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The Do’s and Don’ts of Payroll Outsourcing

Payroll outsourcing is an excellent way to improve accuracy, streamline processes and offload time-consuming, often tedious tasks to a proven specialist. While the service is designed to simplify life for the client company (and the people in it), without careful planning or adherence to some best practices, the whole thing can get a little complicated.

We spoke to some industry experts on both the provider and client side to pinpoint common stumbling blocks and identify best practices – essentially everything you need to enter this type of engagement with eyes wide open.

DON’T Dissolve Your Entire Payroll Department

While it is true that a great motivator for payroll outsourcing is FTE reduction, slashing to the bone will only hurt you.

“One of the biggest mistakes companies that are moving from in-house to an outsourcing relationship can make is getting rid of all of the internal payroll experts when they outsource,” explained Jim Adams, executive director of payroll services at OneSource Virtual. “It’s critical that companies keep one, preferably two, hands-on payroll professionals who understand payroll laws, how the calculations work and can check for accuracy. Every outsourcing partner needs that type of company liaison.”

According to Adams, client companies still have to take an active role in some parts of the payroll process.

Outsourcers do a lot, but we can’t do everything. We can’t check for timecard accuracy, or make sure every work site actually entered their employees’ time in the system,” he said.

It’s like leasing a car versus buying a car.

“Even if you don’t own the vehicle, you still have to fill it with gas, change the oil and turn on the ignition, or it’s not going to take you anywhere,” Adams said. “You have to do something to make the car run, whether you own it or not. The same is true for payroll outsourcing.”

DO Identify Your “Out of the Ordinaries” and “Special Cases” Up Front

Here’s the reality: if you lift and shift a payroll operation with issues, those problems won’t get solved in outsourcing. If you don’t communicate your company’s unique payroll idiosyncrasies before the migration, you’re sure to hit a roadblock.

“You have to take an honest look at your ‘special cases’ and document your ‘issues’ — everything that causes you pain,” explained Beth Jung, a veteran HRIS consultant who spent a good portion of her career on the client side. “Those are the very things that will bite you in implementation.”

Larry Dunivan, chief information officer, for Ceridian HCM, adamantly agrees.

“If you have unnecessary problems that add complexity, the problem is not the process – so outsourcing won’t be the panacea,” Dunivan said. “For example, let’s say someone has negotiated a union contract with some odd overtime calculations, and unusual vacation accruals. It’s a tactic that probably got the contract signed, but also created a tremendous administrative burden, because, by its very nature, it can’t be built around best practices.”

Translation? You’re just not going to see the efficiency gains.

“In that situation, there are really two choices: you can go back and renegotiate the union contract, or you can keep the contract, realizing that you are going to pay more for your payroll processing,” Dunivan said. “In this case, outsourcing makes a lot of sense, but it is not necessarily going to save you money.”

DO Seek Out Your Outsourcing Partner’s Advice

Although the union contract example is pretty black and white, Dunivan is quick to point out that there are other, easier policy changes that could increase efficiency and reduce cost. So, it’s important to use your outsourcing provider as an advisor as well as an executioner.

“Your provider is a payroll specialist, who understands processes, knows how to scale and has a wealth of knowledge gained from previous engagements. Let your provider guide you on the best way to reduce complexity or deal with recurring issues. Chances are, we’ve seen that issue before,”  Dunivan said.

The “easy” fixes are typically internal policies that exist because “this is the way we’ve always done it.”

“It could be something as simple as altering the way an employee is onboarded or making sure employee self-service requirements are enforced,” Dunivan said. “Sometimes, what seem like very minor things can make a big difference in efficiency and ultimately impact your pricing. The right partner can help you be more efficient and reduce costs where you can.”

DON’T Spring the Change on Your Employees

According to Jung, one of the biggest factors in a successful payroll outsourcing transition can be summed up in two words: Change Management.

“Communication is extremely important, on all levels,” explained Jung. “Your HR team has to understand that the change will make their jobs easier and take away redundant tasks. They also need to understand and become excited about what their new positions will be. Talk to them about what they will be doing instead of all the manual work you’re taking away with outsourcing,” Jung said. “That way, they’ll stay focused on the transition and not on whether or not they’re losing their jobs.”

It’s also important to start talking to employees early, educating them on how to use self-service portals and easing their fears about anything that will look or work differently in the new environment.

“If your employee is going to get paid by direct deposit instead of paycheck, start talking about that early on,” Jung said. “If they’re going to use a self-service portal for changes instead of picking up the phone and calling HR, explain how everything will work and let them see for themselves, before the change.”

Jung recommends identifying change agents – employee advocates in the trenches to keep everyone positive about the changes to come — while keeping the rumor mill at bay.

“It’s important to keep employees not only informed, but to talk about the features that will make their lives better. For example, if the change means mobile portal access –talk about that 24/7 access. If it’s direct deposit, talk about the convenience,” Jung said. “If there’s a new HRIS involved in the transition, spend your time training your staff on how to use it. But, what ever you do, don’t make the impending change a big surprise. The more you communicate, the more comfortable your employees will be.”

DO Realize that Payroll Outsourcing is a Partnership

Finally, the fundamental truth of payroll outsourcing is this: both parties are in it together.

“If it’s not an open, progressive partnership, it’s not going to work. That means, if one party sees a mistake, point it out – don’t let it go,”  Adams said. “It’s like a marriage – we have to watch each other’s back. I tell my people and my partner representatives at customers, if we can catch any mistake before it goes out the door to employees, that’s a win.”

Like any partnership, both sides have responsibilities.

“Hiring a payroll outsourcing provider doesn’t take away your responsibility for strategy as a leader,” Dunivan said. “The CFO is still accountable for the ultimate outcome, and how the outsourcing provider engages with the employees.”

Finally, realize that this involvement continues through the (hopefully long) life of the engagement.

“You can’t implement the new HRIS or migrate to BPO and then just walk away,” Jung said. “Continually monitor why employees are calling in, what self-service tools are they using – and look for patterns. That’s how you achieve continual process improvement and a better employee experience.”

Payroll outsourcing can be an outstanding way to improve efficiency, reduce costs and streamline processes. Our experts agree, by following these best practices, you’ll see a big payoff – in fewer fumbles, less headaches and better overall results.

These are our top do’s and don’ts. What would you add to the list?


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