Enhancing operational efficiency: The strategic impact of outsourcing payroll

With organisations facing a squeeze on their finances, outsourcing the payroll function is a way to unlock cost savings while maintaining regulatory compliance

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Even for the most optimistic of business leaders, the operating environment going into 2024 looks challenging. Ongoing economic and geopolitical challenges are having an impact on businesses, which need to develop future-facing strategies in order to mitigate risks and promote operational efficiencies. Back-office admin functions such as payroll are affected by these challenges, but businesses that take action to streamline their finance systems will futureproof their operations.

Payroll teams are therefore having to manage with limited resources while at the same time attempting to navigate a constantly shifting tax and regulatory backdrop. In the UK, a January 2024 change to National Insurance contributions means extra work to ensure pay is calculated accurately for all employees at the new rate. Likewise, in Ireland, for example, new reporting requirements for expenses are creating additional compliance work for payroll teams. 

“One of the largest headaches for payroll at this time of year is around managing updates like these,” says Mary Stevens, head of managed services for UK and Ireland at Zalaris.

Payroll teams also continue to face a raft of underlying challenges as long-term under-investment means payroll professionals typically rely on outdated systems to do their jobs. From a lack of integration with third-party systems to an over-dependence on manual processes that can impact data accuracy and reporting quality, many payroll functions are not fit for purpose. 

Given how vital payroll is for organisations to get right, this is a potentially short-sighted strategy.

Against this backdrop, some organisations are starting to outsource part or all of their payroll function to improve efficiencies and reduce costs. “This is enabling them to focus on their core business instead of worrying about payroll,” says Stephen Burr, executive vice president and managing director for UK and Ireland at Zalaris.

A number of companies have been working with Zalaris to modernise their payroll and HR functions. UK pub operator Marston’s plc has 14,500 people that rely on its payroll system, including salaried employees, pensioners and workers on zero-hours contracts. It also has up to 1,500 new hires or rehires a month to process, on top of other employment-related matters. In the past, Marston’s relied on four separate payroll systems and 100 different applications to manage this. By adopting Zalaris’ PeopleHub platform, the company was able to streamline those processes into one system, helping to cut costs and providing a nearly fully automated payroll service.

Outsourcing to a specialist managed services provider, like Zalaris, also allows organisations to fast-track the digitisation of the payroll function, integrating payroll with their core HR system and third-party services to access a greater trove of employee and time management data to increase automation. For an organisation’s payroll function to be fit for purpose in an increasingly digital world, integration with third-party systems is a critical step.

“Whether that is your pension or benefit provider or a lease car provider, having all of those systems integrated will help reduce inaccuracies within payroll and make it as smooth as possible so there’s not a mad panic because someone hasn’t sent over some data,” says Stevens.

Automation saves time

That automation means payroll managers don’t waste time manually entering variable data into a spreadsheet, a process that historically would increase the chances of error. Instead with automation, organisations can be reassured that payroll has been calculated correctly and all necessary regulatory reporting has been completed accurately.

“Having everything integrated means that when clients are approving payroll, they have comfort that everything is in place and they are not having to do additional checks and reviews, which just makes life all round a lot easier,” says Stevens.

The pace of regulatory change – and the challenges it presents to over-stretched, in-house payroll teams – is another motivating factor to outsource the payroll function to third-party specialists. Managed service providers focusing on payroll can ensure companies are compliant with tax and employment legislation changes, thereby reducing regulatory risk.

“Our role is to understand those changes and make sure that our clients are aware of the impact to them and that they are up to date,” says Stevens.

The cost of being non-compliant can be significant. Not only can it result in headaches with tax authorities, if workers have been underpaid, it can have a severe impact on morale and productivity. “If you’ve ever been paid incorrectly, you’ll know how stressful that can be,” says Burr. “It’s just one of those things that’s a complete red line and you just don’t go over it, because it not only creates more work to rectify the situation, but it can also cause bad feelings with employees.”

Outsourcing payroll adds value

Outsourcing the payroll function – whether for software-as-a-service or a fully-managed service – can help payroll become more effective and start adding real value to the wider business.

“We try to ensure we’ve got as much efficiency within the whole process as possible to really give time back to clients so they can work on more strategic items within their own business,” says Stevens. “That’s where we really strive to listen and collaborate with the client to give them the best service and take the pressure away from them, so they’re not fretting that it’s payroll time.”

Outsourcing can also ensure the payroll function is agile and can flex as the company grows, reducing the challenge of relying on a small team of payroll professionals or trying to find new staff members amid a broader industry talent shortage.

“If you’re a finance director and you think you only really need one decent payroll person to run your payroll – what if they want holiday or they are sick or they leave?” says Burr. “There’s a big risk there.”

Cohesive cross-border payroll

For global companies that are adopting an outsourcing strategy, unifying cross-border payroll with one provider means companies can manage their multi-country payroll without having to deal with multiple service providers in each country.

“The beauty of having multiple payrolls managed by a single payroll service is that reporting-wise, you get an overall picture of what’s happening with your payrolls across countries,” says Stevens. “Having one provider means everything is much more efficient and should deliver cost benefits for clients as well.”

In addition, having a consistent approach means employees have access to the same tools and documents as colleagues in other countries. “For organisations that are operating across many countries, it means their employees are getting the same experience no matter where they are located,” says Stevens.

Zalaris provides multi-country payroll outsourcing services for Finnish forestry business Metsä Group across 28 different countries, giving the company access to local expertise but with a joined-up, consistent approach. 

However, flexibility is key, says Burr, given that some companies may wish to manage payroll differently for each country. “For some countries a company might have a large employee population and have historically had an in-house payroll team that they want to retain, while for other countries they might have fewer employees and so they don’t really need a payroll manager,” he adds. “We can put that under one framework agreement, so they get a common service, but with the flexibility to manage certain elements differently.”

Whether companies have complex cross-border payroll requirements to manage or they simply need to streamline their payroll function while maintaining regulatory compliance, outsourcing to a managed service provider can help companies cut costs without compromising their business.

For more information, please visit Zalaris