After just two paycheque problems, nearly half of all workers say they would look for a new job. So compensating employees for their work properly and on time is one of the most important functions of HR, finance or administration. You might handle payroll internally, which allows for more control over the process and data security. Alternatively, you can let an outsourced payroll services provider in Canada do all the hard work for you. The benefit of that approach is saving time and labour resources. This blog post weighs the pros and cons of both methods.
Payroll Control and Customization
Keeping the payroll function in-house means you retain more control and can customize the process as you like. For instance, you can choose the right payroll software for your organization and decide how to issue payments to employees. You'll be in charge of every element of payroll, increasing transparency in your organization.
Admittedly, you won't get this much flexibility when outsourcing payroll to a service provider. A third-party company will have its own workflows for gathering employee information and calculating payments, meaning you need to relinquish control of your payroll process. However, outsourcing can be very beneficial if you want to reduce the strain on internal resources and capacity and ensure your payroll is as accurate as it can be.
Time and Cost Savings
Perhaps the biggest benefit of using a specialized provider of outsourced payroll services in Canada is time savings. According to a 2019 QuickBooks study, businesses spend 4 hours and 52 minutes calculating, filing, and paying payroll taxes during every pay period. That's 253 hours a year. When you delegate these tasks to an outside company, HR, finance, or administrative teams can spend their time on other priorities.
Outsourcing payroll can also save you cash. With another company handling this process, you don't need an in-house payroll team at all. You also don't have to spend money training internal employees to manage payroll processes or handle vacation coverage for when payroll-focused staff is away from the office.
That said, payroll outsourcing isn't always the most cost-effective method for all companies. Providers will charge you a fee for their services, so it’s important to undergo a cost/benefit analysis for your organization.
Data Security
Outsourcing payroll involves sharing internal employee data with an external company. This information includes social insurance numbers (SIN) and bank account information. If a provider of payroll services doesn't take data security seriously, that information could be at risk and fall into the wrong hands. It's important to check how an external company handles and stores your company's - and employees’ - data.
When you keep payroll data in-house, you don't have to worry about how another company will use that information. However, keeping that data secure is still critical to minimize the risk of a breach or another type of cybersecurity event. Otherwise, you could jeopardize your business reputation. Depending on your industry and location, you could also receive fines for not complying with data protection laws.
Advanced Support and Expertise
The best payroll services providers have years of experience in taxation and compliance. You can leverage these resources to increase the accuracy of your payroll processes and stay on the right side of the law. For example, a specialized payroll services provider can ensure you pay the correct amount of payroll deductions. As a result, you can avoid underpayment penalties and audits from the Canada Revenue Agency.
External companies can also support your payroll efforts. If an employee has a query about the amount of tax they pay, they can contact a representative from your service provider rather than an internal team member.
In-House or Outsourcing: Which Payroll Method Should You Choose?
Whether you decide to handle payroll internally or use a service provider depends, in part, on the size of your company. Keeping the payroll function in-house might make sense if you have a small business with only a few employees. That's because it should be relatively easy to collect employee information, calculate earnings, and issue payments on time. Larger companies, however, might struggle to handle payroll responsibilities for dozens or hundreds of employees. In these cases, a service provider can free up your team’s time and reduce complexity.
Your budget is another factor to consider when deciding whether to outsource payroll or keep it in-house. Outsourced payroll providers obviously charge for their services, with a price range depending on the level of service provided and a variety of other factors. However, as previously mentioned, tapping into external payroll solutions could save you money on internal labour.
It's About the Requirements for Your Business
Paying employees the right amount of money at the right time is incredibly important. Depending on your company's requirements, you can either manage payroll in-house or use an external company to do it for you.
While payroll outsourcing could provide time and cost savings and advanced expertise, keeping this function in-house allows for more control, customization, and data security. So it’s important to weigh the pros and cons of both methods to decide what's best for your company.
The True Cost of Outsourcing Versus Hiring Back Office Staff
Outsourcing versus hiring internally is an important decision for any organization, especially when it comes to bookkeeping, payroll, accounts payable (AP), and accounts receivable (AR) services. The choice between these two options can significantly impact a company's financial health, operational efficiency, and strategic focus. This blog post digs into the true cost of outsourcing these services versus staffing them internally, exploring financial implications, benefits, challenges, and strategic considerations to help businesses make informed decisions.
Financial Implications
Outsourcing Costs
Outsourcing bookkeeping, payroll, AP, and AR services typically involves paying a fixed fee or a variable fee based on the volume of transactions. This fee covers the cost of labour, technology, and expertise the outsourcing firm provides. One of the primary financial benefits of outsourcing is the reduction in overhead costs. Businesses save on the expenses associated with hiring employees, such as salaries, benefits, training, and office space. Additionally, outsourcing firms often have economies of scale, which can lead to lower costs for their services compared to maintaining an in-house team.
Internal Staffing Costs
Staffing these functions internally involves significant financial commitments. In Canada, the total cost of employing someone extends well beyond their base salary, encompassing a variety of additional expenses that include mandatory contributions such as Employment Insurance (EI), Canada Pension Plan (CPP) contributions, Workers' Compensation, and potentially the Employer Health Tax (EHT), as well as voluntary benefits like health and dental insurance, retirement savings plan contributions, and life and disability insurance. Employers also bear the cost of paid time off, recruitment, training, and providing office space and equipment. While these costs can vary significantly based on factors such as industry, company size, and the benefits offered, it's generally estimated that the true cost of employment can be 15% to 30% higher than the employee's base salary. This percentage can increase in industries with more comprehensive benefits packages or roles requiring extensive training and equipment, highlighting the importance for businesses to consider these additional costs carefully when budgeting and setting salary levels.
Benefits and Challenges
Outsourcing Benefits
- Expertise and Efficiency: Outsourcing firms specialize in their respective fields, offering a level of expertise and efficiency that can be challenging to replicate in-house without substantial investment.
- Scalability: Outsourced services can easily be scaled up or down based on business needs without the need to hire or lay off employees.
- Focus on Core Business Functions: Outsourcing allows businesses to focus on their core competencies by relieving them of the need to manage non-core but critical functions.
Outsourcing Challenges
- Less Control: Outsourcing can lead to less control over these functions, which can be a concern for businesses that require tight integration of these services with other business processes.
- Security and Confidentiality Risks: Handling sensitive financial information externally can pose security and confidentiality risks, though reputable outsourcing firms have strict protocols to mitigate these concerns.
Internal Staffing Benefits
- Control and Integration: Having an in-house team ensures more control and easier integration with other business functions, facilitating cross-functional collaboration.
- Dedicated Focus: Internal staff are solely focused on your business, potentially leading to a deeper understanding of company-specific challenges and opportunities.
Internal Staffing Challenges
- Cost and Resource Intensity: The financial and managerial commitment to maintaining an in-house team is significant, especially for small to medium-sized enterprises (SMEs).
- Flexibility and Scalability Issues: Scaling an internal team up or down in response to business fluctuations can be challenging and costly.
Strategic Considerations
Business Size and Complexity
The decision between outsourcing and hiring often depends on the size and complexity of the business. Small businesses and startups might find outsourcing more cost-effective and less administratively burdensome, allowing them to focus on growth. In contrast, larger companies with more complex operations might benefit from the control and integration offered by an internal team. Being strategic when considering the pros and cons of outsourcing versus hiring is very important.
Industry and Regulatory Environment
The regulatory environment and industry standards can also influence this decision. Industries with stringent compliance and reporting requirements might prefer the control of internal staffing, while businesses in less regulated industries might prioritize the cost savings of outsourcing.
Long-Term Strategic Goals
Businesses should consider their long-term strategic goals when making this decision. If the goal is to scale quickly or expand into new markets, the flexibility of outsourcing might be advantageous. Alternatively, if the business strategy emphasizes building in-house expertise and maintaining tight control over all aspects of operations, staffing internally could be the better choice.
The true cost of outsourcing versus hiring for bookkeeping, payroll, AP, and AR services involves a complex analysis of financial implications, benefits, challenges, and strategic considerations. There is no one-size-fits-all answer; the best choice depends on a company's specific circumstances, goals, and the value they place on control, flexibility, and expertise. Businesses must weigh the immediate and long-term financial impacts, considering not just the cost savings but also the strategic advantages that each option might bring. In the rapidly evolving business landscape, the flexibility to adapt this decision over time as the business grows and changes can be a critical factor in long-term success.
The Strategic Benefits of Outsourcing Payroll for HR Departments
Enhanced Focus on Core Competencies
The primary advantage of outsourcing payroll is the liberation it provides to HR departments, allowing them to realign their focus toward core competencies and strategic initiatives. Managing payroll in-house requires significant time and attention to detail, diverting resources from critical areas like talent and performance management, employee engagement, and strategic planning. By outsourcing payroll, HR professionals can dedicate their expertise and energy to initiatives that drive business growth and enhance competitive advantage.
Cost Reduction and Operational Efficiency
Cost reduction is a significant benefit of outsourcing payroll. Maintaining an in-house payroll system involves direct costs, including software licenses, hardware, and employee salaries. On top of that are the indirect costs of training, compliance, and error correction which can quickly accumulate, negatively impacting the bottom line. Outsourcing partners leverage economies of scale and specialized expertise to provide payroll services more efficiently and at a lower cost than most organizations can achieve internally. This efficiency reduces overhead and streamlines payroll processes, ensuring timely and accurate salary disbursement.
Compliance and Regulatory Expertise
Keeping abreast of changing tax laws, regulations, and compliance requirements can be daunting and overwhelm internal HR departments. Payroll outsourcing companies specialize in these areas, possessing the knowledge and systems to ensure compliance with federal, provincial, and local regulations. This expertise minimizes the risk of penalties and fines associated with non-compliance, safeguarding the organization's reputation and financial stability.
Access to Advanced Technology
Technology plays a pivotal role in the effective management of payroll processes. Outsourcing firms invest in state-of-the-art payroll software and systems, offering features including automated calculations, tax filing, and online access for employees to view pay stubs and tax information. These technological advancements provide accuracy, security, and convenience, enhancing the overall payroll experience for both HR departments and employees. Small and medium-sized enterprises, in particular, benefit from access to sophisticated payroll technologies without the need for substantial upfront investments.
Improved Data Security
Payroll processing involves handling sensitive employee information, social insurance numbers, personal health identification numbers, bank account details, and other personal data. Outsourcing firms specialize in data security, employing robust measures such as encryption, secure data storage, and multi-factor authentication to protect against data breaches and fraud. This level of security can be challenging and costly for organizations to replicate in-house, making outsourcing an attractive option for safeguarding confidential information.
Scalability and Flexibility
Business growth or contraction requires scalable solutions to manage payroll effectively. Outsourcing payroll provides the flexibility to adapt to changing business needs without the need for significant adjustments in internal infrastructure. Whether a company is expanding its workforce, entering new markets, or adjusting to seasonal fluctuations, payroll service providers can effortlessly scale their services to meet these demands, ensuring seamless payroll operations regardless of the business cycle.
Enhanced Employee Experience
The efficiency and accuracy of payroll services directly impact employee satisfaction and trust in the organization. By outsourcing payroll, companies can ensure timely and correct salary payments, access to user-friendly platforms for viewing payslips and tax documents, and efficient resolution of payroll-related queries. These factors contribute to a positive employee experience, fostering a culture of trust and engagement within the organization.
Final Thoughts
Outsourcing payroll presents a strategic opportunity for HR departments to enhance operational efficiency, compliance, and employee satisfaction. By partnering with specialized service providers, organizations can focus on their core competencies, leverage advanced technologies, and adapt to the evolving demands of today’s business environment. As companies continue to seek ways to optimize operations and drive growth, the role of payroll outsourcing as a catalyst for transformation and success becomes increasingly evident.
Are you thinking about outsourcing your organization's payroll?
Are you considering outsourcing your payroll function to a trusted provider? Enkel can help! Contact us to find out more about our accurate, on-time, and cloud-based payroll services in Canada for companies like yours.
