Should Payroll Be Outsourced?

By David Tolson, CPA

Over the years Payroll has become one of the most frequently outsourced business processes. The commonly cited benefits of outsourcing include lower costs, less work, and no need for expertise. This paradigm is being challenged. In an economic environment where every dollar counts, companies with outsourced payroll are re-evaluating the cost-benefit proposition and reaching the conclusion that payroll should be moved in-house. Benefits of running payroll in-house include lower net cost, control, flexibility, access to information, and simplification through system integration.

Cost - Quite simply, it is less expensive to process payroll in-house. We have performed return on investment analysis on actual cases and found a payback period of less than 1 year to be typical and realistic. While the breakeven point will vary by company, even smaller companies with as few as 20 employees may benefit from cost savings with in-house payroll. The upfront cost of the payroll software is fixed allowing larger companies to leverage this benefit even further than the example below. Adding payroll to an existing Keystone install does not require an additional investment in computer systems hardware.

Example: Company with 61 employees switching from service to Keystone Payroll.

Annual Cost of Payroll Service $13,359
Keystone Investment $8,376
1 Year ROI 41%
Interest Rate of Return 141%
Cash Flows see graph below
Year Keystone Outsource Savings
0 (8,376)   (8,376)
2 (1,508) (13,359) 11,851
3 (1,508) (13,359) 11,851
4 (1,508) (13,359) 11,851
5 (1,508) (13,359) 11,851
6 (1,508) (13,359) 11,851
7 (1,508) (13,359) 11,851
8 (1,508) (13,359) 11,851
9 (1,508) (13,359) 11,851
10 (1,508) (13,359) 11,851

Workload - While an assumption of outsourcing is transfer of work to another party, this is not realized with payroll. In addition to managing the process, the central functions of entering (or collecting) time, entering and maintaining employee information, and reviewing/verifying data are not transferred. The only functions actually transferred out are the check printing (and/or direct deposit generation) and tax payments. An estimated 90% of the actual work in terms of time remains in-house. The work that is transferred out is the automated part. The increase in workload from tax filings etc is offset by efficiencies in entry/processing and general ledger integration. Bringing payroll in-house can be accomplished without additional personnel.

Expertise - A payroll service selling point is that they have a high level of expertise without which you will be at great risk of making a critical mistake that is expensive in terms of time and resources. The reality is that much of the payroll process is routine. Much of the expertise is built into the software. Keystone support and CPA firms are available for assistance at the time of setup and to address specific situations. The software takes care of keeping you current with changes to tax tables and regulations. With Keystone payroll updates are incorporated into regular web updates. Reports for payroll obligations such as tax payments and garnishments as well as reports including the 941 simply print straight from Keystone. Remitting tax payments and filings are easily learned and become part of the payroll processing. You do not need to possess an in depth knowledge of payroll and tax rules and regulations to process payroll.

Other Considerations - Processing payroll in-house offers other advantages versus outsourcing. It allows you to maintain a higher level of control over the payroll process. There is more flexibility in terms of scheduling without the need to coordinate with the payroll processor. Access to information is enhanced with the ability to create and run reports at any time. The payroll and general ledger modules are consolidated into one program using one database with one vendor point of contact resulting in simplification of the companies� information system. While some General Ledger systems do not have a payroll module, Keystone payroll is part of the same program.

Conclusion - Processing payroll in-house capitalizes on existing human resources and existing systems and software resources to leverage significant cash flow benefit in the future with a very short payback period on the fixed cost investment. In addition to making a compelling case on paper, several of our customers have already successfully made the transition from outsourced to in-house payroll and are already realizing significant cost savings.

GivenHansco - Keystone payroll provides a comprehensive payroll solution that is part of our integrated advantage. If you are currently using Keystone payroll, be assured that you are on the most cost-effective path. If you are currently using Keystone general ledger without payroll, we can assist with a cost-benefit analysis that incorporates the payroll function.

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David Tolson

David Tolson, CPA

    David Tolson has been a CPA for 10 years and is currently a customer service specialist at GivenHansco. David works with customers on all phases of payroll systems planning, implementation, and support.

    Find out more about how Keystone Accounting software can improve your Payroll process at Keystone Accounting.