What are the benefits of payroll outsourcing ?
By using outsourcing as a business strategy, a company can separate its secondary functions and entrust them to experts who can perform the job more cheaply, quickly, and efficiently, while investing the extra time and resources gained in the processes that generate revenue.
According to PwC, companies that internally manage payroll and HR administration have, on average, an 18% higher total cost of ownership (TCO) for those functions than companies that outsource them. This is a result of the higher quality standardization of processes typical of the outsourcing model. Below are four key facts related to the internal strategy of payroll and HR administration:
1. Hidden costs account for over 50% of the total cost of ownership (TCO) of these functions internally.
2. The total cost of ownership (TCO) of payroll administration continuously increases.
3. Outsourcing reduces total cost of ownership. Internally managing payroll and HR administration, on average, increases the total cost of ownership (TCO) by 18%.
4. Using a single supplier or solution to manage multiple functions can bring significant business efficiency.
After conducting a cost analysis of your HR administration and payroll processes, you will come to the following conclusions:
1. Outsourcing brings cost savings.
2. The strategy of using a single supplier for related processes brings financial benefits.
3. Companies that employ multiple service providers or have multiple HR service management systems have hidden integration costs, i.e., the cost of linking the entire process into one integrated, consistent whole.
4. Companies often overlook hidden costs and thus underestimate their total cost of ownership (TCO) of these functions.
The advantages of outsourcing are numerous and tangible:
• more money that can be invested in improving your core product, thereby increasing competitiveness in a dynamic and unpredictable market;
• more time for reorganizing internal processes, increasing flexibility, and speed of adaptation;
• seeing the bigger picture of each process without being burdened with administrative tasks;
• advice on potential savings when introducing new regulations and laws;
• reducing the risk of human error and dependence on employees crucial for payroll calculation;
• expert support when introducing changes (new systematization, process reorganization).
How to choose the optimal solution for your payroll calculation?
You can certainly agree that it is quite difficult to monitor the efficiency of HR processes, given that it is primarily qualitative in nature. However, regardless of the difficulty of monitoring, it is extremely necessary to be informed about the analysis of costs and benefits that it brings, especially since your competitors are taking care of it. Only through continuous development and a detailed understanding of its costs will the human resources department be able to achieve efficiency, savings, and improve your service.
Cost savings can be achieved through better allocation of people, processes, and technology. When calculating the total cost of ownership (TCO), combined payroll and HR administration costs are first examined to provide an overall picture, and then these processes are broken down into their key components to measure costs associated with each task. Identifying visible and hidden HR costs will reveal opportunities for cost savings and establish a link between Human Resources activities and business results.
Total Cost of Ownership (TCO) for payroll departments is actually increasing continuously. Contrary to expectations and despite technological progress, a PwC study has shown that administrative costs have increased because organizations are more focused on technology transformation rather than process transformation. The study's results show that many organizations need to focus on reorganizing processes after deciding to change software. If they fail to do so, they incur additional hidden costs and seam costs.
Visible costs:
1. System implementation cost is a one-time cost of purchasing and implementing a payroll system, which is often a significant investment for an organization.
2. System upgrade cost includes periodic upgrading of the system and updating it to the latest version.
3. Direct labor cost includes the total cost of wages of workers directly involved in payroll processing, benefits they enjoy, travel expenses, and other allowances.
4. Outsourcing costs include the total annual cost of any outsourced service related to payroll processing (sending payslips, compiling legally required statistical reports related to payroll processing, submitting JOPPD, etc.).
Hidden costs
(account for over 50% of the total cost of payroll ownership):
1. System maintenance: IT systems require infrastructure, constant and fast IT support, software, and regular system maintenance, all of which incur a certain cost.
2. Training: The cost of educating, training, and mentoring employees involved in the process, as well as educating employees to use a new or upgraded system.
3. Indirect labor costs: The cost of work hours for employees not directly involved in payroll processing, but only supporting those functions. For example, collecting data required for payroll processing, preparing and approving work time records, collecting payments, enforcement, documentation, responding to employee inquiries, issuing various certificates for employees, etc.
4. Direct costs that do not include labor: The total cost of consultants, flat fees for suppliers, licenses, computer equipment, depreciation, system support from suppliers, payroll overhead, rent and maintenance of space, consumables cost (paper, toner, etc.).
5. Cost of integration (seams costs): Refers to the expenses associated with integrating all processes related to payroll calculation into a comprehensive whole. It pertains to the activities that an organization needs to carry out to ensure and facilitate interaction between the integrated processes. These additional costs are caused by a discrepancy between the development of technology and business processes. Implementing or upgrading technology in organizations often results in unintended costs, such as manual activities to incorporate the technology into existing processes and connect that adaptation at the organizational level. The cost of integration is a hidden cost, but it constitutes a significant portion of the total cost of ownership (TCO): a 21% higher TCO than what companies would have if they outsourced payroll.
6. Data consolidation is a time-consuming and often overlooked separate cost. Consolidating reports generated from different systems takes time. The people performing these tasks may not be part of human resources, but their time consumption should be factored into the decision-making process for selecting a payroll solution.
7. Qualitative opportunity costs: Choosing the wrong solution is sometimes the biggest hidden cost of all because it can have a tremendous impact on the company's future. For example, if a company needs to assemble a team for a new project, its HR processes need to be flexible, responsive, and fast.
8. Costs related to creating and protecting payroll backups: include time spent, storage media, and costs of storage and archiving.
Why should you entrust your payroll calculation to Smart Group?
Because we concentrate not only on the continuous effort to reduce TCO, but also on the quality of service and increasing benefits for our clients. In addition to ensuring that payroll calculations are accurate and timely every month, we provide support to all departments involved in payroll calculations while making efforts to minimize integration costs (seams cost).
We strive to create added value through the option of researching and creating reports crucial for making strategic decisions related to payroll costs on an individual client basis. We do this by analyzing past, present, and future payments through a pay simulation method. HR, Accounting, Finance, Controlling, and Management often collaborate with Payroll in providing various reports on employees and the type of payments made to employees and external collaborators, which represents the company's biggest monthly expense in most industries. This way, we can support budget planning, total payroll, investigate the profitability of certain business decisions, propose solutions and options while indicating possible good and bad outcomes, and more, with minimal deviation in estimation.
In addition to the general advantages of outsourcing payroll calculations that another specialized external supplier may also offer, Smart Group pays great attention to creating added value for each individual client when providing its services. This means that we try to integrate ourselves as much as possible into the existing organization of the client's company when collaborating with each individual client. Looking at the bigger picture, we work with different departments within your company and with our objectivity, point out inconsistencies during information exchange. Knowing the flow of internal processes of each individual client generates added value and reduces integration costs (seams costs). To further explain the latter, we can focus on the client's visible departments we are connected with within their company: HR, Schedule (ERV), Finance, Accounting, Controlling, Management, Legal Department, employees.
Payroll calculation includes pre-calculation, calculation, and post-calculation activities and essentially connects Human Resources (HR) and Accounting. Since HR and Accounting "do not speak the same language" completely and do not fully understand each other's activities, they can hardly come up with efficient ways to integrate into the whole. However, this does not justify the fact that they necessarily have to be unified and collaborate in that regard. In this case, Smart Group's payroll calculation is a mediator between these two departments. It takes information from HR administration, objectively balances inconsistencies in accordance with legal regulations, processes the information, and serves it to Accounting in a clear and understandable form.
In addition to the collaboration that the client feels within their organization, as shown in the figure above, Smart Group also takes care of collaboration with external institutions on behalf of the client, which are closely related to payroll calculation. These include: Tax Administration, Croatian Health Insurance Fund, etc.
Why is payroll outsourcing cost-effective?
As a general rule, organizations tend to underestimate the real Total Cost of Ownership (TCO). Companies that have examined their payroll process have been surprised to find that the actual costs far exceed their expectations, sometimes by several hundred percent. Visibility of total costs, especially between functions that share certain processes and therefore must be well integrated, is often low because the related functions are often under the authority of different functional managers (finance, human resources, IT).
Why is outsourcing payroll and HR administration an even better solution for you?
Using one supplier or solution to manage multiple functions, rather than maintaining different legacy systems, can bring tangible cost-effectiveness to your business. According to a PwC study, organizations that use multiple internal platforms have a Total Cost of Ownership (TCO) for those functions that is 18% higher than organizations that use a single internal solution, and 32% higher than organizations that outsource payroll and HR administration from a single supplier. An integrated solution for your payroll and HR administration has a lower TCO than separate solutions, and the need for a well-integrated whole of business process is necessary because it enables organizations to identify interdependencies, which can result in reducing the cost of the entire solution.
Better understanding of the sources and size of hidden costs and integration costs within an organization will help reduce Total Cost of Ownership (TCO). Since numbers don't lie, we present to you five key strategies for reducing costs associated with HR processes, supported by the results of PwC's TCO study:
1. Reduced expenses per payroll and wage control.
Organizations that have chosen an internal payroll management solution have a 30% higher TCO (total cost of payroll ownership) per payroll, compared to organizations that outsource the same function.
2. Merging related functions such as payroll and HR administration brings cost savings and benefits.
Organizations that manage payroll and HR administration internally have a 43% higher total cost of ownership (TCO) for these functions than those that outsource the same two functions. This is because business decisions are often made for individual processes or functions without considering the big picture, resulting in a series of unrelated processes that do not produce the desired business result.
3. Outsourcing multiple related functions brings cost savings.
Organizations classified as medium to large in size that outsource payroll and HR administration spend an average of 25-30% less than those that keep these functions in-house.
4. The strategy of engaging a single supplier brings benefits in overall ownership costs (TCO) by avoiding integration costs (seams costs).
Many organizations do not recognize the presence of integration costs, that is, linking and managing separate functions that belong to the same process, which would otherwise be a series of disconnected business processes. The cost of integration is significantly minimized for organizations that outsource payroll and HR administration to one supplier. A study has shown that an organization that outsources both functions spends on average 21% less than one that outsources only payroll and leaves HR administration internal.
5. Internal costs of technology implementation increase the total cost of ownership (TCO).
Organizations that retain payroll internally have approximately 3 times higher total cost of ownership (TCO) than those that outsource payroll and rely on technology used by their service providers.
Why should Smart Group handle your HR administration?
In today's challenging business environment, companies not only need to reduce HR costs and achieve savings without compromising the flow of their business processes, but there is also a need for a new way of working that increases employee engagement and productivity by removing administrative tasks from their job description.
Management still sees HR as a predominantly administrative and not particularly efficient function that provides low value, even though it is necessary for the operational part of the company's business. However, a complete understanding of costs enables HR to change outdated views of its role. By increasing its operational efficiency, HR will realize the potential to be viewed on a strategic basis and will be able to report directly to management.
Cost savings can be achieved through better allocation of people, processes, and technology. Revealing visible and hidden costs of HR processes will uncover opportunities for cost savings and establish a link between HR activities and business results.
If you decide to work with us, outsourcing will provide you with the following advantages:
- Reduced HR processing and administration costs;
- Increased efficiency and productivity;
- Improved delivery and service quality;
- More flexible HR function that responds more quickly to strategic business needs;
- Clearer and more specific allocation of work tasks within HR;
- Standardization and harmonization of HR processes that will ensure fair treatment for all employees;
- Better integration of HR systems with other systems;
- Reallocation of HR resources to activities that have higher added value, improving productivity and employee engagement.
Sanja Zelenika Perišić, Manager for Payroll Services & BPO Projects
