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The Benefits of Outsourcing Payroll

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January/February 2001 - Volume 80, Number 2

by Stan Pelz

Outsourcing has been around a long time. When Henry Ford sub-contracted rubber tires for his Model A, he was outsourcing a manufacturing process. Today, outsourcing represents an everyday business practice that spans far more than just manufacturing. What was a $100 billion economic trend in 1996, is today a $400 billion phenomenon—one that continues to expand as technology brings the benefits of outsourcing to businesses that are increasingly diverse and ever smaller in size. A survey by The Outsourcing Institute found that businesses choose to farm out work for a variety of reasons. As might be expected, reducing operating costs and freeing resources for other purposes are high on the list. Outside providers bring economies of scale or savings that derive from specialization, and their clients often use the decreased costs to be more competitive in the marketplace, to provide employees better compensation, or to improve profits to shareholders. Being able to redirect personnel from back-office bookkeeping duties to sales or customer service positions means a boost in productivity and a better focus on company goals. That can translate to deeper and longer lasting improvements in a business culture—ones that can end up being more significant than the initial attraction of cost savings.

Also high on the list of outsourcing goals is the desire to gain world class capabilities. Sometimes an organization has simply reached the limit of its resources, and cannot move up to the next competitive level without outside help. Outsourcing brings onboard top-of-the-line capabilities at minimum cost. The highly skilled (and often highly compensated) personnel needed, any expensive technology required, the cost of continued upgrades or maintenance, and any tricky management experience that's involved, all comes in a turnkey solution with a minimal learning curve. Whether seeking outside assistance is part of an effort to re-focus on "the business of business" or a cure for a process that is slipping out of control, properly selected outsourcing typically brings solutions that are far more expert, quick, and economical than could effectively be developed in-house.

Butch Cassidy Meets Payroll
Here's one software company CEO's experience: "Ok, when I was doing it myself, here was my worst week on the payroll front: I had to go out of town on an emergency and when I got back everybody was upset because their checks were two days late getting signed. One of the programmers was nagging me to get him on direct deposit because it would mean an extra quarter percent off the mortgage he was applying for (we didn't have direct deposit). Two ladies with children in daycare were lobbying for an FSA (I didn't even know what an FSA was). And the topper: a letter from the IRS announcing a sizable fine for making a payroll tax deposit too late. Thank goodness we found a good outside payroll processor. They put out all those internal management fires I was having to fight time after time." While this CEO's problems were her week's worst nightmare, they were really just some of the basic issues of payroll, benefits, and human resource administration. In fact, these days, the proper handling of this area of a business touches far thornier tasks, with even more complicated management and compliance responsibilities.

Payroll involves the gathering of information, calculation of deductions and disbursements, and transfer of money in a fashion that meets strict time schedules and statutory requirements. But, as often is the case, "the devil is in the details," and gathering the data, working the numbers, and moving the money—all while standing on the shifting sands of government regulations—can be a daunting task.

In fact, those who handle payroll don't put the complexity at the top of their list of complaints. It's the recurring, payroll after payroll drudgery and, worse yet, the job of staying on top of constantly changing laws. "I felt like Butch Cassidy when I was doing payroll," is how the office manager at a joint medical practice in Kansas City put it. "In terms of keeping up to date, I was always trying to stay just one step ahead of changes in the law." And remaining current can be difficult. The Wall Street Journal reports that there have been 1,916 changes to the federal tax code in the last five years, with about 7,000 since 1986. Each year, anyone processing payroll faces approximately 400 federal and state changes that affect their work.

Spokes on a Wheel
On the surface, payroll is the calculation of wages and the issuance of checks. Behind the scenes, there's a lot more to it. Reports should be generated for a variety of accounting and management purposes. Payroll taxes must be deposited and payroll tax returns prepared and filed. Electronic filing mandates, garnishment orders, new-hire reporting laws, workers' compensation, and other government-imposed requirements fill the days of those who prepare payroll.

Electronic banking networks have transformed how workers are paid, with nearly 60% of Americans selecting direct deposit. Technology has also made payroll debit cards possible, as well as other special purpose payment options. Enterprising employers have added these to the perks that they use to recruit and retain employees.

Employee benefits also complicate the payroll cycle. An employer can end up involved with a dizzying mixture of general insurance companies, health carriers, brokers and agents, third-party administrators, associations, and other organizations that all require time-consuming interaction. Imagine a wheel with spokes to visualize the process. At the hub is a company's payroll, with information traveling back and forth along the spokes to a myriad of other agencies and entities around the rim. It's an ever-changing scene, tied together and made efficient by the high-tech capabilities of computers and communications networks. And it's one that is becoming even more integrated as the capabilities of the various participants become more sophisticated and as the Internet gives individual workers access to the process.

The Internet Revolution
The current trend in payroll and human resources administration is toward better linking of business systems and to better access at the employee level. Take, for example, a building supplies firm with ten employees operating near Miami. In the past, they had timesheet information going by fax to their payroll provider in the city and were receiving their payroll reports by courier. The company primarily used the phone and mail to communicate employee benefit information to their 401(k) plan provider in Connecticut. Employees used an 800-telephone number to get information about their 401(k) accounts. There was no integration of the company's payroll information and internal accounting software, and there was no automated communication between payroll processor, record keeper, and investment fund manager. Additionally, there were limits on employee access to 401(k) information. However, constraints like these are diminishing, in large part because of the Internet and other means of electronic movement of funds and information.

The primary barrier to close data systems integration has been incompatibility between the various types of hardware and software being used. For example, a reel-to-reel data tape from the payroll company's mainframe computers couldn't be used to feed information into the general ledger software running on that Miami company's desktop PC. Communication networks were primarily special-purpose connections like those used by banks to move money from institution to institution. However, the Internet has changed things radically by lowering both of these barriers. It provides a common network to which nearly any computer system can gain access, and employs common languages that all systems can be adapted to use and understand.

The capabilities are broad. The Miami business can now use the Internet to communicate with its payroll processor, sending timesheet or time clock information and receiving payroll reports. Automated links to the general ledger software are now available. The payroll provider can send participant contribution data to the 401(k) administrator. And, in one of the most important advances, employees can now have 24/7 access to their retirement accounts, with more information and options for action than ever before.

For both employers and employees, the Internet has expanded the scope of business research, allows self-serve access that's neither time nor location dependent, and provides a powerful tool for improving service levels, saving time, and reducing costs. And, of course, technology always moves forward, so the future promises tighter integration of business systems and greater flexibility and power for both users and suppliers of outsourcing services.

The Power of Outsourcing
"As far as I'm concerned, my payroll company is paying me to have them do the work," is how the head of a New York photography studio summed up his experience with outsourcing. "When I took the hours I was spending on payroll each month, and multiplied them by what my time was worth, it added up to double what the vendor wanted to charge me. So, I figure I'm way ahead financially. And, even with our small, five-person shop, payroll was never a small or fun job. I'd much rather concentrate on billable hours for photography. Let the experts handle things like timesheets, paychecks, and taxes." Payroll outsourcing has become an immensely popular approach on the strength of its efficiencies. For companies committed to remaining in the competitive race—and what business worth its salt is not—outsourcing promises continued applications of technology that will deliver even greater cost and labor savings.

When all is said and done, employers have two options to stay on top of payroll and human resource administration. They can choose in-house management or they can outsource. For a growing number of businesses, the choice has been to select the expertise of outsourcers for key specialties, allowing the employers to be their most competitive by focusing on "the business of doing business." It's just a matter of finding and choosing the method that will empower them the most.

Stan Pelz is the Orlando, Florida, district sales manager for Paychex, Inc., a leading national provider of comprehensive human resource compliance and benefits administration, and payroll processing services for small-to medium-sized businesses. For more information, visit or call 1-800-322-7292.

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