Payroll Strategy: In-house vs Outsourced

When it comes to payroll processing, organizations have three options: do it themselves, outsource to a third party, or some combination of the two. In most cases, in-house payroll services take the form of a team of employees using an off-the-shelf payroll software system. Payroll outsourcing providers can take on various different forms, but most often operate as a form of Business Process Outsourcing (BPO), where a third-party team handles affairs. Vendors that offer a hybrid approach combining the two allow for the greatest flexibility and the ability to meet unique needs of global organizations.

Global payroll is especially well suited for outsourcing since the complexities and vagaries of international payroll laws are often best left to localized experts. But there are cases in which organizations, usually with a large footprint in only a few countries, can make do with their own in-house team. Other organizations may have their own in-house teams for some regions, but need outsourced support for others.

The 2022 Gartner report laid out several advantages and disadvantages of managing payroll either exclusively in-house or with traditional outsourcing providers. In this guide, we will look at:

• Advantages of In-house Payroll
• Disadvantages of In-house Payroll
• Advantages of Payroll Outsourcing
• Disadvantages of Payroll Outsourcing
• Which Option Should You Choose?
• UKG One View: An Alternative Hybrid Approach

Advantages of In-house Payroll

There are two main advantages to performing payroll operations in-house:

• Better control of reporting and accessibility
• Potentially lower recurring costs

In-house payroll allows for better control of reporting and accessibility, for example, to accommodate a midyear pay plan change. This is because the data is primarily managed by the client. Of course, this depends on the client doing a good job of managing the data in the first place.

The cost of using payroll processing software for an in-house team depends mostly on subscription fees, implying potentially lower costs on a recurring basis compared to outsourcing operations. This depends on several factors, especially the size of the organization involved.

Disadvantages Of In-House Payroll

There are three main disadvantages to performing payroll operations in-house:

• Higher setup costs
• Greater compliance responsibility
• Greater risk of incorrectly paying employees

Hiring and organizing an entirely new payroll team is expensive. Outsourcing implies simply tapping into an already existing payroll service provider, leading to much lower setup costs.

Organizations that do their own payroll have the entire responsibility over legal compliance. On the other hand, outsourcing to a third-party vendor shifts much of the liability to their hands.

Similarly, the risk of overpaying or underpaying employees falls entirely on the shoulders of an organization pursuing in-house payroll.

Advantages Of Outsourcing Payroll

There are three main advantages to outsourcing your payroll process to a third-party payroll provider:

• Better scalability
• Easier geographic expansion
• Lower implementation costs

With a third-party payroll provider, you can scale operations to reflect the size and needs of your organization. This is because the size of the team dedicated to your interests is not fixed, and payroll providers can tap into existing talent as needed.

A third-party vendor can also aid in geographic expansion. Such vendors will typically have ample expertise in-house for dealing with the regulatory ins and outs of payroll taxes in many different countries. Trying to expand by yourself can imply having to hire a new consultant every time you wish to expand.

Because third-party teams already exist, they typically come with lower implementation costs. They do not need to be hired and trained; instead, they simply need to redirect their energies toward your interests.

Disadvantages Of Outsourcing Payroll

There are two main disadvantages to outsourcing payroll to third-party payroll providers:

• Negative perception of the quality of reporting
• Potentially higher recurring costs

The quality of reporting and control over data is sometimes perceived negatively with payroll outsourcing providers. This is inevitable given the difficulty of completely aligning goals between companies. Some customers complain about requesting an ad hoc report, only to receive a generic one in return. This issue can be prevented by ensuring that your outsourced provider has the ability to offer advanced reporting and analytics.

Because expenditures are determined by the cost per payslip, the recurring cost of outsourcing payroll may be higher. Again, the most important factor here is the size of the organization in question. When only a handful of employees are on an outsourced payroll scheme, the cost per payslip for handling payroll data may appear to be very high.

Which Option Should Your Organization Pursue?

The best option depends on several factors, including the size of your organization and your long-term goals. In many cases, a mixed in-house and outsourced model is the best option. To get a sense of how different situations can affect the decision, we will consider three sample possibilities.

First, consider an organization that is present in 2 countries, and has fewer than 2000 employees in each. Its core HR module is localized for both countries, and it has no plans for expansion.  But it does need to process payroll where it already is.

In this case, in-house is likely the optimal choice. High setup costs would be offset by lower annual costs, and outsourcing would not provide the future benefits of scaling and expansion. Additionally, handling regulations across just 2 countries is not significantly difficult for a single organization.

Second, consider an organization that is present across 10 countries, with about 500 employees in each country. Their core HR module is not localized to all geographies, and they are making plans to expand into multiple new countries over the next 5 years. 

In this case, outsourcing is likely the better option. Expanding and scaling are operations that are better handled by third-party expertise. And the setup costs for each additional office would be prohibitively expensive.

Third, consider an organization that is present in more than 10 countries, and has a varying employee presence in each. In some countries it has more than 2000 employees; in others, fewer than 100.

In this case, the organization should split its payroll operations. In countries where it has a very large presence, it should carry out operations in-house. Elsewhere, it would benefit from outsourcing payroll.

If your organization is like many others, you will likely be served best by a hybrid combination of the two. 

Conclusion: Outsourcing Payroll With UKG One View 

UKG One View offers a hybrid platform based on both payroll BPO and global data consolidation. We help global businesses and organizations manage their payroll, navigate international regulations, and stay on top of cybersecurity and risk management.

By offering a hybrid approach, our platform provides the benefits of both in-house and outsourced payroll systems, with fewer costs. Ultimately, it lets your organization focus on what it does best while letting us take care of the rest.

Our platform is especially valuable for its HCM integration, which allows organizations to centralize their information into one useful platform. This feature helps global companies handle the complexities of having a multinational presence, by making payroll and HR communicate more effectively over national boundaries.

Interested in learning more? We’d love to chat!