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Payroll and HR management - The outsourcing debate

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18th Feb 2005
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The threat of £3,000 fines for employers who fail to comply with the efiling deadlines for PAYE year-end returns (6 May 2005 for companies with 250+ employees, May 2006 for those with 50-250 employees and 2010 for everyonje else) has prompted a wave of activity within the industry, according to Kate Upcraft, policy & research manager at the Institute of Payroll and Pensions Management.

"Everything has been thrown into the melting pot. A lot of people had to consider whether their current payroll systems could cope. The deadline has focused their minds on how much it's going to cost to comply and whether to turn to an intermediary."

Many people make the mistake of burying their heads in the sand and assuming that if they trust their payroll to a bureau, the problems of efiling will disappear. "Just because you are using a bureau to do your payroll run for you, don't assume e-filing will not affect you," Upcraft warned.

For example, unless they have appointed a bureau to handle remittances as well as the payroll run, many employers will find that they have to file the P35 return, which is their declaration of the sums owed and paid to the revenue after reconciling their payroll accounts for the year.

Ironically, the threat of efiling fines will have the least affect on the "250 Club" of companies affected by the May 2005 deadline. For some organisations whose strategy is to treat payroll as an integrated part of their IT systems, the implementation costs to hit the May deadline may far outweigh the non-compliance penalty, Upcraft predicted.

While payroll is regularly identified as the sort of non-core activity that can be parcelled out to a specialist, the lessons from the IPPM indicate that it is not always a clear-cut decision. You need to identify exactly what it is you want to outsource, how much it is going to cost you and how you are going to manage the process.

Greg Ford, business development manager for Sage payroll and HR solutions acknowledged that desktop software developers are in on ongoing fight with outsourcers. "The positive thing for employers is that there is choice - which is good for them," said Ford.

As Upcraft and Ford both see it, organisations go through different stages in their payroll lifecycle. "We see people that use outsourcing and decide to bring it back in house because they want better control over the data," said Ford. "It depends where organisations are and what they consider are the priorities for their own strategy."

This article summarises some of the main options and arguments for and against outsourcing. Advice is proffered from both users and providers to help readers work out their own priorities. For more detail about suppliers, see the HR Zone/IT Zone supplement ">.

Payroll outsourcing options

  • Payroll bureaux - The lowest cost, most common solution, ranging in scale from services provided by high street accountants to specialists in corporate payroll. At the most basic level, the client company will input pay data, which the bureau will then process. The service often extents to dispatching payments, either via cheque or BACS, but this is not universal. As the IPPM indicates, clients need to establish whether the bureau will be able to produce and file their electronic year-end returns.

  • Fully managed payroll - The logical conclusion of outsourcing is to dump all responsibility on the outsourcer, which effectively becomes your payroll department. In some cases, suppliers will even take on your existing payroll staff. The arrangement will usually extend to other other admin issues that crop up aside from the regular pay run and year-end returns - for example, pensions and tax credits and enhanced management reporting. A conscientious supplier will act as your agent both for efiling and any other engagements with the Inland Revenue and provide regular management reports.

  • Full responsibility organisations - Why stop at payroll? A growing number of consultancies will assume full responsibility of your company's HR activites. They effectively become a co-employer of your company's workers and take full legal responsibility for employees - including hiring and firing, training, development and remuneration. Such organisations present themselves as partners for the business, and undertake to deliver all the HR processes needed to achieve the company's strategic targets. The full responsibility service will often be made possible by networked systems that link into client organisations, and can extend to business process outsourcing in other administrative areas, including finance.

    Outsourcing pros and cons
    Since payroll was one of the first business activities to be computerised, the argument over the pros and cons of payroll outsourcing payroll is also one of the the industry's longest-running debates. The prevailing wisdom has often shifted in response to new technologies or outside events such as the government's recent enthusiasm for efiling.

    HR Zone member Alison Morgan pointed out some of the eternal truths that underpin any discussion of this topic: "Pros/Cons will depend on the size of your organisation, the type of HR system you have now and whether you are currently running payroll in house."

    As long ago as 2001, accountant John Mackay summarised the outsourcing debate as one of cost versus control. For the smaller companies he services, cost is usually a major concern and he argues, a smaller PAYE-dedicated agent (such as himself) would be more suitable than large conglomerates like Centrefile, ADP and Northgate.

    If you are looking at outsourcing as a quick fix to the efiling issue, or you are lured by some of the full service options, Robert Edwards, of Limeone, sounds a note of caution: "Moving payroll is costly and cumbersome. So be wary. A lot of payroll providers are not also HR consultants, just resellers of the HR software. Going from manual to computer-held records on payroll is a large scale job in itself without the distraction of HR also. Once you choose an HR system that 'just happens' to also do your payroll, you are tied in."

    For those businesses that are still at the manual payroll stage, for example, Edwards advises keeping payroll separate from any HR IT function.

    Karen Paterson, founder and CEO of solutions provider Patersons disagrees. Offloading the processes to experts can free HR and payroll managers to focus on areas where they can make a more positive contribution to the organisation. "It also takes away the need to support and maintain software. The bigger the organisation the more expensive and complex this can be," she says in a recent interview with HR Zone.

    The integrated approach means there will only be a single source for data entry, which reduces the administrative overhead and cuts costs, she argues.

    Even with a full service approach to payroll and HR outsourcing, the client still needs to have someone to have overall responsibility for payroll, both to manage the provider and to act as a point of contact for both the employees and the bureau.

    "The right choice of bureau is critical," Paterson continues. "It is not just about producing payslips. A single point of input, comprehensive report capability and customer service are just a few areas that need to be efficient and effective. Payroll is one of the most important functions in an organisation. Failure to pay staff accurately can have damaging repercussions."

    Tips for outsourcing success
    There are enough high-profile horror stories out there to induce caution in any organisation dipping its toe into payroll and HR outsourcing.

    If outsourcing is going to work for you, you need to know exactly what you want and how much it is going to cost to process each payslip - bearing in mind any additional charges for corrections, reports and even stationery.

    For real-time management queries and reports, many bureaux may be able to link to your finance systems, but you will need manage the security issues and be aware of extra costs involved. Will you be happy with a standard package of monthly and year-end information, or will you want ad hoc reports and more sophisticated analytical features to analyse trends and check "what ifs" on current data?

    All of these functional and cost elements will need to feature in your contract and be backed by a service level agreement stipulating what is delivered and when, with sanctions for failures to hit the performance targets.

    Whether you go for a large supplier or small, John Mackay advised, you need to be certain there is duality of control - so that someone experienced in payroll gets copies of both lodgement data and audit trails. When payroll processing is outsourced, employees have to be made aware of cut off-times for notifying changes in bank details, holidays and so on to comply with the bureau's timetable. Whatever size service you opt for, "Ask for references from existing clients," he urged.

    In addition to checking with reference sites (and financial stability), Paterson suggests a menu of issues to consider even before you set out the detailed ingredients of your service level agreement. Should Web-based services, or full HR capabilities be serious priorities, the functionality, availability and flexibility of the software should feature high on your checklist. In particular, Paterson advises checking whether the software can be easily adapted without major development costs should you want to change or enhance your system as the organisation changes.

    "Users need to manage their expectations," says Paterson. "Beware of over zealous salesmen. Always write a script for a payroll demonstration so that you can be sure the software does actually do what you want. An evaluation period is also very useful. If the software is up to the job the software vendor should have nothing to hide."

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