When it comes to payroll processing, there are three main options.
Firstly, do it yourself. Secondly, as with the traditional bureau service, input the data in-house but contract out the processing of the data, including the generation of payslips and control reports, to a third-party specialist.
And thirdly, go the whole hog and transfer your payroll function to an outsourcing specialist.
Leaders in the field offer a wide range of services. Cara Group, which has bases in Ireland, the UK and Europe, offers both a payroll bureau service called Carapay and an outsourced payroll management service called Cara Resource.
Centre-file, owned by US giant Ceridian Corporation, produces 20 million payslips a year and claims to be the largest provider of payroll services in the UK in terms of total pay processed.
‘We calculate the payslips for over 6% of the UK’s working population,’ says spokesman Ron Wood. Again, Centre-file offers both the traditional processing service and a full management service, called PayCentre, which it claims is growing by as much as 50% a year. At that rate the revenue generated from full outsourcing could exceed that from traditional bureau work in the next three to four years.
Growth in payroll outsourcing results in part from the management trend to focus on core business and hive off the rest. But when you get down to practicalities, the potential for cost savings is a key driver. They may result from reducing the in-house headcount, cutting IT purchasing and maintenance costs, and cashing in on the economies of scale available to outsourcers.
Last October, Asda signed a #10m deal with Centre-file under which the outsourcer took over Asda’s existing payroll operation in Leeds, establishing a new regional Centre-file PayCentre.
Fourteen Asda staff moved across, initially dedicated to running the Asda payroll catering for 76,000 employees across 214 locations.
Asda’s two prime objectives were to achieve improvements in cost efficiency and year 2000 compliance. ‘One of the solutions for companies having problems getting millennium compliance is to outsource,’ says Wood.
Getting key experts on the job
Another reason companies turn to outsourcers is to gain access to their expertise. Changes in tax legislation put a strain on payroll departments that outsourcers can alleviate.
‘While self-assessment is putting responsibility on individuals to do their tax returns, it also puts responsibility on the employer to give employees the information to put on the tax returns,’ says Wood.
Reliability of service is another trigger to move payroll out of house.
This is particularly true for smaller businesses, which may be reliant on one individual to process pay data.
What happens when that person goes sick or leaves suddenly?
Levy Gee decided to outsource its payroll when its payroll manager resigned. Outsourcing appeared to offer security against dependence on a single staff member. ‘We also needed confidentiality and the service to be accurate,’ says partner Malcolm Gee.
‘Now the whole thing is handled out of the personnel department by e-mail. I don’t think we would want to bring it back in-house. It’s worked out well economically too.’
The desire for confidentiality can lead some companies to prefer to have their payroll, or even parts of it, managed off-site. Tesco has its own payroll department to handle the pay for most staff, but CMG handles the payroll for the supermarket’s senior managers, just 14 or 15 people.
‘This was a part-time job in-house but, because of the confidentiality aspect, it had required a very senior person to do it and so it was a very expensive part-time job,’ says Mick Clark, divisional director for CMG’s payroll business.
Some organisations may outsource the management of payments to their pensioners because they believe the pensions area requires specialist knowledge.
Payroll outsourcing is also growing healthily because it can be applied to so many types of business, large and small. The Royal Bank of Scotland offers a payroll service called Payroll Solutions, charging a flat-rate charge of #50 a month for processing the payroll for up to 100 employees.
‘That’s a small price to pay to get rid of the hassle,’ says product manager Gill Blackmore. RBS’s target market includes any company with around 15 or more employees. About a year ago, Centre-file launched a service aimed at smaller companies with less than 50 employees. ‘That’s taking off like crazy,’ says Wood.
Dierdre Hardy, a Coopers & Lybrand senior manager in human resources and payroll consulting, believes outsourcers have also tried to make their service more attractive to the largest organisations. Providers have become more flexible in the services on offer.
‘In the past, they would say a company had to get all the information in by such a day,’ Hardy says. ‘It was very rigid and management information wasn’t readily to hand. Now they are moving towards organisations being able to manipulate data even though they are remote from the supplier.’
Some businesses will find it more problematic than others to outsource their payroll. ‘The more widespread the payroll is within the organisation, the more difficult it is to outsource,’ says Clark.
‘It is easy to hive off a centralised department. ‘But if you are a distribution organisation, for example, with several hundred depots round the country and at each depot someone is doing a bit of payroll, it’s more difficult to outsource.’
An organisation that expects to be going through significant amounts of change also needs to think carefully before getting tied into a restrictive outsourcing agreement. ‘If the organisation is changing, through merger or downsizing, for example, it should build levels of change into the service level agreement and try to foresee what may happen in the future,’ Hardy advises.
Looking for solid track record
Companies that decide in principle to outsource payroll then have to choose a service provider.
Common sense suggests looking for a company with a solid track record in payroll outsourcing.
‘Then you have to ensure that, from a functional perspective, they can offer what you want and in your timescale,’ says Hardy. ‘We often find when organisations choose an external service provider it’s very much a cultural thing, an instinct for whether they will provide you with what you want.’
Before signing on, companies need to ensure the service agreement covers everything they could possibly want, including any peculiarities in pay procedure.
Failure to specify precisely the service required, including management reports, can lead to a doubling of costs once the service goes into action.
‘We do find companies who have gone back in-house,’ says Hardy.
‘That’s usually because they have had a bad experience. It may be that they didn’t define the service properly and the costs spiralled and the company didn’t understand why. You have to be very clear about what it is you want,’ she stresses. ‘About 90% of the time, when things go wrong, that’s where the brunt of the problem lies.’
Clark also advises establishing the standards by which to measure outsourcer’s service. For example, what is the response time for an employee’s query? What is an acceptable error rate?
Organisations do need to be realistic about the service they can expect, however. ‘The provider is offering the service to a number of people and that’s what allows them to offer the service cheaply,’ says Hardy. Companies can probably expect to get 80% of their ideal service.
The remaining 20% probably isn’t that important.
Hardy believes organisations are increasingly looking to see if they can outsource more than just payroll: human resources too, for example.
‘Most traditional payroll organisations also offer the outsourcing of HR systems and associated services,’ she says. The outsourcer deals with the administration, while the in-house HR department retains control of strategy and culture development.
‘We can provide a wider HR consultancy,’ confirms Clark. ‘One of the things we get a good sight of is a client’s employee terms and conditions. We get asked what we think of them. We can say what best practice would be. We can advise on policy issues.’
Any organisation that decides to outsource has to consider the impact on its own payroll staff who probably won’t be immediately overjoyed at the idea. However, the option to transfer to the outsourcing provider can provide a boost for their careers. Angus Cunningham, former payroll manager for Harcros UK (now part of Jewsons) based in Glasgow, is now location manager and team leader for Centre-file’s office in the city.
‘Harcros was a supplier to the building trade,’ he says. ‘In payroll, we weren’t particularly encouraged to advance ourselves by gaining certificates, diplomas and so on. Since joining Centre-file, people have been given the opportunity to study and improve their knowledge. And there are other career opportunities in Centre-file – in implementation, consulting, or sales and marketing.’ Six of the seven Harcros payroll staff transferred to Centre-file, one rejecting the move because of increased travel time to work.
‘I would be lying if I said everyone was over the moon when first told,’ says Cunningham. ‘But when we realised the upside, things seemed more positive. Since then, we have blossomed.’
Despite such optimism, some scepticism about the outsourcing trend remains.
‘My feeling is that the industry is in a state of flux,’ says Martin Jackson, a senior lecturer with the Institute of Payroll & Pensions Management.
‘Some areas are growing, but I do come across companies that are already outsourcing but are considering bringing it back in-house.’
Jackson says he believes companies decide to return their payroll in-house because they find the outsourced service expensive. Nor is Jackson convinced the report generation capabilities can be as easy to achieve or as cost-effective if the data has to be retrieved from off-site. ‘I am a fan of in-house payroll,’ he admits.
‘My feeling is, as computer systems become more powerful and relatively cheap it can become easier and cheaper to run your own payroll than to outsource. Why pay someone to do something that you could easily do yourself?’
The answer has to be partly that managers see benefits in maximising the time that in-house staff spend on core and preferably profit-generating activity. Those that do try outsourcing need to allow a realistic timescale before they assess its worth.
‘There will be teething problems in the first year,’ warns Hardy. ‘Allow perhaps a five-year time scale and ensure you dedicate enough resources internally to the project. Don’t think it will all happen as planned straight away.’
Sarah Perrin is a freelance journalist
OUTSOURCING THE VENDING GAME
Vendcare Services supplies and services vending installations in business, education and leisure sites throughout the country. The #21m turnover company has around 375 employees and has been using Centre-file since 1994, when Vendcare became independent through a management buy-out, so losing the services of the previous owner’s central salaries department. The management team decided to focus on its core business and outsource the payroll function to Centre-file.
Personnel manager Gordon Lord says the outsourcing service breaks even in cost terms, given the saving in payroll staff salaries. ‘It would take us an additional person if we did the payroll for ourselves, and we would have no cover if that person was sick, for example,’ he says. ‘There is also a hidden saving, because we don’t have to buy, maintain or update the (payroll) computer system.’ Lord also appreciates the expertise Centre-file has in tax and payroll matters. ‘As a relatively small company, we would have difficulty keeping up with all the issues relating to payroll,’ he says. The concept of payroll outsourcing also fits well with Vendcare’s own business concept, given that its service is to manage other people’s drinks and snacks provision.
‘It would be a bit silly of us not to practise it (outsourcing) in other respects,’ says Lord.
Andrew Tyrie airs views on the Finance Bill, 'Making Tax Policy Better' report, and Brexit
In our latest managing partner Q&A looking towards 2017, CVR Global's Richard Toone talks about recruitment, and the potential threat of competition from the legal sector, as key issues for the firm in the coming year
Deloitte to avoid tendering for government contracts over the next six months, to appease Theresa May following consultant's report that painted a less-than-flattering picture of Brexit plans
In our first Q&A looking towards 2017, Menzies senior partner Julie Adams flags up increasing digitisation, aligned with more hands-on consultative services, as the key mix for her practice