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Why Do Companies Hire on Third-Party Payroll?

While most operators would suggest that salaries and payments are the business’s strategic components since it populates the Sales, General & Administrative line item, a significant portion of businesses across the globe outsource it to third-party service providers.

As per a Deloitte survey, 24%-27% of firms across North America, Latin America, EMEA, and APAC outsourced their payroll management function to third-party vendors. 

Payroll management services generally include a basket of services like:

  1. Integrating time-sheets into payable salaries and tax liabilities.
  2. Managing tax-deducted at source, tax filings, and deductions.
  3. Providing management reports.
  4. Managing wage garnishments and other ad hoc requirements.
  5. Processing payment discrepancies.

If one-fourth of businesses are taking up third-party payroll services, there has to be a specific set of advantages gained by companies that choose to outsource. Here are some benefits that make business operators choose third-party payroll systems over in-house management:

  1. Unlocks Cost-Efficiencies: Hiring & retaining talent is entirely different from payroll processing. Generally, businesses consider people operations critical to long-term strategic adherence because they want to hire and retain talent to execute their strategic initiatives. Even then, the entire payroll operations part is largely rule-based. If a business has readily available infrastructure in terms of technology, bank relations, and update mechanisms, it can easily make its payroll operations more efficient. 

However, getting all these efficiencies requires significant investments that come with marginal increments in expenses. That means, as soon as the hiring capacity goes up, the business will have to pay more for the increased capacity even in terms of resources necessary to make the changes in the payroll system. 

Payroll management service-providers already have the necessary investments made in the systems necessary to unlock the cost-efficiencies. Plus, there is hardly any differential cost of hiring more people. 

  1. Ensures Compliance: While cost-efficiencies help the business maintain its profitability, compliance can be a major operational hurdle. A business has to take care of both the federal and the local laws, in line with labor-laws and remuneration policies in place by employee federations, even if it does not hire unionized employees. 

It can become a major headache for a business to frequently change its payroll systems with the evolving labor laws. If a business operates in different countries, the problem grows by another fold. Having a payroll-management partner can help the business streamline its entire payroll compliance function.

Since payroll-management services providers are in the business of managing payrolls, they can afford to have dedicated resources that provide it with the capacity to comply with the changing laws – this way, the business can take care of its compliance and cost-effectiveness.

  1. Standardizes Payroll: The last thing a high-performing employee would want is a delay in her payments for a month. Even when employees are not dependent on their monthly salaries to pay their bills, they have significant expenses like installments and rent to be taken care of. If a company manages its payrolls and faces a delay in payments, the employees would end up taking the heat. 

Payroll management companies have established relationships with banks and financial intermediaries. Since the volume of transactions they make is substantial, the entire transaction-flow is standardized. This ensures that a business, no matter how big or small, gets the benefits of standardized payroll processes and its employees get their bank accounts credited consistently month-on-month. 

  1. Provides Quick Turnarounds: A significant challenge for a business running its payroll processes would be to integrate a significant change. Here, a business would have to look at different functions like Finance & Accounts, IT & Systems, and HR and Admin, to ensure the necessary updates in its payroll processes are executed as planned. When a third-party system manages the entire organization’s payroll, a business has to fill in a change order. Payroll management systems operated by vendors generally have turnkey solutions integrated into their platforms, allowing them to execute change orders coming from businesses of all scales quickly. This way, a business can make changes in its payroll policies without mapping out all the bottlenecks it will face in executing the changes; that come under the responsibilities of the payroll management service provider. 
  1. Decreases Lead Times: Beyond the consistency of payment for the employees and the cost-effectiveness for the businesses, the lead time is a significant differentiator between in-house and third-party payroll management services. Since the financial intermediaries, technological platforms, and processes maintained by a payroll management partner are more standardized than that of a smaller business, the lead times for disbursements can come down dramatically. This is primarily because of the economies of scale – a business can only invest a small portion in such systems; a payroll management vendor makes critical investments in such systems since that is the entire business. 

In Conclusion

Outsourcing payroll management gives a business the resource-efficiency that can translate into additional profits while ensuring compliance, operational consistency, and unhinged access to professional-grade services irrespective of the business’ scale. On the other side, the employees get reliable remuneration facility, quick resolution in issues & discrepancies, and standardized services for taxes & benefits management that help them plan their finances with reasonable accuracy. In a nutshell, it’s a win-win for the business and the employees.

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