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Why Many HR Teams Stop Outsourcing Payroll as Their Companies Grow


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Payroll is every company’s most significant expense, and managing it is cumbersome. When first getting started, many companies begin by preparing and sending monthly spreadsheets to external payroll service providers who then process the payroll. 

However, over time, this workflow starts to involve too much friction. As a company grows, its employee base becomes more complex. Worker statuses change, filing needs evolve, and outsourced service providers, who often work with dozens of clients, struggle to keep pace with everything. 

This puts the company in a tough situation. Should you power through and stick with your payroll services vendor, or should you bring it in-house, using HR software that includes integrated payroll? Here are a few reasons why companies find themselves facing this challenge.

Rigid Timelines

Outsourced payroll processing often runs like a project. Rigid spreadsheets filled with heavily formatted data must be delivered before a deadline for processing. Outsourced providers might struggle to accommodate changes, despite their best intentions.

They simply have too many clients to accommodate ad-hoc or last-minute requests, putting fast-growing companies in a bind. This inflexibility is a symptom of payroll run as a project. Worse, the company loses visibility over payroll costs and processes, since payroll data stays outside the organization.

Here’s why this happens. An outsourced payroll service provider stores data on their systems but doesn’t provide the company full access to it. While this suits small businesses, it does not work for growing companies. These companies need payroll data for their growth projections.

As the most critical cost a company incurs, leaving payroll data out of growth model projections makes no sense. Even if the outsourced provider sends data over in a spreadsheet, the company’s finance team has to transform, clean, and upload it.

They also have no way of confirming the accuracy of such data. After all, it does not reflect a real-time view of a company’s workforce, leading to a lack of trust in the output. As a result, companies don’t know where they stand and have to conform to financial projections around payroll timelines. This isn’t a great situation for any company, let alone a fast-growing one.

Regimented Processes 

Why do outsourced payroll service providers operate with such rigid timelines? The simple answer is that these timelines result from processes with little leeway. Having many clients means each must conform to specific workflows that suit the service provider.

The client has no say in the matter, even if workflows don’t suit them. The result is that payroll ends up inadvertently running the business. Company processes begin revolving around payroll deadlines and hiring plans get shelved.

This is because making last-minute hires or shifts in worker statuses might attract fines due to incorrect payroll filings. Worse, existing employees do not receive flexible work arrangement approval quickly, since the company has to wait for updated data from their payroll bureau to model the financial impact and respond.

There is a bigger problem in this arrangement. Outsourced service providers do not understand a company’s aims and have no incentive to change their processes. As a result, payroll becomes a growth sticking point.

Companies cannot freely create hiring plans or scale without worrying about payroll impact. Given its outsourced nature, this impact has more to do with processes than costs, which is an odd position for any company to find itself in.

No Room for Creative Compensation

Fast-growing companies often find it challenging to hire talented people. As exciting as their growth trajectory is, their future is uncertain, and convincing people to join them is tough. Compensation plays a big role in luring such candidates, making payroll a big part of the decision.

Outsourced payroll services end the conversation before it begins because the service provider cannot accommodate the work it takes to design such packages. For instance, if a prospective employee asks for less equity and more healthcare perks, modeling this impact and negotiating with them is close to impossible when outsourcing payroll.

The service provider can model the impact and send data over, but is unlikely to be able to accommodate the back-and-forth that occurs during such discussions. As a result, the company has to stick to vanilla work arrangements, making them less competitive in the market.

Existing workers don’t receive the benefits of high growth either. Compensation plans take too long to review and work arrangements remain in place to prevent upsetting payroll processes. In short, the company turns into a less desirable place to work.

Outsourcing Payroll Imposes a Ceiling

While outsourcing payroll makes a lot of sense initially, it places a ceiling on growth for a lot of companies. Choosing software or bringing payroll in-house are two good solutions for high-growth companies. Outsourced services, no matter how flexible, will struggle to match the ease those options offer.

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