Why are companies looking to outsource payroll services instead of using in-house payroll?

payroll outsourcing

Outsourcing in general is a business strategy that is currently at the forefront. It applies especially to those tasks that take time and are not among the company’s main profitable activities. In this sense, and as you may know, payroll processing requires a lot of time, and companies must always ensure the proper functioning of this task. That is why many companies turn to payroll outsourcing instead of carrying out this process in-house.

In this article, you will learn why it is more convenient for companies to outsource payroll activities instead of implementing in-house payroll.

  1. What is payroll?
  2. What is payroll outsourcing?
  3. Advantages of outsourcing payroll duties
  4. Why is outsourcing your company’s payroll a good option?
  5. How to choose a good payroll services provider?
  6. How can we help you outsource your company’s payroll?

1. What is payroll?

When we talk about payroll, we are talking about essential documents in any employment relationship with a company.  Also, they are documents with legal validity that, if not handled correctly, can bring sanctions from the authorities. The magnitude of the sanctions will depend on the seriousness of the errors and the labor legislation of each country.

Likewise, we can define payroll as that financial record kept by the company where the data of its workers and other salary data are indicated, which include deductions, taxes, bonuses, etc.

In accounting terms, payroll is an extremely important record, as it allows the employer to determine how much money the company takes to pay employees, and therefore, through its analysis, it can make decisions for the business’ financial wellbeing

2. What is payroll outsourcing?

Payroll outsourcing is the hiring of a third party, be it a company or person, to be in charge of the process of paying workers and everything that this entails. 

This is a company particularly specialized in this activity. This point is crucial since payroll, in addition to being an extremely cumbersome process, is also delicate for its legal implications. Therefore, it is important to always resort to companies with good references, since mishandling the payroll can lead to sanctions by the authorities.

On the other hand, many companies are still unsure about the idea of implementing payroll outsourcing. However, this is only the case for businesses big enough to have a Human Resources Department.

If the company is just starting out in the market, we recommend that they outsource this process. For it to be managed in-house, it must have sufficient human and technological resources. This will mean that the company will have to invest a larger amount of money for this sole purpose. 

There are large companies that handle this process in-house. However, they have sufficient economic capacity to install all the necessary human and technological equipment to carry out this task efficiently.

But, in the same way, there are also companies that, despite having sufficient economic resources, resort to a third party to handle this process for them. These businesses have chosen to only dedicate their time to their main activities and delegate these processes to experts.

2.1. Types of payroll outsourcing

There are two modalities that can be applied when choosing payroll outsourcing, which are the following:

Technological outsourcing: This is a modality where the hiring is based on the supply of technologies for the handling and management of this process internally.

As we can see, we are not talking about full outsourcing but only a part of the service. In this way, the contracting company is only interested in supplying the necessary technological tools to be able to carry out this process within the company.

This modality is not the most popular, but some companies use it above all to maintain control of this complex process.

In other words, the payroll outsourcing company, in addition to serving as a supplier to the contracting company, will also serve as a technological advisory company. It will recommend which payroll system to use for better performance in managing this process.

Outsourcing of services: In this case, it englobes the complete service of handling the payroll tasks of the contracting company. This refers to the traditional modality where a company hires a third party to carry out their payroll process.

3. Advantages of outsourcing payroll

The use of payroll outsourcing entails a series of advantages that many companies can take advantage of. In this sense, the main advantages of outsourcing payroll are:

3.1 Cost reduction

Collaboration with external companies helps save expenses, such as those associated with an investment in infrastructure or technology, or the hiring of new workers who take charge of tasks that are not a specific function of the company, such as payroll.

And it is evident that having workers in the company requires not only the payment of their salaries but also that it is necessary to invest in the implementation of certain special payroll systems, which is more money than the company has to disburse. Therefore, it is cheaper for companies to use payroll outsourcing than to do it in-house. In addition, to the expenses for maintenance and updating of payroll systems, which are expensive.

3.2 Focus on the main activity

Payroll outsourcing, being such a complex activity, allows the company to focus mainly on the business and not on consuming human and financial resources in other areas that are not strategic to its main activity. Thus, they achieve greater performance by avoiding unnecessary distractions. It is easy to deduct that by spending more time on activities that generate money for the company, there will be greater business productivity.

3.3 Transformation of variable costs into fixed costs

Payroll outsourcing allows you to reduce investments in infrastructure and technology by contracting certain services to an external provider. This contract involves the establishment of a fixed price, so we can obtain a forecast of the cost of the service.

3.4 Productivity increase

The job is carried out automatically through a company specialized in this area, taking this task off the HR management’s workload. This significantly increases business productivity. In addition, it allows them to concentrate on other equally important processes.

3.5 Improve innovation processes

By reducing costs and time in the execution of certain activities, the company has more resources to innovate and start new projects that can position it higher in the competitive market.

This is achieved by outsourcing perhaps the most delicate and stressful process for any company: payroll. In this sense, by outsourcing payroll and other processes that distract the company from what is important for their development, new challenges can be taken on that will make the business grow.

3.6 Access to the latest technologies

Like all technological processes, payroll also has first-generation systems that lighten and speed up this process. Hiring a suitable outsourcing company allows you to have the latest technology without having to make large investments in equipment or training specialized personnel for their use.

3.7 Avoid penalties

We know that payroll is a complex process where mistakes can easily occur. By leaving this process in expert hands, the chances of receiving a sanction from the authorities are considerably less.

Each country has its particular labor laws. Normally, by outsourcing this service, any kind of labor or fiscal responsibility is also being delegated to the contracting company.

3.8 Greater competitiveness

The end result of following a payroll outsourcing strategy is to get the company into a good position in a competitive market. Payroll outsourcing allows you to reduce your company’s costs, achieving greater productivity in a flexible way. Practically, this is the result of all the advantages of payroll outsourcing, making the company evolve to higher levels in the shortest possible time.

4. Why is outsourcing your company’s payroll a good option?

A company that outsources this service enjoys the peace of knowing that it will be handled by experts. Getting rid of the administrative burden of an activity that does not generate profitability.

On the other hand, especially for startups, it is important that they have the support of an expert to avoid payroll mistakes that could cost the company significant penalties. Payroll outsourcing is also great for small businesses as they prevent spending on employees, infrastructure, and technology.

Regardless of the size of the company, although there are companies -mostly large ones- that have their own team for managing payroll, it will always be a good option to free up time in the HR department to dedicate to the wellbeing of employees and overall improvement of the department.

5. How to choose a good payroll services provider?

The most important thing for any entrepreneur, and especially for one that is starting, is the optimization of resources. The money that the entrepreneur allocates towards an objective must be as effective as possible since no company -especially those with little capital- want to lose money on an investment. Therefore, it would be useless to hire the services of a payroll outsourcing company if it does not have the capacity of offering quality work.

After choosing the company, both must define responsibilities and objectives to strengthen the skills of the service provider.

It is important to define the responsibilities that the provider will exercise. It is best that these responsibilities are clearly established in a service contract to prevent misunderstandings between the parties.

Of course, in addition to the quality offered by each company, which you can verify through references from other businesses, it is important to take into account the cost of the value of this service and make a cost-benefit relationship between the different companies’ candidates.

Therefore, if a company offers great services but it costs the same as if you set up your own HR team, it is not worth hiring their services. The objective is to save money, which is one of the main advantages of this strategy.

Consequently, take into account the costs of the services of each company and take the one that, based on the quality and value of the service, appears to be the most attractive for your business. Note that each company has its particularities, so this does not necessarily apply to all, but mostly to small and medium-sized companies.

6. How can we help in outsourcing your company’s payroll?

It is extremely important to select an expert provider that guarantees quality service. On PEO Middle East, the efficiency of our technological solutions, the extensive experience of the teams, and the successes achieved have allowed us to become one of the most excellent payroll outsourcing companies in the UAE and the entire Middle Eastern region.

You can become one of the many organizations we have helped achieve success with our services. Our team of experts has the purpose of becoming your best partner when it comes to outsourcing in the Middle East. Take a look at our locations where you can easily hire our payroll outsourcing solutions:

Start making the difference for your company and get the services of a team that cares about your business’ progress. Become a part of our long history of success now!

We have vast experience being the main provider of integrated solutions for companies. If you wish to hire our payroll outsourcing services or you have any questions or requirements that you desire to communicate to us, you can contact our team at [email protected]. We are more than glad to provide with all the information you need.

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