Ask any payroll vendor why your company should outsource payroll functions and you are likely to hear about cost savings. The ability to save money via outsourcing is one of the primary selling points of the industry. Yet companies really need to know what those cost savings actually look like before settling on a payroll solution. Not every company is going to save what they are hoping to save. Some may not save at all.
To be fair, most companies that outsource payroll functions do find they spend less than they were keeping payroll in-house. But how much is saved can vary significantly from one company to the next. There are three things that play into this; three things every company needs to be familiar with in order to fully understand the cost effectiveness of their current payroll processing solution.
1. The Role of Company Size
The cost effectiveness of outsourcing any business process is directly related to the size of the company and the percentage of the company’s revenues currently going to that function. Believe it or not, size sometimes indicates a company should keep payroll in-house.
Let’s say you have a small business with just five employees. Let us also say one of those employees handles payroll in addition to his or her other tasks. The payroll needs are so small that it may not be cost effective to outsource. However, as the company grows it will eventually reach a point of diminished returns. Then it is time to consider sending payroll out the door.
That business can continue to grow until it eventually has tens of thousands of employees. At such a large size, continuing to outsource payroll to a third-party vendor may no longer be cost-effective. A company that large may find it cheaper to bring payroll in-house once again.
2. Combining Payroll and Benefits
The second thing to know is that bundling services can be a big money saver – especially for those larger companies. Consider Texas-based BenefitMall as a vendor. Not only do they handle payroll processing but they also offer benefits administration as well as services relating to 401(k) plans, workers’ compensation, and more. Larger clients who sign on with BenefitMall for fully comprehensive payroll and benefits of registration find they are able to eliminate a lot of processes currently supported by HR, thus saving both time and money. It is the simple economics of scale at work here.
3. Model of Providing Service
Lastly is the model a payroll vendor uses to provide service to customers. One of the hottest trends right now is offering flexible solutions similar to software as a service (SaaS). The payroll industry has learned that the SaaS model enables them to offer cloud-based services customers can choose from a la carte.
Under this model, one company can choose a solution that combines some in-house processes with others that are outsourced. Another company can turn payroll entirely over to a provider like BenefitMall but still handle retirement and health insurance benefits in-house. A third company can outsource everything.
This kind of flexibility is where the true savings are found in the modern payroll environment. Companies are able to custom design their payroll solutions to meet their needs and budgets. Indeed, there is no longer a one-size-fits-all payroll solution for everyone.
Outsourcing payroll saves most companies that do it quite a bit of money. But savings are not equal across the board. Companies will save varying amounts depending on their size, the number of processes outsourced, and the model through which those services are accessed.