Payroll Support Models

Our previous article provided an introduction to the current challenges for HR and payroll, SAP’s three payroll solutions, and the factors that will help an organisation identify the most suitable choice. In this paper, we examine the options available for supporting payroll operations.

While the choice of payroll technology is crucial for a business – for instance, to allow integration with other enterprise systems – support for payroll operations remains an important question. Historically, the choice has been between in-house and outsourced models, but the flexibility of today’s technology enables businesses to tailor a mixed model that can balance the benefits of each approach.

Insourcing Model

An in-house operation keeps sensitive employee and payroll data wholly within the organisation, and is managed by its own, employed and accountable, experts. This approach reduces complexity in data security, and avoids the need for complex security arrangements, which can arise when data is handled by third parties.

The organisation also retains total control of its payroll operations. With in-house experts, who can be reached directly by employees and stakeholders, payroll arrangements can thus be more flexible and responsive.

Although payroll is a major operation, large organisations may still find that the scale and complexity of their payroll requirements makes an in-house function the most cost-effective way to meet those needs. However, payroll expertise is scarce, and some organisations may have difficulty sourcing the talent needed to staff an in-house payroll operation.

Furthermore, every country has different regulatory requirements, and international businesses may find that their workforce in some countries is too small to justify a full-time payroll expert with regional knowledge. In such cases, the in-house approach may become less cost-effective, or spread local payroll expertise more thinly, which could create compliance risks.

Outsourcing Model

Outsourcing payroll to a specialist operator can give a business access to support from dedicated payroll experts, even for countries where its workforce is small.
Payroll maintenance can be conducted (and paid for) only when required, so outsourcing can often be the most cost-effective approach for small- to medium-sized businesses, especially if their payroll requirements are fairly simple and standardised.
An outsourced payroll can also save time, with routine tasks being handled by the supplier. The payroll can also be scaled up or down as the business changes, without the time and cost implications of scaling an in-house operation.
Such savings may, however, come at the cost of reduced control, flexibility and responsiveness, if the contracted support arrangements are based on tightly-defined service standards. As a result, payroll corrections might be processed more slowly, while innovations could take longer to implement.
In addition, external management of payroll operations can reduce their visibility, for high-level oversight, and to understand how payroll changes might impact HR or other processes, whether those are managed in-house or by a different provider.
Finally, an organisation’s outsourcing options might be affected by its choice of payroll technology. Companies with bespoke, outdated or niche systems may encounter difficulties or high costs when looking for a provider of operational support. On the other hand, widely-adopted payroll solutions, such as SAP HCM Payroll or SuccessFactors Employee Central Payroll, are well-supported, with a competitive market for service provision.

Mixed Model

Modern payroll technologies like discussed in our previous SAP articles as well make a mixed support model possible, whereby some activities are managed in-house, while others are outsourced. By combining the benefits of internal and external payroll operations, a mixed model can offer the flexibility and responsiveness of in-house management, while reducing costs and making high-level expertise available when required.

A mixed model also provides greater control over payroll processes, and high-level visibility of how payroll solutions interact with, and impact, HR and other solutions within the organisation.

Given the scarcity of payroll talent, one challenge with this approach may be sourcing suitable payroll experts, who can collaborate with the outsourced team to make a mixed model work most effectively.

A further challenge lies in the division of activities between internal and external teams, and establishing transparent interfaces between them. This challenge may be greatest for complex projects, or where a rapid resolution of issues requires close collaboration.

Although there are some challenges, the technology need not be one of them. The modular nature of SAP’s solutions makes them well-suited to a mixed support model. ERP HCM Payroll (on-premise or private cloud) is well-established globally, so the exact blend of in in-house and outsourced support can be tailored to reflect regional factors, such as the availability of skills or regulatory complexity. With SuccessFactors Employee Central Payroll, support can be blended even more easily and precisely, because – as a cloud-based solution – access and security is more flexible and controllable, so the appropriate team (internal or external) can be given access to only the aspects of payroll activity they support.

Centralisation

Although the main decision will usually be who should manage the payroll, as considered above, another important decision is where it should be managed, whether centrally or locally.

With an insourcing model, an international business may choose to manage its entire payroll with a centralised team, or locate a payroll function in each country or region where it operates. While a centralised payroll can provide the greatest control and efficiency savings, it may lack the country-specific expertise needed for compliance with local laws and regulations. On the other hand, devolved payroll functions make it harder to achieve consistent quality and visibility across the whole global payroll, but may be able to recruit local payroll experts more easily.

As described above, outsourcing can offer lower costs, but also reduced control over the payroll process, and a large organisation may decide to outsource at global or local level. Where a provider is contracted to provide a central service, business-wide quality can be maintained, with greater visibility across payroll data and solutions. Where the business operation in each country or region outsources its own payroll, this can reduce high-level visibility and consistent quality across the global payroll, but may result in a more responsive payroll service, if the local office and service provider operate in the same time zone, for example.

In summary, the main factors to consider in deciding on a support model are quality, cost, control and visibility. Outsourced support offers lower cost, but less control, compared with an insourced model. A centralised model can provide higher quality and visibility than a decentralised approach, although may be less adaptable to changes in local tax, legal and statutory conditions.
Our next article will examine the approaches available for managing time and attendance…

Are you considering optimizing your current Payroll landscape & service model, please reach out to Ilonka Noorman (inoorman@deloitte.nl). We can further discuss and explore the options and best fit for you based on your strategy and technology preferences.