The Concept of Payroll Outsourcing

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Table of Contents

Operational Aspects
Advantages Within the Workplace
Critique of Payroll Outsourcing Use Within The Workplace
Consideration of Possible Improvements
Conclusion
Reference List

Operational Aspects

The topic of payroll outsourcing directly fits the given module of performance management as the former helps to power the latter by focusing on the creation of more value. In particular, the solution to apply outsourcing in the identified field is likely to lead to greater integration of the workforce and timely payroll delivery. This paper aims at addressing the following objectives:

To determine the role of payroll outsourcing in the organization;
To reveal benefits, including performance measurement tools;
To specify any drawbacks of payroll outsourcing in the workplace;
To provide recommendations on the enhancement of payroll outsourcing patterns and practices.

All of the mentioned objectives are to be accomplished based on the recent scholarly literature and other credible sources in order to provide reliable information and come up with valuable considerations regarding possible improvements.

Payroll is considered the most important action in the activity of the organization’s accounting department. From the point of view of accounting and finance, the calculation of wages is the sum of benefits, deductions, and compensation from the salaries of all employees of the company (Meliyio & Moronge 2013). Speaking of operational aspects in terms of payroll outsourcing, it is essential to emphasize that the calculation of remuneration has to be carried out regularly by any company, be it a permanent or a temporary job. According to the Labor Law of the United Arab Emirates, the salary must be paid at least once a month as specified by the local legal act of the company (Labour Law – Ministry of Labour 2017, para. 3).

In small firms, especially in the absence of a full-time accountant, the calculation of wages may be quite problematic. However, even in medium-sized and large organizations, accounting often works with overload, which leads to errors, conflicts, penalties, etc. In this regard, outsourcing use is beneficial to eliminate excess workload, reduce the accounting staff, and, at the same time, ensure a competent impeccable payroll in an organization (Meliyio & Moronge 2013). Therefore, the identified problem is solved quite simply by the application of the delegation of the above functions to a third-party specialized company – outsourcing services. The direct and indirect economic advantages of such a decision are confirmed by practice, and more and more organizations are now switching to payroll outsourcing.

Outsourcing is performed via Software as a Service (SaaS), a model for using business applications in the format of the Internet services. SaaS applications run on the server of the SaaS-provider, and users get access to them through the Internet browser. A user does not buy a SaaS-application, but leases by paying for the use. Thus, an economic effect is achieved, which is considered one of the main advantages of SaaS. Outsourcing for payroll services includes a range of functions. First of all, it involves the payroll itself as well as the calculation of compensation for holidays, allowances, dismissal, vacation, social payments, contracts concluded with individuals, etc. (Meliyio & Moronge 2013). An organization responsible for outsourcing would also prepare and submit reports for the tax inspection and extra-budgetary funds along with payroll and pay sheets for employees. In addition, the calculation of a personal income tax and deductions to extra-budgetary funds are also under the responsibility of payroll outsourcing specialists.

Advantages Within the Workplace

Recently, many enterprises have started using outsourcing to calculate wages. Speaking of the advantages of payroll outsourcing, it seems essential to provide some examples. For instance, IKEA has almost no own production. Instead, it cooperates with 2,500 suppliers that have been tested for years, and IKEA’s logistics functions along with payroll are also delegated to a third-party organization (Koniorczyk 2015). It turns out that IKEA directs all its resources to the organization of retail business, and the rest of the services and business infrastructure are outsourced. The paramount advantage of payroll outsourcing is its settlement process that can be easily distinguished from the general flow of office work, clearly describing the tasks, requirements, and their specific conditions, and then transferred to an external service (Sharma & Keswani 2013). The main task of outsourcing is to outsource non-core and highly specialized lines of business.

At the same time, all the necessary actions for the calculation of wages will be made by a specialized expert, who constantly monitors changes in labor legislation, regularly improves his or her skills and knowledge, and has significant experience in this sphere (Butler & Callahan 2014). As companies that specialize in outsourcing value their reputation and accept merely professional staff, this side of outsourcing seems to be safe. The calculation of wages will be carried out within the given timeframe without absurd mistakes and hasty alterations. Thus, the risk of making claims on the part of inspection bodies is minimized.

From the point of strategic tasks’ implementation, outsourcing makes it possible to concentrate resources on the primary production and also improve operational control (Sharma & Keswani 2013). In addition, the process of introducing new technological or managerial operations is facilitated, thus guaranteeing independence, a lack of personal interest, and maximum confidentiality. In this regard, from an economic point of view, outsourcing allows the company to significantly reduce costs – it will not have to contain an additional structure and inflate staff. Transaction costs may also decrease since some fixed costs can be transformed into variables, depending on the needs of the firm in a particular period of time.

From a technological perspective, outsourcing opens access to modern technologies and promotes their utilization. If the staff does not have the necessary specialists, they can be attracted through an outsourcing program. The quality of payroll service in the case of outsourcing is significantly increased as a third-party company undertakes to monitor the quality of the contract work (Sharma & Keswani 2013). There will be an opportunity to pay the accrued salary on time, which will help to avoid discontent and a number of unnecessary conflicts – both with individual employees and with the team as a whole. Accordingly, employee satisfaction and performance indicators would grow with the proper payroll system.

In terms of kaizen, small, gradual, and consequential changes that need to be made constantly and are to have a positive impact on the general performance may be noted as a means of advancement. Kaizen refers to actions that are aimed at eliminating losses from every operation and process, increasing the time for adding value, and promoting openness between departments and workplaces (Butler & Callahan 2014). The delegation of authority to payroll outsourcing experts as the transfer of a certain amount of authority is quite beneficial. This is possible by training in the given specialization, mastering broad skills, and collecting relevant knowledge. More to the point, standardization is required for outsourcing is essential as some common methods are needed to consolidate the success achieved. Standardization is composed of activities to establish rules and characteristics for the purpose of their voluntary reuse, targeting the achievement of orderliness in the areas of production and circulation of products and increasing the competitiveness of products along with works or services (Butler & Callahan 2014). As an integral part of outsourcing, it also adds value to the above option.

Critique of Payroll Outsourcing Use Within The Workplace

Despite the impressive list of advantages, some companies prefer not to transfer the payroll function to external suppliers for one or several reasons. The incorrectly performed task is the major disadvantage of outsourcing and, specifically, payroll outsourcing services. Work can be done correctly at first glance, but, in the end, it may turn out that it was necessary to do something completely different. This depends on the clarity of the problem statement and its understanding by the outsourcing company (Mohiuddin & Su 2013). Unfortunately, correct understanding does not always happen, and not all employees manage to properly set the tasks. As a result, a lack of a regulatory framework may lead to employee dissatisfaction based on inappropriate remuneration. Therefore, the fact that the contract concluded between the companies can be made solely illiterately, failing to take into account the specifics of the company’s activities, is another problem that can cause performance management challenges.

The confidentiality terms and the associated issues can be noted among the disadvantages of payroll outsourcing. In any contract, one can include conditions on the confidentiality of information, involving the contract of outsourcing, yet, in, the reality it is rather difficult to prove the leakage of information and collect some data, if not to say that it is impossible (Mohiuddin & Su 2013). Therefore, by transferring information to an outsourcing company, the core company is at risk to some extent. The threat of disclosure of the trade secrets of the organization and distortion of data exist since along with the transfer of information the company connects the outsourcer to the management of several functions and processes.

For an outsourcing company, there is always less control than for regular employees. The difficulty of bringing the outsourcer to account for the violations committed is one of the disadvantages in this case (Mohiuddin & Su 2013). It should be emphasized that it is impossible to accurately predict the success of the company’s development, and, consequently, to determine the volume of the load. The discrepancy between the quality of the services provided by the outsourcer to the customer and non-transparency of payment for services of outsourcing companies may also be noted as drawbacks. In addition, the impossibility of timely decision-making in force majeure cases also should be considered while addressing payroll outsourcing. The novelty of outsourcing services and the immaturity of this market, in general, create situations that are still difficult to anticipate and prevent. In addition, often outsourcing is a guaranteed failure for companies that have not yet established or developed business processes. There is a risk of default by an outsourcing company; for example, in case of bankruptcy.

Problems with the transfer of information may also occur in the course of payroll outsourcing. In order to ensure that employees continue receiving their checks with properly calculated wages and tax deductions, it is necessary to transfer a large amount of information to the supplier’s database in an appropriate way. If problems arise during the transfer of information to the vendor’s database, the company may become so disappointed with the supplier that it will decide to return to the in-house accounting. To send information for the calculation of taxes, the company organizes the collection and transfer to the supplier of the corresponding data.

The function of tax accounting should be delegated to suppliers in the event that the company is not large enough to ensure the full employment of its own tax department. This function is often divided into two parts such as reporting on taxes to the state budget and the federal budget assigned to the external executor, and local tax reporting is conducted on its own. The reason for the above separation is that many firms providing tax accounting services specialize in state taxation and federal taxation because they have their own expert groups advising them on these issues. Thus, information gathering and transition may also be regarded as challenges.

Consideration of Possible Improvements

With this aforementioned information in mind, it becomes clear that there are several recommendations, the implementation of which can significantly enhance the effectiveness of payroll outsourcing. First of all, while concluding a contract for outsourcing services, it is necessary to thoroughly ponder over a number of essential points such as the definition of goals and objectives along with a clear formulation of procedures and organizational regulations (Yadav, Sushil & Sagar 2014). The next step refers to determining the criteria for evaluating the results of work – they are to be unambiguous. It is also possible to claim that one should pay special attention to the delineation of responsibilities and their limits. The above statement means that payroll outsourcing specialists should clearly understand their tasks and responsibilities.

In order to evaluate the effectiveness of payroll outsourcing, it is possible to use a performance pyramid suggested by Lynch and Cross (Yadav, Sushil & Sagar 2014). It is a pivotal idea to focus on a customer (in this case, an outsourcing firm) and identify the relationships between the company’s overall strategy and its financial performance supplemented by several more non-financial factors, while, in the traditional model of management control, such information is provided only to managers of higher levels. The performance pyramid is based on the concepts of total quality management (TQM) and industrial development, as well as cost accounting by activities in the company’s value chain (Dale 2015). The specified tool contains four levels of the company’s organizational structure and characterizes the two-way communication system necessary to spread the ideas of the corporate mission and strategy at different levels of the organizational hierarchy.

A fundamental shift in focus from quality control (checking whether the work has already been done according to the necessary standards) for quality assurance (when quality is embedded in production processes in such a way that only operations corresponding to acceptable standards are performed). In this regard, an employee-oriented approach may be implemented. According to TQM, every decision starts with what a consumer (an employee) wants and what the organization needs to do for this (Goetsch & Davis 2014). The concept of an employee-orientation extends to internal factors as every department and team has its own set of tasks and responsibilities. The recognition of the fact that evaluation and improvement of performance can only be found by the appropriate ways of measuring is a paramount step towards success. Indeed, the prevention of errors is much more effective than their correction as well as the overall transition from traditional management to management systems based on the principles of TQM.

More specifically, the main factor to measure if payroll outsourcing is effective is goals and indicators and their consistency with the company’s strategy and its activities (Dale 2015). In other words, the company’s goals are to extend from the higher levels of the hierarchy to the lower ones, adapting, at the same time, to the peculiarities of each level, and the performance evaluation indicators are to be transferred from the bottom up, creating a holistic picture. As noted by Goetsch and Davis (2014), the evaluation should be based on an integrated system of indicators, in which the operating performance at the lower levels would be linked to the financial indicators at the upper levels. This would allow the top managers of the company to determine which particular values of financial indicators are achieved and which factors play a decisive role.

Benchmarking is another significant tool to measure and improve performance that is, as a rule, utilized by companies targeting continuous improvement. Typically, benchmarking is used by an organization that wants to improve its operations (Goetsch & Davis 2014). In order to compare its processes or products, a company chooses a competitor that occupies a leading position in one or another field. However, it is not necessary to select direct competitors to conduct benchmarking. For comparison, a company from another field of activity can be chosen or the one working with another group of customers.

Specifically, for payroll outsourcing, benchmarking is likely to promote the application of the best practices of other companies by comparing the work of different outsourcing services. In this connection, one needs to get a full understanding of own processes, because it is impossible to make an adequate comparison without having an idea of one’s own activity. To do this, one should know the boundaries of the processes under consideration, the operations being performed, the current level of process execution, and other parameters that characterize the business. In addition, payroll outsourcing allows hiring a benchmarking consultant who, at a professional level, is engaged in researching the experience of companies in a certain sphere of the economy and adapting it to the customer’s company. If the permanent and temporary staff of the firm does not have such an employee who could deal with the above issues, then outsourcing the personnel from the outside is the best decision.

Conclusion

To conclude, it should be emphasized that outsourcing of payroll for employees allows enriching business processes with new knowledge as for the third-party observers, it is easier to identify the current problems of the company and pinpoint beneficial sides. Nowadays, outsourcing is one of the most popular options for companies that need to delegate some part of their business. Along with advantages, payroll outsourcing presents some drawbacks, including potential risks with confidentiality, accuracy, and timeliness. With the aim of measuring performance quality in terms of the given processes, it is possible to apply kaizen and a performance pyramid. In order to enhance payroll outsourcing, one may consider TQM principles and benchmark.

Reference List

Butler, MG & Callahan, CM 2014, ‘Human resource outsourcing: market and operating performance effects of administrative HR functions’, Journal of Business Research, vol. 67, no. 2, pp. 218-224.

Dale, B 2015, Total quality management, John Wiley & Sons, New York, NY.

Goetsch, DL & Davis, SB 2014, Quality management for organizational excellence: introduction to total quality management, Pearson, Upper Saddle River, NJ.

Koniorczyk, G 2015, ‘Customer knowledge in (co) creation of product. A case study of IKEA’, Journal of Economics & Management, vol. 22, no. 4, pp. 107-120.

Labour Law – Ministry of Labour 2017, Web.

Meliyio, SE & Moronge, M 2013, ‘Determinants of outsourcing accounting services on growth of small businesses in Kiambu County’, International Journal of Social Sciences and Entrepreneurship, vol. 1, no. 7, pp. 1-18.

Mohiuddin, M & Su, Z 2013, ‘Manufacturing small and medium size enterprise’s offshore outsourcing and competitive advantage: an exploratory study on Canadian offshoring manufacturing SMEs’, Journal of Applied Business Research, vol. 29, no. 4, pp. 1111-1130.

Sharma, R & Keswani, B 2013, ‘Study & analysis of cloud based ERP services’, International Journal of Mechatronics, Electrical and Computer Technology, vol. 3, no. 9, pp. 375-396.

Yadav, N, Sushil, A & Sagar, M 2014, ‘Revisiting performance measurement and management: deriving linkages with strategic management theories.’ International Journal of Business Performance Management, vol. 15, no. 2, pp. 87-105.

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