Evaluating Payroll Service Delivery Models Pays Off

Three different types of payroll service delivery models exist, and employers must consider several factors before determining which one best meets their needs, a payroll operations expert said May 13.

The three types of models are in-house, outsourced, and co-sourced, and each result in a different amount of control and ownership that an employer has over its own payroll activities, said Kathleen Soderman, managing director at Ernst and Young. The in-house model provides the most control and ownership, while the outsourced model transfers most payroll processing tasks to a third-party vendor. A co-sourced model offers a Goldilocks alternative by having internal employees and a third-party vendor share payroll responsibilities.

Employers should consider several factors when determining which model is right for them, including employee experience, opportunities for customization and scalability, budget, and company size, Soderman said at PayrollOrg’s 43rd Congress in Kissimmee, Florida.

“Part of it is company size, and actually I should say employee size,” she explained. Generally, she said, for an employer with fewer than 5,000 employees, a managed service makes sense. “You don’t have to worry about software, you don’t have to find employees who are trained on payroll, and, depending on the organization you go with, you might get attached to individuals with more capabilities than just payroll that you need support with, like employment tax or mobile employees,” Soderman said.

Each model presents unique advantages and disadvantages for employers, she added. The in-house model offers flexibility regarding last-minute payroll changes and is well-suited to shorter payroll cycles but requires a large payroll staff and can consume a company’s resources. The co-sourced model provides more control over the employee experience, but employers may face challenges integrating their payroll team with that of a third-party vendor. The outsourced model presents less chance for fraud but is generally inflexible and limits an employer from having its own payroll expertise.

New challenges and market trends in the payroll industry can also factor in an employer’s choice of payroll service delivery model, Soderman said. Payroll systems are now expected to provide real-time payroll data and often incorporate artificial intelligence. Many employers are also facing pressure from employees to use mobile payroll applications, improve pay transparency, and establish flexible work arrangements.

Soderman recommends that employers conduct an internal assessment to determine costs, define their payroll strategy, review current payroll contracts, and analyze manual payroll processes that could be automated in the future.

“You can do this on your own, or you can engage a provider to do a current state assessment,” Soderman said. “There are assessment tools out there that can look at your headcount, your geographic footprint, and your costs to figure out what makes sense for you.”

No single payroll service delivery model will meet the needs of every employer, and some multinational employers may even want to adopt a different models for specific countries, she added.

“The model you have in the [United States] might be a different model than you have in another country,” Soderman said. “What works for you here might not make sense for you somewhere else.”