financial or other input is required – get business buy-in
  • Clearly identify the scope of the services to be outsourced: it is likely that all services to be outsourced are not documented in detail internally – being clear about customer requirements enables better supplier responses
  • Identify internal service levels and gather information to support them: this will assist during negotiation of service levels and help to set realistic expectations as to the quality of the outsourced service
  • Supplier due diligence: The supplier needs the opportunity to properly assess the risks (identify any areas where poor performance eg inadequate or incorrect data, additional interfaces). The better the information available to the supplier before contract signature, the better the price. Also reduces the scope for price creep/constant change control following contract signature
  • Identify customer systems that need to interface with the outsource provider: eg customer time-recording systems. If the provider is taking over or using existing systems, early identification allows more time to dig out relevant third party licences and approach licensors if necessary 
  • Impact on current HR employees: Identify whether any employees may transfer to the provider under TUPE, and ensure procedures are in place to manage that transfer effectively 
  • Research potential providers: financial stability, reputation and cultural compatibility are all critical; cultural compatibility is particularly critical in relation to HR where certain HR tasks are very closely intertwined with the culture of the company
  • Consider the types of models available: ‘One-stop shop’: Outsource both HR and payroll functions to a supplier that will provide the full spectrum of services. ‘Payroll plus’: payroll is main outsourced function, but with HR ‘add-ons’ such as employee self-service portals that takes away some of the more administrative tasks traditionally undertaken by HR (eg Centrefile). ‘Bureau service’: provider hosts software application on its own technology platform, into which customer feeds data which is then hosted and processed by the supplier (eg Northgate/Midland)
  • Plan ahead: identify areas of potential change, so that flexibility can be built into the contract to accommodate that change as far as possible without the need for detailed re-negotiation.

Finally, don’t forget to people manage the people managers.

Vanessa Robinson says: “It must be remembered that a transition from in-house HR provision to the use of an outsourced provider is a significant change for the organisation, and must be managed accordingly.

“If significant time is not devoted to the process of change, with unequivocal top-level support, there is a danger that staff/line manager relationships and other aspects of people management policy may be neglected.”

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