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The benefits of outsourcing payroll in the era of Covid-19

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Despite the strategic business value it offers, organizations rarely commit the same level of technology investment to creating a more efficient payroll and HR processes as they do in other areas such as customer service.

The day-to-day challenges that result from this are numerous: from struggling to process payroll accurately with a limited team, to keeping compliant with ever-changing legislation, to managing the unnecessary and sometimes ‘hidden’ costs precipitated by a lack of process automation.

The ongoing Covid-19 (coronavirus) pandemic has only served to exacerbate these challenges. In a recent survey of decision makers, Zellis found that nearly a third (30 percent) of organizations have lost capacity in their payroll function. They cited a number of causes, including the extra work required to process payments in accordance with complex emergency measures, problems with accessing essential technology at home, and worries over losing essential payroll staff to illness or absence.

Even under normal circumstances, many payroll and HR departments struggle with conducting imperative technology upgrades and getting implementations approved through intricate IT and procurement processes. And what about the perennial concern of business continuity? With a small team and limited location support, businesses can suffer dramatically if an incident causes a stoppage of service, or if a key employee departs the business for any reason.

Developing the right hybrid or fully outsourced model can help you to overcome these challenges. It consolidates everything into a single, manageable cost, handles all compliance and technology requirements, and keeps operations running continuously.

Whilst there are many benefits to partnering with a specialist HR and payroll company to support your business, here are the top three reasons:

1.            Reducing operating cost

The clearest benefit of adopting Managed Payroll Services is the savings your organization will benefit from in leveraging an organization with the scale and experience to provide the service for you.  Specialist payroll companies have economies of scale, labor arbitrage benefits from a global footprint, and automation investments that are difficult for an in-house payroll team to achieve.

Additionally, you also benefit from removing the hidden costs in areas such as payroll-related errors - from incorrect manual calculations (more likely to occur when dealing with the complicated employee furlough scheme), or failure to submit data to HMRC within the required timeframes.  Furthermore, in-house processing requires a large amount of manpower and office space – something that some business don’t have, or struggle to invest in.  The cost of running a payroll is greater than employee salaries and payroll software.  There are many additional hidden costs to consider, such as continuous training, rent, utilities, print costs, system maintenance, and breach protections that add to overheads. 

These issues are reduced or eliminated by partnering with a Managed Services provider, as you are protected by its SLA provision and all costs fall on them.  In fact, a report by PwC estimated that organizations managing payroll in-house using premise-based or hosted software solutions spend, on average, 18 percent more than organizations that outsource.

All of this ultimately means that your time and money can be spent focusing on achieving your core business objectives. It gives you back more time to tackle the burning questions that many organizations are grappling with, such as how to adapt to a post-pandemic world.

2.            Access to legislative experts and stronger compliance and risk management

In outsourcing your payroll, not only will you get both the hardware and software provided and hosted within a secure data center, but you will also have access to the valuable knowledge that payroll specialists hold – something that cannot be easily or quickly replicated. This is especially true during the Covid-19 crisis, with government guidance for payroll professionals changing on what feels like a daily basis.

Along with being an extra source of payroll expertise in these challenging times, a Managed Services provider can deal with the process from beginning to final sign-off, including managing all payroll inputs and calculations, liaising with third parties such as HMRC and pension providers on your behalf, and preparing and submitting BACS/SEPA payments - all to agreed timescales. The right Managed Services provider will see itself as an extension of your own team.  It will offer choice, share in the risks and responsibilities around the complex world of payroll, and offer a level of support which matches your business requirements.

Additionally, the impact of mistakes and non-compliance on your organization– including the potential for punitive redress by the government – must be considered when assessing your long-term payroll model.

With the myriad of new legislative changes coming into force every year, keeping systems compliant and harnessing automation to reduce the frequency of mistakes is key.  Too many organizations fail to upgrade their systems in a timely manner and do much of their work in spreadsheets, which can be a breeding ground for errors.

Consider also that a company’s structure may not offer the scale to ensure an appropriate segregation of duties or control risks within payroll, which could lead to fraud. Outsourced providers are experienced in spotting instances of payroll fraud.

Similarly, the use of spreadsheets and out-of-date technologies, combined with a lack of proper security across all areas of the company, creates the risk of a data breach and violation of GDPR.  Holding all personal and confidential information in a secure data center, backed by the latest payroll technology, ensures protection. 

Another risk is loss of knowledge within your organization.  If a payroll is processed in-house and a team member goes on holiday, sick leave, furlough, or leaves the organization without proper succession planning, you may end up with late, incorrect, or even missed payments, as well as mistakes.  When using Managed Services, the workload is always covered.

There would also be support from a reliable partner during large-scale organizational changes, such as acquiring or merging with another company, or during crises like the Covid-19 pandemic.  There would be the peace of mind in knowing your Managed Services partner is there to help prepare for such changes and ensure the continuity of your payroll operations.

3.            Value added services

Payroll is often considered to be a ‘black box’ – full of mysterious secrets, but with no knowledge of where the key is to unlock it.  A good payroll provider can supply you with various reports – both pre- and post-final payroll run – ensuring transparency and understanding throughout the whole process.  Payroll-related correspondence such as payslips and leaver P45s are covered, along with the processing of tax year-end and the delivery of P60s and P11Ds.

However, beyond compliance-focused reports, a great Managed Services provider can use its expertise to help you maximize your use of payroll data and generate real Business Intelligence.

Payroll analytics has a number of important use cases, including:

  • Modelling flight risk: For example, we at Zellis have conducted a trial modelling flight risk that predicts with more than 70 percent likelihood if someone is about to leave the company. Armed with this knowledge, the right steps can be taken to try to retain that person.
  • Finding payroll outliers: Analytics helps you to understand the nature and frequency of different payroll-related outliers and anomalies, so that the right steps can be taken to correct them if needed and to improve the overall process. This might mean identifying someone who has been given a salary increase that surpasses the pay bracket for their particular role or, in a more serious case, to root out potential instances of fraud.  Some providers offer enhanced system checks to help protect you from fraud.  These checks can include: duplicate bank details, new starter validation, pay variance, zero tax deductions, and high earner checks.
  • Correlating performance and pay: This is useful for a number of reasons. At a basic level, correlating current performance and current rate of pay makes it easy to assess candidates for a possible salary increase. But it can also be used at a deeper level to analyze the relationship between bonuses and other incentives on employee performance.
  • Supporting resource management: Real-time insights help you to understand and highlight key resource trends and patterns, allowing you to plan more effectively.  For example, at Zellis we enable insights such as cost and impact of overtime; cost of absence by individual, department, or company; and pay ratios providing percentage spend on elements such as basic pay, overtime, absence, bonus, and expenses.

Ultimately, it’s important that the wider HR function can measure its impact on business performance through deep analytics, especially since other functions such as marketing are already becoming more data-driven.  At the end of the day, without access to good data, HR can’t add as much value to different departments within the organization, nor can it hope to positively affect its biggest controllable cost – the wage bill.

Looking ahead

Outsourcing payroll can be successful as both a short- and long-term solution for organizations, especially for those that have been heavily impacted by Covid-19. In the short-term, those that have reported a loss of payroll capacity can benefit from the additional support and expertise offered by a third-party provider. For organizations that have only been marginally affected, it may only be the case of outsourcing part of the payroll process. But for those that have been drastically affected, full outsourcing may be a necessity.

We could also see a stronger trend towards outsourcing over the long-term due to the cost savings and peace of mind it can provide for organizations that will likely be hit hard by economic downturn and uncertainty. Even as organizations eventually start to return to normal, there will still be a number of issues to tackle. Making sure that an integral process like payroll is completely taken care of may just help to alleviate some of the worry.

Abigail Vaughan, Chief Operating Officer, Zellis