The big payroll question: In or out?

By Anthony Harrington, The CA Magazine

30 April 2015

With so many changes to regulations, is it best to get external experts to manage staff salaries or to keep the system in-house?

Payroll is a critical function for most businesses and there has been a lot to contend with in terms of regulatory change over the past few years.

First it was Real Time Information (RTI). Then along came auto-enrolment, and since then we have had paternity leave and a complete rethink on how holiday pay should be calculated. On top of all this, technology and the way it is used are evolving constantly. The rise of cloud computing and increased use of mobile devices, such as tablets and smartphones, are changing the game for payroll applications, as they are for software in general.

The big strategic issue, which everyone involved in payroll has to address, is a deceptively simple question. Is it more beneficial to run the payroll system in-house or put it out to a third party?

Everyone, it seems, has an opinion. Suppliers are generally agnostic on the issue. Most will argue that their payroll system will do as well for a firm of accountants that is carrying out bureau-style payroll services for clients, as for a company running its own payroll in-house.

Cloud-based payroll systems

Gary Turner, UK managing director with payroll and accountancy package provider Xero, makes exactly this point about his product, which has just been launched in the UK as a complement to the Xero suite of accountancy software. However, Gary argues that because the Xero payroll system targets "micro-employers", i.e. companies with 10 or fewer staff, it is ideal for the client who wants to run their own system. Being cloud based, it is also very easy to move to for those who want something better than the rudimentary free package offered by HMRC.

"The HMRC offering is very basic indeed. It doesn't even print payslips and is only there for the online filing of RTI submissions," Gary says.

Despite this, more than a third of UK businesses use the HMRC offering as their sole payroll system. There are more than 1.2m employers in the UK and the vast majority, more than 1m, have fewer than 10 members of staff. Of the rest, Gary says (that is, around 200,000 employers), some 40 per cent are using an outsourced provider and the others have a payroll package from a systems house like Sage or Access.

"We have a couple of thousand UK accountancy practices using our accounting suite and now that we have launched our cloud-based payroll package, we expect that a significant number of these will opt to take payroll as well." 

Gary Turner

Gary adds: "Some of them will use this to offer bureau services to their clients. But in time I think payroll will move away from accounting firms offering outsourced payroll services and go for an in-house managed, cloud-based system, since it is very simple and straightforward to use, and the information is always at their fingertips."

The role for accountants

Derek Moffat, payroll manager with accountancy firm French Duncan, and Janice Robson, partner in charge of payroll services at the company, disagree.

"It seems pretty clear that smaller businesses who cannot justify employing a finance director or controller full time value the services we can provide, including payroll. We do everything a small business would need, from bookkeeping and VAT returns, to providing them with payroll services, and absentee reports. A big part of what we do is providing the management reports that companies use to run their businesses, so providing payroll is a natural additional service," Janice says.

Derek points out that the compliance burden on companies of all sizes has mushroomed in the last few years, and small business owners and directors need to be able to offload that compliance burden onto their payroll provider.

He says: "Our clients have as much control and access to information as they would if they were running the system in-house. We use Star Payroll, which is different from most of the payroll providers out there in that it is in the cloud, and employers can log on and view reports."

Added HR services

French Duncan uses the payroll to provide an HR service for clients, where employees can look at their holiday entitlements, leave already taken, and so on.

"The next thing that is coming out from HMRC and the government is shared parental leave. That is going to bring some fresh problems with it for payroll providers, but so far they have always managed to stay on top of all the changes. When RTI was first talked about, we thought it was going to be huge, but it was managed well by the software providers and it all went smoothly, and the same goes for auto-enrolment," Derek Moffat comments.

He points out that the overwhelming majority of the firm's clients simply want him and his team to manage all the administration tasks associated with auto-enrolment.

"They just can't spare the time to deal with it, which is another strong argument for outsourcing payroll," he observes.

IN-HOUSE OR OUTSOURCED?

THE PAYROLL PROS AND CONS

WHY OUTSOURCE?

  • Let someone else take on the compliance burden
  • Privacy – your staff won't see what their colleagues earn
  • Save the costs of employing finance/payroll staff in-house

WHY GO IN-HOUSE?

  • Control your own operations
  • Cloud applications make running payroll easy for a small employer
  • Switching providers or bringing data back in-house from an outsourced provider may be problematic.

Yorkshire Dales National Park Authority is a prime example of an organisation bringing its payroll operation in-house. The Authority has some 130 employees, all paid monthly, and it took the system back in-house with a view to making efficiency gains.

Hannah Clark, head of HR and communications at the Authority, says: "We had our payroll outsourced to the local council. They provided a very reasonable service, good even, but we thought it would be better doing it ourselves in-house. Not only would it be more cost-effective, but we felt we would certainly be able to get more information out of the system running it in-house. At times, with the council, we felt we were at the back of a long queue when it came to payroll services."

"Apart from pay slips, the more important reports for us are absentees and sickness. We have a flexi-working hours system here and the payroll package also caters for this." 

Self-service benefits

The self-service element to the system allows employees to update things like their bank details and to request leave through the system. On the innovation front, Carvel, the payroll provider, is bringing out a mobile application for employees to use on their smartphones in the near future, she says.

Nick Hogan, divisional director at Access, which provides everything from full Enterprise Resource Planning software to payroll, says that his payroll is targeted largely at the 75 employee and above bracket.

He says: "We sell it as both a bureau system and an in-house package and we are completely agnostic as to which route people choose. We say that the fact we can be neutral as to the route you go for is one of our strengths."

"All we need is three months' notice and we can have the entire system with all their payroll data and history moved to their server in-house."

"Many of these cloud-based outsourced payroll services that are now springing up will leave clients with a huge problem when and if they decide that they want to move payroll back in-house."

"I would advise any company or organisation that is thinking of outsourcing their payroll to make sure they address the issue of how they are going to exit the service, right up front in their contract with the bureau service,"

Nick Hogan

'A social payroll'

Nick Hogan points out that later this year Access will launch what it terms "a social payroll". He says: "What we mean by this is a departure from the traditional scenario, where you have a payroll manager and you need to transmit data to your provider. The most common way of doing this is by email, which includes scanning documents and attaching them to the email. This is then sent unsecured to a payroll clerk in the outsource provider's office, who then has to respond. The big problem with bureau services is that the outsourcer does not talk to the end-user organisation to keep them abreast of where the outsourcer is in the payroll cycle."

One result of this is that you may not notice you have a problem until the staff don't get paid on time. The problem with the traditional approach is the gap in communications that can occur. If the payroll clerk is off ill, for example, Access's approach is to incorporate payroll into a task-based system. Each step of the cycle is allocated as a task and the end user can look at the task schedule to see exactly where the outsourcer is in the payroll cycle at any point in time.

The beta system also includes chat functionality and it tracks all communications in both directions so there is no need to go searching through a stack of emails to find a missing bit of correspondence. This can be really important in nipping any disputes between customer and provider in the bud. If there is a snag in the payroll because the customer is late in filing, it shows up instantly as a missed deadline in the task system.

Security concerns

Security is an obvious issue with payroll. One of the major reasons for using an outsourced provider, for many companies, is to keep the payroll private from other members of staff.

French Duncan's Derek Moffat points out that one client recently cited privacy as the issue that led them to outsource payroll. "They are uncomfortable with the idea of anyone knowing exactly what everyone is being paid," he says.

If the other factors look evenly matched, for some business owners that might just be the clincher.

Topics

  • Corporate and financial reporting
  • CA Magazine

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