Manage Payroll Internally or Outsource? Common Questions and Answers About Payroll Services

Is the payroll process giving you a hard time? Many companies leave their payroll and staff administration to a professional partner. But how does it work in practice, and how do you know if it suits your company? We answer some of the most common questions.

Hiring a payroll service partner, also known as payroll outsourcing, means that your company assigns all or parts of the payroll and staff administration to a company specialized in those services. This way, your company can spare time and energy, and the employees can wholeheartedly focus on what they do best. Both small and big companies realize the advantages, and today payroll outsourcing is one of the most extensive and fast-growing outsourcing services.

It is true – putting your staff’s wages in someone else’s hands is not a tiny thing – many questions and concerns will probably arise. But with this guide, we’re hoping to help you and your colleagues on the way.

How Can an Outsourcing Service Reduce Vulnerability?

Ensuring that proper wages, compensation, and benefits are disbursed, keeping track of sick leave, vacation, statistics reporting, taxes, and employer’s contributions. And on top of all this, navigating through new rules and laws… Payroll administration is a complex and time-consuming job. At the same time, it is not uncommon for the payroll department to consist of only one person with all the crucial knowledge to perform all elements of the payroll process. So, what happens if this person goes on sick leave or resigns? Reducing this vulnerability is a common reason for choosing an outsourcing solution.

In a company where the payroll service is (or is at risk of becoming) very dependent on one or a few persons, a payroll provider is a safe option as the right staff is always accessible. And you can be confident that the service will be provided even if sickness, vacancies, or other unforeseen things should occur. Also, your partner’s responsibility is to stay updated and well-informed on collective agreements, laws, and rules – so that you won’t have to.

Will Staff Costs Really Decrease When Using a Payroll Service?

For companies today, the staff is commonly the most significant expense item, and reducing staff costs is a common motive for outsourcing. But how is it, really? Is outsourcing cheaper than hiring?

To determine the most cost-effective option, you must first have a fair picture of what an employee costs and what you expect your partner to deliver. Regarding wages, social security contributions, and pensions, such costs are usually comparable, regardless of whether the job is performed by your own or external staff. But it’s important to remember that payroll consultants only charge for their services – nothing else. An employee, however, will cost more in terms of “unprofitable hours”: sick leave, work hours spent on other tasks, training days, etc.

You can proceed from the rule of thumb that, on average, an employee will cost the business 1,3—1,5 times the pay and use as little as 60 percent of their working hours to perform their core tasks; the rest will disappear into other activities and different kinds of absence. With a payroll service, you don’t have to worry about recruiting and training new staff or replacements, which is both time-consuming and costly for the business. Employee healthcare, insurance, equipment, and offices are other costs you can cut.

What Other Advantages Can We Expect?

Not only can you rest assured that your staff will always get paid on the 25th, but also that your outsourcing partner, if mindfully chosen, can considerably streamline your processes. If you choose a professional and experienced payroll provider, you will have access to a team of specialists that has many years of experience and know best practices and the latest digital solutions. Their specialists will be able to view your payroll process with new eyes and come up with suggestions for how heavy and repetitive elements can be automated. In other words, fewer working hours (and less frustration) for both your payroll provider and staff!

Lastly, effective and future-proof payroll management is dependent on modern software. Investing in a new payroll system or pre-system for time reporting and travel expense claims is both expensive and time-consuming – so is the work with all the updates and ongoing support. With an outsourcing solution, this is one thing less to worry about since it’s usually the partner who provides the services and the software.

What Does Our Partner Do, and What Do We Do?

Outsourcing is far from a question about all or nothing – what is included in the service is, to a great extent, up to your company. For example, some outsource the entire payroll process and administration of time reports, expenses, and travel expense claims; others prefer to keep parts of the job in-house. Usually, you can also add different types of HR services, like onboarding/offboarding, support in pay equity analysis, accessing HR key figures, etc.

Most suppliers within payroll services offer flexible solutions where services and program modules can be packaged according to your company’s needs. With today’s web based HRM systems, there is also the possibility for the customer and the outsourcing partner to work together on different tasks, where they use the same interface and have access to precisely what they need.

Lastly, for an outsourcing solution to work ideally: look at it as a partnership. Even if your payroll provider does most of the process, it doesn’t mean you can let go of control completely – you still have to be available to answer questions, follow up on deliveries and communicate your needs and requirements. In other words, ensure that you still have at least one resource at your company that knows your company’s payroll process.

So How Does It Work in Practice?

The handover usually begins with jointly creating an annual plan with all crucial deadlines of the payroll process. Exactly how this payroll process plays out can vary between different solutions, but in short, it usually looks like this:

1. Time and travel reporting
The employees in your company report working times, absence and other discrepancies, as well as travel costs/expenses in the pre-system (commonly provided by the partner). Following this, the managers carry out all attestation routines.

2. Payroll run and controls
According to your agreed checklists, the outsourcing partner will perform the payroll run and additional controls for that month. A preliminary payroll list is sent out for approval and possible corrections.

3. Pay slips
The outsourcing partner will send the payroll records to the bank for salary payments, and pay slips are sent to the employees through the web, an app, or a digital mailbox.

4. Report package
The outsourcing partner will deliver the report package included in your agreement; standard reports, potential special reports, and statistics and pension reporting.

What Do We Need to Consider Before the Changeover?

The decision to outsource is made, and a significant transformation journey awaits – what should you keep in mind to succeed with your new partnership? Here are our top three tips:

Don’t skip homework.
Companies that do their homework will have the best conditions for succeeding. Beforehand, they ask questions like: Why do we want to outsource? What do our routines look like today? Which ones work well, and which ones can be improved? What goals do we have? The key to making accurate requests to your outsourcing partner is your shared understanding of current and future needs.

Involve the right people.
Do you have the right employees on board? A common mistake is that the people in charge of the outsourcing project lack understanding of how the payroll and staff administration works in practice. In other words, involve company resources that truly understand your needs and can offer correct knowledge and insights – from procurement to changeover.

Clarify the framework.
Which routines and tasks will be our partner’s responsibility, and what is our responsibility? Which services are included in the basic package, and which will come with additional costs? No matter which arrangement you choose, clear-cut frameworks and agreements are essential. This way, you never have to deal with clashes in what is expected from and delivered by your partner, and you will reduce the risk of tasks falling between the chairs. An excellent way to create clarity and consensus is to do an introductory workshop with your partner, where all details regarding the division of responsibilities and agreements are reviewed.