There is a lot of debate out there about whether or not payroll should be outsourced. Most of articles written are from companies that offer payroll outsourcing services and are a little biased in their assessment. You can’t blame them for throwing out propaganda to try and get more customers right? ClockWorkAccounting is not a payroll company and so we believe our assessment of the situation will be less biased.
Disadvantages of Outsourced Payroll
We debated starting out with the advantages, but we decided we wanted to go a little against the grain and talk about some of the disadvantages first. Note that in some situations these disadvantages will not apply to your company. If none of them apply to your company, then you probably want to outsource your payroll function. How’s that for stating the obvious?
#1 Firing Employees Isn’t Fun – Yes for some cold-hearted people this isn’t a real cost. However, most people don’t enjoy seeing others suffer because of lack of work. This lack of enjoyment is considered a cost. Yes, we understand basic Economic theory that at the end of the day everyone is better off if everyone does what they can do most efficiently. That being said, we also know that giving people bad news isn’t always fun.
#2 Lose Potential Stars – Sometimes the best employees, the stars, come from unlikely places. It may be that you have a budding star in your payroll department and you will lose him/her if you outsource payroll. In addition, payroll could be considered a training ground for potential future managers.
# 3 The Normal Outsourcing Problems – We’ve lumped this disadvantage of outsourcing payroll into one category that consists of normal problems that are associated with outsourcing. (1) Switch over/start up fees. Don’t forget to calculate the cost for forming a contract, paying severance to fired employees, and initial start up fees. (2) Management no longer has control. This means when there is a problem, you have to work with the outsourcing company and you really don’t have any say over their operations. (3) Security loss, lack of confidentiality. Most good payroll outsourcing companies will take good care of your information, but it is always a concern when you’re not the one in charge of it.
Advantages of Payroll Processing Outsourcing
Note: Before we dive in to the advantages of payroll outsourcing, we want to make mention that some of these advantages depend almost completely on what your company is like. For example, one benefit often claimed by advocates of outsourcing is that it will save you money. That is not necessary the case if you are paying some college kid $8 an hour to do all your payroll work. Keep in mind that these advantages may or may not apply to your company.
#1 Expertise – It would be really nice if payroll was as straightforward as it sounds. However, the truth is that payroll gets very complicated when you start calculating withholdings and other compliance issues. Payroll outsourcing companies handle these kinds of issues all day every day. They know what to do to make sure your company is in full compliance with the IRS.
#2 Time Saver – Having another company take care of your payroll frees your company up to focus on its core competencies. This is an especially big advantage for smaller companies.
#3 Money Saver – Having an outsourced payroll can save your company money. Because payroll companies focus on payroll all day every day they have developed economies of scale. In many situations, outsourcing payroll will be less expensive than having an internal staff perform this function.
There are other supposed advantages and disadvantages to an outsourced payroll, but we felt them trivial when compared to the main reasons above. Each company has to decide where it fits in respect to these advantages and disadvantages. In addition, don’t be afraid to think outside the box, maybe co-sourcing where you have both outside experts and internal employees working on payroll is the best option for your company.
Summary
Disadvantages:
1. Firing Isn’t Fun
2. Lose Potential Stars
3. Normal Outsourcing Problems
Advantages:
1. Expertise
2. Time Saver
3. Money Saver
