Outsourcing the Hosting of your Payroll System could Save you Time, Money and Resources

The arguments both for and against businesses outsourcing their HR and payroll functions are strong but more than ever before outsourcing is becoming an accepted part of business. Whether it's banks or building societies outsourcing their customer services to call centres, a marketing department outsourcing their PR to an external agency or businesses handing the administration of their payroll over to a bureau.

A recent manpower survey of 2,100 UK companies found that 68% outsource parts of their business. This figure has not changed in the last two years, but business attitudes to outsourcing are becoming more positive: 51% of companies surveyed said that outsourcing has become an established way of working, 14% more than in 2003. Significantly the proportion of respondents who say that outsourcing has saved them time and money has increased from 47% to 64%. It must be noted however that these figures refer to outsourcing in general rather than payroll outsourcing. The business areas most likely to be outsourced are printing and design (40%), telecoms (21%), product and service maintenance (19%) and IT services (19%).

During the last few years however the demand for payroll and HR outsourcing services has grown rapidly due to the ever-increasing legislation and particularly in light of the Inland Revenue's e-filing requirements. As a result many businesses have decided to outsource all or part of these highly administrative functions allowing key staff to concentrate on core business activities whilst making direct savings to the bottom line.

By the same token, advances in technology mean that software packages now offer more control than ever for in-house payroll departments, with many using fully integrated solutions that offer payroll and HR with one database from which to process the payroll and extract meaningful reports and statistics to be used by management to drive the business forward.

But why shouldn't companies have the best of both worlds? The answer is that they now can. A relatively new phenomenon has hit the payroll industry, which is likely to change the in-house versus outsourced argument as it consolidates the benefits of both. It is now possible for payroll departments to have full access to a payroll system without the upfront costs of purchasing the system, whilst outsourcing many of the associated labour intensive functions. This solution is termed a Hosted Bureau Service and means that a supplier hosts the payroll system on a server and processes the payroll data on behalf of the client, whilst the client retains all of the benefits of an in-house system, including the ability to input and analyse real time payroll data from their own office (see Fig 1).

The biggest competitors for this type of service are the Web Enabled solutions generally offered by the larger payroll providers in the market. Such Web Enabled solutions typically offer cut-down versions of much larger mainframe systems, which do not provide clients with a full functionality system as with the Hosted Bureau system described above.

Based on this and the tremendous benefits and support it offers to its clients the Hosted Bureau service is growing in popularity. In addition to minimal up-front costs and elimination of the requirement to purchase software, there are no user licence fees. This type of solution also eradicates IT costs and internal IT support, which is fantastic news for IT Managers who often inherit the support of business systems that they are not familiar with. Similarly, Payroll Managers will retain the ability to input payroll data direct into the system whilst having access to real-time data, the ability to produce draft runs of the payroll and produce and run their own reports.

Direct cost savings are also made through outsourcing the processing of the payroll data to the supplier. The likelihood is that the supplier will be servicing many other clients in a similar way and can therefore benefit from economies of scale which will be passed on to their clients by way of low service costs, fast turnaround times and substantial extension cut off dates. Whilst at this point you may be consumed with fears of losing control, which are of course natural, you needn't be. Many payroll-outsourcing providers will assign each of their clients with a dedicated payroll administrator to assist in creating a more personal working relationship.

The vast majority of these payroll administrators will be professionally qualified with a Payroll Alliance Advanced Professional Diploma in Payroll Management or the Institute of Payroll and Pensions Management Advanced Diploma in Payroll Management and be fully conversant with the latest payroll legislation. A further consideration is that previous concerns surrounding payroll staff being off sick or on holiday are no longer an issue for the business. If the dedicated payroll administrator at the bureau is absent for whatever reason, another payroll administrator will step in to provide continuity of service.

In addition to the support provided by an assigned payroll administrator, clients can expect to benefit from the supplier's extensive contingency plans in the unfortunate event of a disaster, plus regular upgrades and enhancements to the system carried out by experienced staff. Most suppliers also offer full project management, implementation and training which is backed up a qualified team of help desk analysts to assist Payroll Managers with any operational difficulties that they may experience in the use of the software.

So how does it work and what processes are outsourced to the supplier? The first stage of the process is for the supplier to review the client's current processes, establish their exact requirements and highlight where cost savings and efficiencies can be made. This process has many terms including due diligence and blueprinting. The payroll system would then be installed onto an external server in accordance with the client's individual payroll rules, regulations and requirements for user access and levels of security. The supplier would then give the client access to the payroll system over a secure data link. It is important to mention at this point, that an external server is the recommended or best-practice route to offering clients superior service under this type of arrangement.

Following installation, any import of data from a third party system would be carried out and the client's designated staff would be trained on how to input payroll data into the system. Before going live suppliers would usually recommend that sample or parallel runs be carried out to satisfy the client that the new software is functioning as they would expect. Once a client's inputs are complete any other routines such as bonus calculations can be run and a payroll calculated, viewed and signed off. Once the client is happy with the results, the supplier would access the client's data on the server and carry out a number of processes, which would typically include:

• Processing the payroll to calculate Gross Pay, Deductions and Net Pay
• Production of security payslips
• Production of standard reports
• Production of P45s for leavers
• Courier or postage of payslips, P45s and reports
• Production of an accounting interface file
• Production of BACS payments for all employees
• Production of BACS payments for third parties if required
• Provision of off site data backup

In addition to the above payroll processes the supplier would also take care of year-end processing on the client's behalf. This would include the printing of employee P60 documents and the electronic transmission of the year-end information to the Inland Revenue.

Some suppliers will additionally offer the added benefit of integration with HR and/or associated business functions such as Time & Attendance and Recruitment. In these cases both payroll and HR will benefit from only having to key data into the system once, further reducing administration and increasing business efficiencies.

If nothing else it is certainly worth questioning your business's current payroll processes. Why do you do things the way you do? If the answer is because it's always been done that way, you could be missing an opportunity to save time, money and resources.