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Does Your Company Outsource Payroll? Why You Might Want to Reconsider

22 August 2023, 13:05 CET

Historically, outsourcing payroll management to a service provider has been a good idea for many companies. But nowadays, growing businesses are often better off handling it on their own.

In recent decades, outsourced payroll and accounting services have offered UK businesses a viable way to handle the paperwork associated with paying employees, with significant cost savings. That's why an estimated 61% of companies in Britain outsource payroll processing to a third-party service provider. After all, prior to the rise of cloud-based automation software, building payroll expertise in-house was a far more expensive undertaking.

Nowadays, however, third-party payroll services can act as a growth roadblock for some companies. High-growth businesses that experience ongoing payroll structure changes might find that outsourcing payroll works against them. Given recent technological advances, many companies are finding that investing in a cloud-based electronic payroll platform is a good idea.

Here are a few ways outsourced payroll services create growth roadblocks and how companies can overcome them in-house, by integrating data sources and automating workflows.

Lack of access to (and control over) data

Third-party service providers offer companies a significant data handling and storage advantage. These vendors store data in a single place, removing storage worries or expenses from a company's list of worries. However, using a vendor's storage involves some serious drawbacks.

Companies need to liaise with their service providers to receive reports and filing data. While this situation doesn't impact small companies significantly, growing companies will find themselves constrained. These companies need to model growth scenarios and project expenses.

Given its position as a significant expense, payroll data is central to these projections, and companies need ad-hoc access to these datasets. Reaching out repeatedly to an agency for reports and transforming them into suitable formats (PDF to spreadsheets, for example) is time-consuming and counterproductive.

In such situations, companies will find an internally managed electronic system more suited to their needs, since cloud-based technology reduces storage costs and does not restrict data access. Payroll teams can format reports and drill down into data as they please, without worrying about data collection lag times when running reports.

Outsourcing can still be a viable choice if your company does not encounter situations like these. In most cases, external payroll bureaus bring much-needed organization to a company's payroll process, moving it beyond a spreadsheet. For instance, managing PAYE filing deadlines is a tough task if a company's payroll is run from a single spreadsheet.

However, fast-growing companies need flexibility while maintaining data integrity – something external vendors struggle to offer.

Limited support for unconventional compensation models

High-growth companies run into another hurdle when modeling payroll scenarios. These companies often compete intensely to attract top-tier talent and must use compensation to attract candidates. Flexibility, or the lack of it, poses a problem when creating compensation packages with an outsourced provider in the mix.

External service providers usually manage several companies' payrolls at once and cannot offer personalized attention beyond a certain point. A company cannot design a compensation model, wait for an analysis of its impact on payroll costs, redesign it, and wait for further analysis.

In this situation, company executives will likely run out of time to offer talent the right package and bring them on board. Closing payroll that involves complex incentive models is also extra tricky when involving a third-party vendors.

Fast-growing companies need the ability to generate payslips based on several types of employee performance signals. What's more, these companies often eventually expand internationally, bringing international compensation hurdles into the mix. For instance, if an employee in the UK wants to relocate to a new Spanish location, how does this impact payroll classifications and filing considerations?

Will the company save payroll taxes by classifying the employee as a staggered-hours worker and designating them as a part of the Spanish location? Does the company even have the option to save by offering the employee flexible work as a contractor and giving them the chance to relocate to any location worldwide?

External payroll and accounting agencies can give advice on these situations, but they might struggle to deliver insights on time for a company to meet the required deadlines each month. On the other hand, growing companies may find that bringing payroll management in-house is the best choice to fuel growth, as they can make changes to formulas and figures on the fly, until the moment they close payroll.

Increasing HR team workloads over time

Outsourcing payroll reduces HR's burden significantly, at least on the surface. However, it doesn't eliminate tasks that turn into bottlenecks for high-growth companies. For instance, HR teams still need to review reports, follow up over email, communicate changes to service providers, etc.

In small companies, these tasks don't add much workflow friction, since the scope of HR tasks is small. Beyond onboarding employees, ensuring reports are filed before deadlines, and managing workplace experience for a small number of people, these HR teams don't have much else to worry about.

However, HR teams at high-growth companies have a lot on their plates. They manage a changing workforce, regulations arising from business expansion, and plugging data into broader growth scenarios. In such an environment, automation offers the highest ROI, and outsourced agencies cannot automate communication or changes to filings.

Reaching out to the outsourcing provider for every payroll change becomes a hurdle. Self-service payroll combined with automation reduces HR burden and is often a wiser choice for these companies.

Outsourcing payroll is not an automatic choice

While third-party payroll services are a great choice for many companies, they should never be a default choice. As your business grows, the friction involved with using a payroll bureau can create growth ceilings. Instead, using automation with a self-service electronic platform that centralizes data is often the best way to ensure that payroll management processes don't weigh you down.

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