Outsource Payroll?

Why Outsource Payroll?

Whether or not you choose a PEO or payroll service provider, it rarely makes sense to keep payroll in house.  Payroll is a necessary function of employing people, but it does not help create revenue or increase sales.  Simply put, payroll is a drain on most employers' resources because it is a non revenue generating process.

The most common argument I've heard for keeping payroll in house usually center around control.  Control of the check timing, the tax payments, etc.  This argument is counter productive to the better kind of control- control over marketing and growth.  The fact is that most employers who actually do outsource payroll are relieved to have it off their desk or the desk of someone else in their office.

It should not surprise anyone reading this, but most employees would rather do anything else than focus on bottom line activities such as sales, collections, marketing, etc.  The more functions they can find to avoid the more challenging tasks the better.   Revenue generating functions take energy and can create confrontation or rejection.  So employees find other tasks to avoid the ones that matter most.  The simple solutions for employers is to remove as many of these avoidance functions as possible.

The age old adage applies here.  Would you rather save a dime or make a buck?  If you would prefer to arguably save a small amount of money by holding onto to payroll in house than outsourcing is likely not for you.  Conversely, if you recognize the value of your time or your employees' time and the opportunity costs associated with holding on to non revenue generating employer related activities, than outsourcing should be the only solution that makes good sense.

The Evolution of Payroll Service Bureaus

Payroll only providers used to be considered a bland commodity, they all pretty much did the same thing- basic payroll processing and tax management.  As PEOs increased the competitive playing field and technology made it easier to offer new services such as benefits and insurance, payroll companies began providing more value adding solutions to their programs.

Today it can be difficult to spot the difference between payroll companies, ASOs, HROs, and PEOs.  Many of them can operate in multiple environments depending on what a customer wants or needs.  It is, however, worth mentioning that a PEO relationship is the only co-employment relationship that can provide some of the solutions to unique employer problems I discussed in the section on when PEOs can be the right fit. 

The fact is that PEOs typically have a higher administration fee than other payroll service organizations.  That said, their administration fees may be offset if they can reduce costs in other areas of operating costs such as workers compensation, benefits, HR, or unemployment tax.

Comparing PEO vs. Payroll Costs

The way to determine which type of relationship makes the most sense for your business is to net out all of the expenses associated with a few qualified PEOs and payroll providers and then compare them to you current employer costs or estimated costs.

Here is a brief example of employer related costs for a typical service business:

Our agency owns and operates our own payroll company and insurance brokerage and often integrate many of the same programs as PEOs including Pay As You Go Workers Compensation, General Liability, Benefits, and HR tools.  Our preference is to help our customers understand all available options including PEO, ASO, payroll outsourcing, and standard insurance options.  We do not operate our own PEO Program.

           |        |