How to outsource payroll

Two female workers in office

Chris Williams, Sales Manager at SME payroll specialist Moorepay, provides a step-by-step guide to outsourcing payroll.

Much coverage is devoted to large-scale payroll outsourcing contracts and the benefits that such an arrangement can bring to businesses. Organisations cite cost savings and the need to focus on core competencies as key factors that have influenced their decision. However, small and medium sized enterprises (SMEs) also stand to gain in the same way as large corporations.

1. Recognise the need

The first step is to assess whether the SME needs to outsource its payroll. This is often triggered by an identified problem with the payroll. An organisation may find its payroll is not accurate; or the in-house professional responsible for payroll (often a PA, office manager, or even managing director) does not have enough time to devote to it.

Common circumstances under which an SME may choose to outsource the function include:

  • Departure of payroll staff resulting in insufficient in-house function
  • Downsizing of organisation making in-house payroll function uneconomical
  • Organisational changes such as mergers or takeovers eliminating in-house payroll function Benefits associated with payroll outsourcing:
  • Freeing up employee time, which can be spent on directly productive duties
  • Delegating responsibility for keeping abreast with complex and changing employment legislation
  • Saving costs (e.g. avoiding high overheads associated with employing a dedicated specialist in-house)
  • Reducing the risk of having one person responsible for payroll, who may be on holiday or ill at a critical time
  • Implementing a scalable payroll solution to support the business as it grows – Improving disaster recovery (the outsourcer stores all critical information on more than one computer source)
  • Accessing better management reports

2. Research

To find the payroll outsourcer most suited to the needs of the business, there are a variety of sources available such as local Chamber of Commerce, Business Link, bank or accountant and the internet (e.g. the Institute of Payroll and Pensions website). SMEs should talk to other partners and contacts to see whether they can recommend a provider.

3. Choosing the payroll partner

When assessing the best outsourcer, there are five areas to investigate:

Experience: Consider how long the outsourcing provider has been in business (indicating its stability) and the degree to which it is a dedicated payroll specialist (as opposed to some providers which offer a payroll service as an optional extra to their main activity). Check its employees hold recognised qualifications from the Institute for Payroll and Pensions.

Culture: Ensure the provider has experience of your industry sector, so it can appreciate the challenges that may arise. The advantage of choosing a partner that works across a broad range of industries is that it can introduce learning from one sector to another, constantly improving its service offering.

Service: Check the provider uses software that is capable of delivering the service required – will it produce the appropriate management reports? Can it be tailored to reflect any special circumstances that may affect the company? Choose a provider that is able to provide support every working day – not just the two or three days when the payroll is due to be processed – some situations arise throughout the month, such as new starters and leavers.

Flexibility: A good provider will offer a choice when presenting payroll information – for example, reports can be printed, posted to the web or sent in a data file. It should be flexible enough to grow with the SME, negating the need to change providers if employee numbers increase or decrease.

Price: Although direct price comparison is important, remember that the cheapest option is not always going to be the most effective, and may end up costing more, if it does not deliver what is needed. The payroll provider can help to assess the cost of the existing in-house solution, enabling SMEs to benchmark.

4. Contract

It is vital that there is a contract and service level agreement in place. The SME should be aware of the service it can expect and how the relationship will work (e.g. timescales for processing the payroll etc).

5. Start Up

This is the tactical aspect of moving responsibility for managing payroll from the original in-house professional to the payroll partner. The payroll provider should conduct an analysis of existing payroll practices, so it can:

  • Provide advice regarding any processes that can be improved to make the payroll more efficient – Check the SME is adhering to all relevant employment and tax legislation, eliminating risk
  • Advise on any cost savings, for example, many SMEs are unaware that they can claim the majority of maternity pay back from the government

The payroll provider will transfer the relevant data from the SME. Organisations should check the accuracy of the data, prior to forwarding it to the payroll partner, however, the test payroll run will highlight any issues.

There should be minimal disruption to routine during this process, and the SME and payroll outsourcer should agree a project plan with clearly defined timescales, so that there is no risk to the payroll running late during the transition period.

6. Maintaining the ongoing relationship

It is important that you have an ongoing relationship with the provider. A helpdesk is essential, as is the ability to contact an account manager for possible problems or a general contract review. Remember the provider will become your payroll department, and you must be able to confidently rely on them.

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