What is the ROI of Payroll Outsourcing?

What is the ROI of Payroll Outsourcing?

by on 16 Nov, 2021

According to a recent Deloitte study, 73% of businesses said they partially or totally outsource their payroll functions. In addition, 58% of companies that outsource some aspect of payroll have been with their payroll partner for five or more years. Another 21% of study participants report they are highly satisfied with their outsourcing solution.

Time is a precious commodity for owners, staff, and managers of small to midsize businesses. While some owners say they adopt payroll outsourcing measures to save time, the benefits of outsourcing payroll services go well beyond that benefit. Outsourcing payroll processes also saves money. 

If you run a business that has fewer than 500 employees, outsourcing payroll services is often more advisable than hiring experts to upgrade a small in-house team.   

Whether you run a smallmidsize, or large business, you need to understand your return on investment (ROI) of outsourcing payroll services. That means comparing the costs of in-house payroll tasks to outsourcing payroll duties to an HR outsourcing partner.  

What makes up the cost of in-house payroll processing? 

When you examine the in-house costs of payroll responsibilities, you need to look at the total cost of ownership (TOC). TOC is an estimate of the direct and indirect costs of the business's payroll duties.  As you might expect, the direct cost of payroll processing includes the salary and benefits paid to Human Resources (HR) employees. However, TOC goes beyond that to include other direct and indirect costs. 

What are direct payroll costs? 

Direct payroll costs entail costs for:

  • Payroll software implementation and installation fees, 

  • Payroll software development and maintenance costs, 

  • Payroll employee salary costs on a per pay period, per full-time employee basis, and

  • Non-payroll employee salary costs.   

Some non-payroll, full-time employees collect, prepare, and keep employee records. The costs associated with their responsibilities are determined on a per-payroll period basis.  

Direct payroll costs also include buying new technology and training new HR staff in payroll functions and systems.  

What are indirect payroll costs? 

Indirect payroll costs are more difficult to measure than direct payroll costs. Still, getting a handle on indirect costs is critical to understanding their impact on the eventual cost of keeping payroll in-house. Indirect payroll costs include expenses related to increased payroll complexity. Those costs include:

  • Determining employee classifications for independent contractors and part-time employees 

  • Building payroll capacity in-house

  • Difficulty managing in-house payroll capacity

  • Limitations resulting from in-house legacy technology

  • Compliance costs of carrying out HR department's legal responsibilities and avoiding fines for non-compliance

  • Operational risk that may result from in-house payroll fraud

  • Costs of outside consultants, vendor fees, and corporate overhead 

What makes up the cost savings of outsourcing payroll?  

Professional payroll solutions offer best-in-class payroll software. Best-in-class payroll software eliminates the need for you to buy, maintain, and update your own software. The payroll software also integrates with employee time and attendance tracking features. These features eliminate the manual entry and re-entry of payroll information.  

Payroll outsourcing also increases employee productivity rates. Payroll outsourcing:

  • Reduces payroll salary cost per full-time employee per payroll period;   

  • Frees up HR staff’s time to focus on what they do best: growing your business; 

  • Saves on costs that result from HR's compliance with legal guidance 

  • Keeps up with constantly evolving local, state, and federal laws.

A payroll outsourcing partner charges a fee that is a fraction of the amount of money that you might expect to spend to hire an in-house payroll specialist. Bear in mind that your in-house payroll costs are not limited to employees' salaries.  
Remember, too, that your selected payroll partner ensures that you are in compliance with deadlines linked to payroll legislation, saving fines and penalties that reduce your profit margin. 

Is payroll outsourcing right for you? 

When deciding whether payroll outsourcing is the answer for your business, keep in mind that ROI increases as the outsourced services become more comprehensive. Depending on the state where your employees carry out your business, you may benefit from direct savings on health insurance and workers' compensation insurance

After all, a dedicated payroll processor only keeps you in compliance with payroll-related laws. Outsourcing payroll processes may save you from penalties on payroll violations. However, a comprehensive HR outsourcing solution monitors all HR regulatory guidance to ensure compliance in all areas and avoid penalties. 

Finally, remain mindful of the comprehensive HR partner solution's ability to increase ROI by implementing safety audits and best practices that it garners through its extensive experience with other companies using its services. 

13 warning signs that you should outsource payroll

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Disclaimer: this article does not represent expert advice and is provided for informational purposes. Please get in touch if you would like expert HR advice.

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