Are you ready to outsource payroll? Some things to consider

Every small-business owner aims to focus on the big picture - improving customer service, increasing the bottom line, growing the company - but the details can overwhelm the best of intentions.

It's impossible to think strategically when you're in the weeds, when the must-do jobs take precedence over the should-dos. For that reason, many are outsourcing tasks that detract from what's most important.

Payroll is one of those 'back office' functions often targeted for outsourcing. Paychecks can't wait. The job must be done quickly and correctly, and it's time-consuming. Employers are often eager for someone else to take over, thinking it will not only save time, but money too.

While that can be the case, observers say business owners should carefully consider the decision to outsource payroll to either an accountant or a payroll company. The details of outsourcing can flummox even the most sophisticated companies.

Consider the experience of consumer products giant Unilever, as described by The Wall Street Journal. The company decided to outsource payroll, training, and other personnel-related tasks for its 200,000 employees, then dedicated nine employees working full time for five months to consider the bids. Eventually, the company will cut an estimated 1,000 human resource jobs. Even so, Reg Bull, a Unilever senior vice president, says it is a "mistake" to outsource to save money. Rather, he says, managers should look at outsourcing as a way to focus the company's resources and attention on its most important tasks.

While the decisions of a small business aren't nearly so daunting, job No. 1 is to fully explore your expectations. And know that the change will be disruptive at first.

"The way the textbook goes is to identify your core competency and seriously consider outsourcing anything outside of that," Frank Casale, CEO of The Outsourcing Institute, told bMighty.com, which covers IT needs for small and mid-size businesses. "I like the word growth-sourcing because outsourcing really is a growth enabler" for smaller companies, Casale said.

Kelly Services offers these pros and cons to think about in outsourcing payroll:

 

  • Saving money: Outsourcing payroll will generally cost less than setting up an internal payroll process, at least in the short term. Think about 'opportunity costs' too - outsourcing can free up time to focus on core functions.
     
  • Gaining flexibility: If your company is growing quickly, your outsourced payroll is much more likely to have the infrastructure and know-how to handle the increased workload.
     
  • Accessing data: It may become difficult to access important employee data in outsourced payroll information systems.
     
  • Supplying Sensitive Information: Some business owners may not be comfortable letting an outsider handle sensitive information. If payroll mistakes occur, the ability to quickly fix the problem may be compromised.

    Kelly Services advises: "A savvy manager should not believe the hype that can sometimes surround outsourcing, especially when it comes to payroll."

    Need more advice? Conduct due diligence on vendors (don't just take their word for it); manage the relationship, oversight is key; understand your own processes before you outsource them; think beyond saving money in the short-term. "If you're willing to have a grand revision and think of the upside, both long-term and strategic, then you have a wonderful opportunity," Casale said.

    Forrester Research principal analyst Bill Martorelli told bMighty.com: "You have to make sure you are in a position not only to demand good service from the provider, but also to do your part of the bargain in terms of having the internal preparation that's essential to being an effective consumer and helping to manage the relationship on the customer side."

    Smaller companies must be prepared for change, for challenges, and for outright difficulties in making outsourcing work to its maximum potential, Martorelli said.

     

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