<i>Dear Workforce</i> What Are the Advantages and Disadvantages of Outsourcing Our Payroll Function?
August 3, 2010
History actually provides some great lessons on the potential impact of a decision such as this. The health insurance savings benefit is only one potential value of this arrangement. The reduction in overall administrative costs stemming from having 50 fewer employees also would be sizable. Organizations that have outsourced employees, along with services, can realize cost savings and potentially some enhancement in services through expanded service capabilities—but you asked about possible downsides.
This particular outsourcing model, often referred to as "takeover outsourcing," would have a profound effect on both the organization and the employees personally involved in this transition for several reasons. First, this type of transaction would normally require that you terminate these employees in order to "move" them to the new organization. Invariably when employees "lose" their identity as part of the company, there is a significant change effort for all parties. Even in the most benign "co-employment" scenarios, payroll staff must make the mental shift from being part of the organization to becoming service providers for the organization.
|Benefit cost savings
||Risk of the rebadged employee leaving and a reduction in service potential and institutional knowledge. Two immediate factors drive this deterioration: employees who leave because of the transition event, and future efforts of the outsourced payroll organization to reduce headcount.|
|Familiarity with client payroll
||Risk of losing the personal touch and "ownership" of employees versus contractors over the course of time.|
|G&A cost reduction (reduced headcount, facilities, overhead tied to 50 payroll people)||What happens to the cost over time? Will the outsourcing fees increase to minimize the savings? Have service-level agreements, or SLAs, been established to guarantee similar levels of staffing, response time and interaction/resolution quality?
• Mass salary changes
• Exception processing
• Special projects
• Off-cycle adjustments
• New-hire reporting
• CPI adjustments
• Volume (population) changes
As you consider potential savings, it is very important to carefully consider the potential out-of-scope costs that typically alter the value proposition significantly.