Updated: Nov 24
Payroll management is one of the most essential business processes, for big and small companies alike, and you need to get it right 100% of the time – or you risk creating a negative employee experience, losing your employees’ trust, or even getting into legal trouble.
Organisations across the globe are recognising the strategic importance of payroll: According to a Deloitte survey 88% of organisations currently have a payroll strategy in place or plan to develop one in the near future. For many, this includes making better use of technology, or finding the right partners.
And indeed, payroll can be a stressful and time-consuming process that can expose you to a high risk of errors. One in four employees report they have been paid incorrectly by their employer and 50% of employees would look for a new job if paid incorrectly just twice. For this reason, many businesses are looking for ways to automate or outsource payroll in order to ease its burden and guarantee an error-free process.
What’s the best way to do that though? In this article, we look into the pros and cons of the following options, compare them and help you make a decision which one is right for you:
In-house: Run payroll in-house using your own payroll software
Outsourcing: Outsource payroll to a managed service provider
Hybrid: Outsource payroll processing but use your own payroll software
What is managed payroll?
Managed payroll, or outsourced payroll, essentially means delegating your payroll to a third party and their software.
Typically, your accountant or a managed service provider (MSP) specialized in payroll will calculate your employees’ gross and net pay, deductions, taxes, and pensions, handle salary transfers, and send payslips and tax declarations to your employees via email.
The level of outsourcing can vary, depending on whether you want to delegate all payroll processes to an external provider or retain some ownership.
Outsourcing your payroll enables you to outsource some of the work related to payroll processing and speak to an expert if you need help or advice.
The disadvantages of outsourcing payroll
Despite having some clear benefits, using traditional managed payroll services in this day and age has many disadvantages that can quickly outweigh the benefits.
Low value for money
Some service providers can be expensive and cost up to £10 per employee. For companies with a simple payroll made up of mostly full-time salaried employees this offers low value for money.
Increased amount of manual data entry
With managed payroll, employee data required for payroll has to be collected and updated separately to your in-house employee data collection, and then again manually entered into an external payroll software. Compared to a unified approach, this triples the amount of manual data entry, the most hated task of knowledge workers.
Automation Anywhere found that knowledge workers waste over 40% of their time on manual digital administrative processes and over 75% believe spending time on tasks that could be automated is a poor use of their skills. Manual data entry is not just a waste of resources and source of mistakes in your company but one of the biggest killers of the employee experience.
Increased email traffic
Because employees usually cannot access or update their payroll data and payslips directly themselves, they need to send you emails every time they have a question, problem or need to update or correct personal information, and you need to chase them for information they forgot to provide.
According to a McKinsey report, employees waste 25% of their work day looking for information on emails, and managed payroll is yet another source of constant administrative email flow that is silently killing your business’ productivity and employee experience.
Risk of incorrect payments
Changes in employee or salary information and new joiners and leavers are more easily forgotten to be reflected in an external payroll system, resulting in incorrect or forgotten salary payments.
And this is far from an exception: 25% of employees say they have been paid incorrectly and over 50% of employees would consider moving jobs if an employer pays them incorrectly just twice.
In the worst case scenario for the employer, accidental payments to recently departed employees may never be recoverable or require you to take your former employee to court.
Service providers can often be inflexible in case you need to make any last minute changes (such as adding bonuses or reflecting salary increases) or correct mistakes due to their style of running payroll in semi-automated batches. This unnecessarily adds to the amount of incorrect payments and email traffic with the service provider.
Poses a large security risk for your business
Using the services of an external payroll operator and communicating sensitive employee and company information via email significantly increases your risk of security breaches and fraud.
Up to 90% of data breaches happen via email – and external payroll providers are an ideal phishing target because it's easy to impersonate different people. Attackers might impersonate the payroll provider, your business, or an individual employee, and redirect payments to an external bank account. Merging payroll into your existing employee operations processes prevents data breaches and promotes ISO 27001 compliance.
Data breaches caused by a third party (or by the communication with a third party via email) are the responsibility of employers, and recovering funds after an attack or regaining control of your sensitive data can prove to be impossible in most instances. For this reason, employers need to be extremely cautious when outsourcing payroll.
Why is outsourced payroll still a popular option?
If there are so many disadvantages to managed payroll, why is managed payroll still popular?
The reason is simple: Historically, it was a viable alternative to manual in-house payroll processing.
Before we had good software to automate payroll and reduce the manual element of data entry, and introducing employee self-service, payroll required a lot of manual work – so its outsourcing definitely made sense. This led to the growth of payroll bureaus and service providers. Cybersecurity and data protection were also less of a concern when outsourced payroll first became popular.
However, most of the manual work can now be automated with payroll software that is HMRC-approved. Data entry can also be automated and shifted to employee self-service. Today, externally managed payroll can actually lead to more manual work because the process is so inefficient.
Having your own payroll software – or, even better, using a unified employee platform – can help you streamline your payroll processes, either by keeping them in-house or using a hybrid model where you use your accountant to run payroll on your internal software that is optimised for your own needs.
What are all the alternatives to outsourced payroll?
If you don’t want to outsource your payroll, you have two main options:
Run payroll fully in-house using your own payroll software
Hybrid model using the services of an external accountant but your own payroll software
These two options enable you to retain full control over your payroll and employee data and not depend on an external payroll provider.
As a side note, manual payroll using HMRC deduction tables will soon be discontinued in the UK, meaning that all payroll will have to be submitted digitally. Essentially, this means that payroll software will shortly become mandatory for everyone whether that software is running internally or externally.
Let’s see how they compare with outsourcing your payroll to an external provider:
Run payroll yourself
+ Full control
+ Reduces manual work
+ The most flexible option
+ Least security risk
+ Highest degree of automation
→ Recommended for companies that are financially confident
→ Zelt is the best software to use
Pay someone else to do it
+ Can ask an expert
+ Manual work is outsourced
→ Recommended for companies that are financially less confident
→ Zelt is the best software to use
Managed service (outsourced payroll)
+ Can ask an expert
- Manual data entry
- Lots of emails
- More mistakes
- High security risk
- Low value for money
→ Not recommended to anyone: It’s an outdated model that is insecure
Using your own payroll software (or a unified employee platform) is a better alternative to managed payroll, as it enables you to retain full control of your payroll processes and manage them yourself, often at a fraction of the cost of outsourcing payroll.
Using your own payroll software that integrates into your existing processes has the definite advantage of reducing the risk of errors and the time you spend on payroll. It enables you to provide a positive experience to your employees and make sure there are no delays or surprises when paying their salaries. Of course, you still need someone from the admin side of business to input data and double-check everything, but the whole process is much more efficient.
Choosing the right payroll software can be somewhat time-consuming, especially if you also consider options that go beyond payroll, but once you do it, then you simply need to learn how to use it.
On the other side, payroll experts can help you navigate complex situations, such as mergers and acquisitions; you could, for example, opt for a hybrid model, where you’re using your own software but pay someone else to handle payroll for you (by using your own software). In this way, you get access to expert support and also retain full control of your data.
When choosing payroll software, you should think strategically and consider options that allow you to handle other business processes, as well. Using a unified workspace platform to handle payroll and the rest of your employee management processes – such as HR, pensions, app access, and device management – enables you to consolidate everything in one place and improve the overall employee experience.
Zelt can help you with all of this: It enables you to use a single interface for all admin work, and also give a single point of access to your employees for everything work-related, from downloading their payslips to accessing all apps they need in their day-to-day work, adjusting their pension contributions, or requesting a new device.
A platform that is built around your employees instead of your business processes (such as payroll) will enable you to provide an excellent employee experience and empower your employees by providing them all the tools they need to excel, and also making sure they feel heard and appreciated.
That might sound like a tall order for a software tool that handles payroll, but this is exactly why you shouldn’t look at payroll in isolation. Instead, you should seek to consolidate it with the rest of your business.
Why payroll software shouldn’t only be about payroll
Payroll is one of the many processes you need to take care of when managing a business, together with HR, admin, account access, and pensions, among others.
So, instead of looking at each of these areas separately, you could combine everything in a single platform, where all the different processes live together in harmony.
This way, you can get a complete overview of the employee lifecycle of each employee, manage their pay, days off, benefits, accounts, and devices, and also make sure that payroll is streamlined and embedded into the employee lifecycle from onboarding to offboarding. On top of that, having a single platform for all processes enables you to easily do compensation benchmarking by looking at all the different elements of your compensation plan in one place, such as pension and equity.
Your employees, on the other hand, can access all the information and apps they need to do their jobs from a single platform, and also manage their pensions, benefits, and time off – or even request a new device.
Zelt does exactly that: It enables companies to provide a better employee experience, automate all administrative processes (including payroll), and empowers employees to excel. Payroll is one piece of the puzzle – and definitely a very important one – but you shouldn’t think about each business process in isolation and only look for narrow solutions to each problem as it comes up.