Most facilities outsource payroll for the same reason: since payroll isn’t a core competency, it can easily be taken care of by a third party. The myth is that HR departments will be freed of the burden of processing paychecks. The reality is often another story.
Fact: Not all the Payroll work is outsourced
It soon becomes clear to Payroll staff that the payroll function isn’t entirely outsourced. They still have to make manual calculations about pay and benefits variables so that information provided to the payroll outsourcing company is correct. As Jim and Anna discover, they also need to keep track of employee activities to reveal overtime trends and track variances.
Fact: Obtaining Payroll data costs time and money
Meanwhile, the facility realizes it has lost control of information about its own people. For instance, if management at a hospital asks for details about nursing overtime costsso they can set next year’s budget or funding allowance request, the Payroll department
can’t access the data. Since many departments in healthcare facilities can’t predict their workload, scheduling can be a challenge. If there’s a big accident or a widespread outbreak of flu, the Emergency department may have to call in more nurses or ask nurses to work overtime. If there’s a baby boom, the Maternity department has to call in more staff. If this hospital is facing growing needs for its services, that may be reflected
in increased overtime costs for nurses. But how can managers set a budget for the next year if they don’t understand how costs were incurred in the previous year? Managers need to be able to track employee data, but it’s difficult if Payroll staff don’t have access to this information. They have to ask for a report from the payroll company, which incurs extra fees, can take days or weeks to arrive and may still not include all the data they need.
Fact: Being unable to access important data is a source of stress
There’s also the anxiety created by errors. The adage is that no one pays attention to payroll until there’s a problem with paychecks. If people aren’t paid properly, the results range from frustration, at the very least, to complete work stoppages. When payroll was taken care of in-house, potential problems could be flagged and solved more quickly. There’s a different sense of responsibility when you’re preparing the paycheck
of someone you work with every day. And when hard-working Payroll staff like Anna can’t provide answers to questions that management has, the result is a great deal of aggravation on both sides.
Fact: The hidden costs of outsourcing include incomplete data, frustrated employees, additional charges for information and more staff time spent on manual tasks
As organizations grow and become more complex, the outsourced payroll function is increasingly cumbersome. In a growing healthcare facility, it becomes hard to track where extra staffing costs are being incurred. Are the nurses working more overtime or is it administrative staff? HR staff are now spending entire days doing manual calculations, scheduling is more complex, and it requires even more time and money to compile reports about employee costs.
In short, the advantages of outsourcing payroll have disappeared.
Growing Concerns about Customer Support, Costs
Payroll is outsourced by almost half of employers, according to a Society for Human Resource Management survey of its members.1 This varies according to company size: 58 percent of companies with fewer than 500 employees outsource payroll compared with 28 percent of companies with 10,000 or more, the survey finds.2
But there are signs of dissatisfaction. Seventy-four percent of executives nationwide “have some concerns about outsourcing”, a national survey of financial and HR executives by Empagio in 2006 finds. The primary issues are lack of responsiveness and lack of customer service. Twenty percent of executives say they no longer outsource due to poor customer service, and more than one-third of executives reported they were planning to change how they manage their organization’s payroll or are reviewing their options, the survey found.3
In addition to issues about customer support, there are questions about spiraling costs. Many organizations that outsource their payroll are discovering that as their operations become more complex, they’re getting less value for their money. The true cost of outsourcing can creep up on you – hidden costs, fees for every report generated, arbitrary price increases, extra costs for tax filing…add up all those “extras”, and the
price tag is suddenly much higher.
At the same time, in-house staff are spending time doing manual work to ensure the information submitted to the outsourcing company is correct. It can take considerable time and resources to calculate overtime, seniority, vacation accruals and other important details.
Are you sure outsourcing payroll is still the best choice? In the face of current economic challenges, the pressure is on everyone within an
organization to achieve more using fewer resources – doing more with less. You need to be confident that your current payroll system is cost-effective and that it’s enabling your HR department to function at full capacity.
1 Society for Human Resource Management, July 2004.
2 American Payroll Association, July 2004.
3 2006 Empagio Executive Study on Payroll and Tax Filing, October 2006