Payroll Outsourcing: The Pros and Cons
Explore the advantages and disadvantages of payroll outsourcing to evaluate if it is the right solution for your business.
In This Post:
Payroll systems have often been the overlooked heroes of HR technology.
Since payroll processes were among the first to become automated, they often go unnoticed until a paycheck error or costly compliance problem occurs.
However, as more organizations have globally dispersed workforces and deploy new features and functionalities to improve the employee experience, payroll demands more attention.
In other words, payroll systems have transitioned from a low-profile technology to one that is becoming a critical strategic tool for many HR leaders.
As a result, the payroll market is undergoing tremendous changes, and forward-thinking companies are beginning to realize the untapped potential of modern payroll systems.
In this report, we investigate the transformative journey of payroll systems, from their early automation days to becoming strategic tools for modern HR leaders.
Shortlister Findings
Our data indicates a significant surge of interest in payroll software in 2022, followed by a leveling off the following year. A culmination of factors has made 2022 a peak year for interest in payroll software.
First, the COVID-19 pandemic exposed the limitations of existing systems as companies adapted to remote and hybrid work models.
Similarly, the pandemic brought on many regulatory changes, including new compliance requirements related to remote work, furloughs, and government aid programs like the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC).
Companies had to be agile and adapt quickly to these changes. Instead, many found their old systems too rigid and couldn’t keep pace.
After the initial pandemic shock, the focus shifted to improving employee experience and retention, especially in response to broader economic trends like the Great Resignation and the Big Quit.
For these reasons, more companies began upgrading to payroll systems that offer more than simply salary processing.
Our data also shows that March to May is typically the busiest period for purchasing payroll software, possibly due to tax season demands and annual budget planning.
Industry Trends
Megatrends like cloud computing, big data analytics, and artificial intelligence are transforming business operations worldwide. From customer service to human resources, these technological innovations and trends reshape nearly every aspect of the business.
Payroll is no exception.
New payroll technology industry trends are on the horizon, and leaders must stay ahead of the latest developments to maintain a competitive edge.
1) The Evolution of Payroll Systems
Among core HR functions, payroll is perhaps the business process that is most frequently automated across businesses of all sizes.
According to Deloitte’s Global Payroll Benchmarking Survey, 91% of organizations use at least one type of payroll system, while the remaining 9% use two or more systems.
With such high adoption rates, finding an organization without a payroll system is rare.
Traditional payroll solutions typically include features such as:
- Scheduling pay runs
- Keeping historical pay records
- Calculating state and regional taxes
- Determining deductions
- Processing payments
Yet, despite its critical role, a company’s payroll system is often treated like the coffee maker in the office: it’s relied upon daily but rarely considered for upgrades or improvements, even though there might be more efficient options available.
Further solidifying this idea is the fact that, according to Sapient’s annual HR Systems survey, the average ownership period of payroll suites is around 14.6 years.
The effects are clear—only 11% of organizations reported that their current solution is “always meeting their business needs,” a significant drop from 22% the previous year.
However, as Shortlister’s findings and broader industry data reveal, recent global events have created a global urgency for organizations to future-proof their payroll operatio
2) The Disruptive Wave of Payroll Transformations
Over the past few years, payroll has undergone significant change and disruption.
Recent challenges, such as the shift to the cloud, the emphasis on employee experience, and the need for globally adaptable systems to comply with various legislations, have all contributed to the current state of disruption in payroll.
According to Sapient’s annual HR Systems survey, as many as 50% of all Payroll, Time, and Analytics platform owners are considering replacing their current system within the next one to two years.
Similarly, a 2023 study by Human Resource Executive revealed that 13% of surveyed organizations were engaged in a payroll RFP, while 15% were planning to make a replacement within the next 12 to 24 months.
When employers were asked about the main drivers for their payroll transformation, the most common concerns were payroll data security, integration challenges, technological upgrades, and enhancing the employee experience, according to a study by ADP.
While the need for technological updates and cybersecurity is clear, including employee experience as a driver stands out as an outlier.
How does payroll affect the employee experience?
3) Integrating Payroll into the Employee Experience
Traditionally, payroll has been seen more as an expense rather than a vital process that supports employee satisfaction and engagement.
As a result, investments in digital payroll systems have often lagged behind those in other areas of HR technology, such as talent management and learning and development.
Yet, with the ongoing cost-of-living crisis, the necessity for precise and timely payroll has never been more urgent. According to our Financial Wellness Report, over 60% of employees live paycheck to paycheck, with financial wellness at its lowest since 2010.
Aside from the legal ramifications of mistakes, inaccurate payroll data can damage the employer-employee relationship and majorly affect business decisions.
Recognizing these challenges, as much as 30% of leaders have named improved employee experience as a key driver for payroll transformation.
Beyond accuracy, payroll systems must support pay equality, transparency, data protection, and financial wellness.
To this end, many companies are diversifying their payment methods, introducing flexible options like Earned Wage Access or on-demand pay. In addition, providing paycheck previews can also enhance transparency and help employees manage their finances better.
However, maintaining a consistent employee experience across different geographies may be more difficult than expected.
4) The Challenges of Global Payroll
As the world of work is becoming more distributed, global payroll has struggled to keep up.
Many organizations depend on a network of local payroll vendors for their global payroll needs, resulting in a costly and complex system.
According to a Forrester study, three-quarters of employers say payroll complexity stems from using different vendors for each region. On average, organizations use six payroll tools.
Moreover, 86% of leaders use a hybrid approach where some payroll is managed internally and some externally. However, this leads to vendor fragmentation and dedicating too many resources to payroll management.
Juggling between different payroll tools can also lead to increased errors, employee frustration, high software costs, and difficulties hiring top talent globally.
It comes as no surprise that Alight’s 2024 Company Payroll Complexity report shows a clear link between the number of countries an organization operates in and the likelihood of receiving fines.
While 24% of single-country operations faced fines, this number jumps to 67% for those operating in two to five countries, where fines are most prevalent.
A unified global payroll platform that is also cost-efficient can solve many of these issues, making it easier to hire and manage employees worldwide.
5) The Future of Payroll
So overall, some emerging trends in data and functionality that we can expect to see in the future in the payroll space include:
- Global payroll capabilities
- Scalability
- Employee paycheck previews
- Self-service pay audits
- On-demand apps or Earned Wage Access (EWA)
- Intelligent features, specifically in audits and payroll runs
The era of separate manual payroll, time and attendance, and HR processes is slowly but surely ending.
Today, everything must be automated and connected, reducing time spent on data entry, minimizing errors, and providing real-time visibility across the organization.
According to ADP’s The Potential of Payroll in 2024 survey, 94% of respondents agree that they would like to see integration across all systems, geographies, and HR processes.
As businesses adapt to new working models and regulatory landscapes, the need for integrated, flexible, and intelligent payroll solutions is certain to stay on top of corporate agendas.
Keyword Map
To better understand how visitors search for payroll-related terms in our app and website, we have created a keyword map highlighting the most popular search queries.
Written by Ivana Radevska
Senior Content Writer at Shortlister
Sources
- Paycheck Protection Program (SBA)
- Employee Retention Credit (IRS)
- Deloitte Global Payroll Benchmarking Survey
- 25th Annual HR Systems Survey White Paper (Sapient Insights)
- The potential of payroll in 2024: A global payroll survey (ADP)
- Employee Benefits Report: Financial Wellness
- Forrester Study—Is Global Payroll Truly Global?
- 2024 Company Payroll Complexity Report (Alight)
Payroll Companies
Browse our curated list of vendors to find the best solution for your needs.
Stay Informed
Subscribe to our newsletter for the latest trends, expert tips, and workplace insights!
Share on facebook
Share on linkedin
Share on twitter
Related Posts
Best Paylocity Competitors & Alternatives in 2024
Paylocity has secured a spot as one of the top payroll providers thanks to its convenience and comprehensive features. However, as companies’ needs evolve, we explore Paylocity alternatives and competitors that stay current with these changes.
Employee Benefits Report: Payroll
From behind-the-scenes support to the forefront of strategic HR innovation, payroll systems are evolving into indispensable tools for transforming the employee experience and driving organizational success.
What’s a 147c Letter?
Explore the purpose and significance of a 147c letter, understand what it is, and when you should request one.