How do we define payroll in the simplest of ways? Let’s just follow the usual routine. Google the words and this is one of the definitions that Google throws up.
“Payroll is the process through which employees receive their pay checks and is obviously the most important part of an organization because everyone works for money.”
I don’t really think there could ever be a much simpler version of the term.
While the definition might look simple, the process hardly is. With the ever-increasing complications in laws, companies are finding it extremely cumbersome to take note of the same and keep up with the changes. Not just this, there are multiple reasons companies outsource their payroll.
While payroll has been an area that has been neglected historically, it has assumed greater significance in recent times. No more is payroll just another department. But with increasing significance, comes increased responsibility. Not just in terms of workload. Even in terms of expenses, the payroll function costs about 30-35% of the total expenses of the organization. Let’s now look at some of the reasons organizations outsource payroll.
- Time & Cost
When it comes to managing payroll for an entire organization, the needs are extensive. Organizations, especially the ones large in scale, would require a separate department to take care of their payroll needs. This mandates the company to invest a sizeable amount in not just the department, but also the IT systems & solutions, with respect to payroll. This would additionally mean investing a lot of time in training the company staff about the laws and other statutory compliances. The company will also need to spend a lot of time checking and cross-checking the details involved in payroll since it involves money and other crucial details. Outsourcing the entire payroll service, saves a lot of time and cost and helps the organization focus on its primary area of service and increase its core competence levels.
- Statutory Compliances
Organizations across the globe want to spread their wings in more than one country. While the core competence activity remains more or less the same, it is not the case with the payroll department. Entering the portals of another country means understanding their minimum pay structure, their wage structure and compliances, their tax structure and so much more. Unless the organization is thorough, there are chances of lapses and it might not add to the reputation of the company. This is where specialized Payroll service organizations might be of utmost help. Being their primary area of service, the organization to whom the services are outsourced is expected to know the laws of the land and other statutory compliances, thus relieving the original organization of the statutory headaches. This way, the parent organization is less worried about the statutory compliances & tax laws that are updated regularly.
Information is wealth. And today, data security remains a prime cause of concern for organizations. The amount of data that’s being handled during the Payroll process is no joke. Any small leak about the payroll data might prove to be costly. With all of this under question, the doubt remains if a company would be willing to spend money on securing the data. Security plays such a vital role in today’s environment and a lot of organizations feel they’re better off outsourcing their payroll services considering security in mind. Specialist organizations, no doubt have a better firewall protecting the data and this remains one of the primary reasons why organizations outsource their payroll services.
While this could’ve been clubbed under Time & Cost, it is important to look at the productivity aspect of the organization, under a different lens. In organizations, where the volume of data isn’t huge or where there are not many employees, the company might not be interested to have a separate payroll department. Instead, it might delegate the payroll services to the HR department, thus preventing the HR department from carrying out their primary work, without any interruptions. Over time, companies have realized the importance of not delegating work as it diverts the flow of attention and also leads to errors. Outsourcing payroll services allow business organizations to focus on their primary business functions that act as revenue outlets.
Grapevine has largely been a problem in modern organizations. The flow of information leads to internal conflicts among the employees and the organization. And one such tool is monetary compensation and allied data. Internal employees having access to payroll may pass on such data to their peers that might result in conflict. While this threat may look small, the amount of unrest it can cause within the organization is beyond comprehension. To avoid such unnecessary conflicts and keep the flow of payroll data to a very minimum level, organizations look at outsourcing Payroll services as a solution.
- Business continuity planning (BCP)
Gartner defines BCP as a “broad disaster recovery approach whereby enterprises plan for recovery of the entire business process. This includes a plan for workspaces, telephones, workstations, servers, applications, network connections and any other resources required in the business process.” After the COVID-19 outbreak, BCP became one of the top 3 priorities for many organizations across the globe. Outsourcing payroll was suddenly considered a wiser option as an organization running payroll in-house could afford to grapple with challenges around remote working, IT infrastructure, or even an unwell payroll team member at a critical time. For those who had outsourced payroll, COVID-19 caused no sweat. Sudden shutdowns, work from home and the security concerns it brought along with had no impact.
Considering the way modern organizations have been developing in the recent past, it is no wonder that they choose to outsource the areas they are not familiar with. The complexities that have developed around Payroll and allied areas only add to the pro-outsourcing argument. While only a few reasons have been listed, a lot more reasons can be added to the list.