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Payroll – In-house or outsource?

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LightCastle Analytics Wing
January 25, 2016
Payroll – In-house or outsource?

Globally the payroll landscape has evolved drastically over the past decade due to significant tech intervention, service delivery models and complex solutions being offered by service providers. The payroll landscape in Bangladesh is however, not very well developed. Multinationals have mostly tailored their group payroll solutions for local purposes and some use their group Shared Service Centres to process payroll. Local firms on the other hand are starting to wake up to the idea of actually professionally managing their payroll. This may be a good time to mention that payroll is essentially known as the process of paying employees on a periodic (usually monthly) basis after deductions. The most important deduction is tax at source which an employer is legally required to withhold and pay the government on a regular basis. This is something local companies were reluctant to do till recent tightening in tax laws. In contrast a lot of start-ups nowadays look to remain compliant and are actively managing payroll. This is where the question arises of whether to outsource a payroll function or not.

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Here are some major factors which influence the decision to outsource a payroll function and this applies to both established businesses and start-ups (particularly start-ups):

  • Costs – we all hate costs and start-up founders are known to have dreams of a cost free world. Business consultants have always advocated the outsourcing of non core functions and payroll is one of the easiest areas to outsource. Research indicates globally businesses with less than 10 employees will spend US$2,600 annually on direct labour related to payroll and in Bangladesh a minimum of BDT 500,000 annually (assuming they wish to properly manage payroll). Cost of outsourcing this function both globally and locally are far less, maybe even up to 40% less. Remember, at the least you will need to buy less PCs and have less non revenue generating staff occupying your expensive floor space.
  • Time – traditionally payroll is time consuming. Outsourcing frees up staff time which can be used in revenue generating activities. This is more important for small businesses where all employees are expected to contribute to revenue generation. Research shows the number one function that small businesses outsource is payroll.
  • Expertise – most business owners and employees cannot keep up to date with constantly changing regulations, withholding rates and government filing requirements as this is not a core function and in all honesty this is a rather boring area. By outsourcing payroll, a small business can take advantage of expertise that was previously available only to big companies for a competitive price.
  • Technology – manual payroll is probably one of the biggest hassles to businesses who cannot afford their own technology. Even if a business does invest in technology there is a constant question of updating software for regulatory changes. Outsourcing eliminates this headache completely as payroll providers always keep their technology up to date to ensure quality service.
  • Transfer of best practices – most businesses owners/managers will not invest in learning or training in best practices related to payroll (unless a very large company). Payroll service providers tend to train, test and implement best practices they pick up from various sources across their entire client base. This way small companies can achieve similar practices of a large company, at low cost, allowing it to grow smoothly in future.
  • Staff Turnover – most small businesses will have one person managing payroll. Medium sized business may have two or maximum three people with one person acting as the knowledge centre. Imagine having spent 1-2 years training this person only to have him leave for a “better opportunity”. The vacuum will take time to replace, but payroll is a function which cannot be postponed as employees need to be paid at the end of the month. Outsourcing eliminates that business risk.
  • Security & Confidentiality – Payroll processing is a complex and potentially risky business operation. Even with trusted employees, there is always a risk of identity theft, embezzlement of funds, or tampering with company records for personal gain. There’s also an ever-present risk when using in-house payroll software: How safe and secure is payroll data on the company’s server or network?

By contrast, online payroll solutions offer a “safe haven” for your confidential payroll data. In addition to redundant backup and multiple server locations, a quality payroll provider invests in state-of-the-art systems for storing and protecting data, simply because it is part of the service provided to clients.

  • Compliance & Avoidance of Penalties – Generally speaking, small business owners aren’t experts in the complicated world of government tax regulations. At the same time, they are legally responsible for any cases of misrepresentation or a failure to accurately report employment taxes to federal and state government agencies. Mistakes can lead to audits and penalties—situations no small business wants or needs.

Competition being what it is in today’s world, business owners struggle to keep up with advancements in their primary line of work and therefore cannot be expected to be experts in a non-core function such as payroll. Hence it is safer, cheaper and more professional to outsource a non-core function such as payroll to someone for whom it is a core function i.e. a payroll service provider.

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WRITTEN BY: LightCastle Analytics Wing

At LightCastle, we take a systemic and data-driven approach to create opportunities for growth and impact. We are an international management consulting firm which creates systemic and data-driven opportunities for growth and impact in emerging markets. By collaborating with development partners and leveraging the power of the private sector, we strive to boost economies, inspire businesses, and change lives at scale.

For further clarifications, contact here: [email protected]

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