Payroll Insourcing vs. Outsourcing: Which Is Best for Your Business?

In the early 1970s, when the first outsourced payroll companies were formed, the debate immediately commenced evaluating whether outsourcing payroll was better than insourcing (running the payroll in-house).

This debate has continued and even escalated since those early days with a plethora of articles having been written promoting either option. When Googling “payroll outsourcing versus insourcing”, there are 58,000 results and the debate has not been settled. Why?

There is no generic correct answer and/or better option

it depends on the company, their specific needs, unique requirements, geographic location and distinctive circumstances

One could argue that outsourcing is relatively inflexible. A counterargument is that in-house personnel often lack compliance experience in complex jurisdictions like Africa. Arguments and counterarguments can be made ad infinitum.

The Goldman Sachs study for the American Payroll Association found that the prevalence of outsourcing decreases as the number of employees increases – refer to the chart below. Larger companies can afford to spend significant sums on payroll systems. Whether cost savings or increased efficiency is obtained is debatable. However, in the in/outsourcing argument this inverse correlation appears to be the only quantifiable fact.

Axiomatic Consultants currently provides insourcing and outsourcing options to clients in 44 African countries, so we understand this debate. Further, one would expect this article to vehemently promote the superiority of outsourcing. However, we firmly believe there is no better or worse option. The question to be asked and evaluated by each company is- what is best for my company?

Instead of adopting the route followed slavishly by many of the 58,000 articles which list advantages and disadvantages, we have elected to opt for a simplistic approach and pose the question – why would one model be better than the other from a simple logic basis?

Outsourcing companies use economies of scale across multiple clients to achieve what a corporate payroll would refer to as a centre of excellence. Economies of scale facilitate investment in superior technology, consulting, compliance, tax expertise, processes, administration and most importantly, human capital. The economies of scale achieved by payroll outsourcing vendors are logical. It is equally logical that large companies can also achieve similar economies of scale which facilitates the insourcing of large payrolls.

To achieve the holy grail of economies of scale, outsourcing providers force their clients to adopt their practices and procedures. A company with an insourced payroll can completely customise the process, procedures and technology to achieve what works for them. Critically though, customisation comes with additional costs which may destroy any ROI. As such, larger companies can achieve ROI with significant investment; it is the smaller companies who typically struggle with the debate.

Commonly used methodologies by Axiomatic.

Outsourcing: A full end-to-end service offering where both the technology and administration services can be provided to complete the payroll function across 44 African countries. At Axiomatic, we believe in continuous improvement, embracing technology, employing integrations and AI while simultaneously attempting to provide clients with as much flexibility as possible. Further, we manage our client’s good governance in Africa and mitigate any damage to reputational risk.

Insourcing: A service offering where the technology is provided across the 44 African countries we service. This is backed up by best-in-class support to our clients to ensure they have a trusted partner with an extensive and superior pool of resources.

Hybrid Model: This model provides the company with flexibility- we do not believe that every time a company changes their payroll model/ platform it should have to repay for the set-up. The salient advantage of this model is that with the flick of a switch, the client can change from insourcing to outsourcing and visa versa. Our experience has shown that enhanced efficiency is obtained where a hybrid model is employed by a company – some payrolls are insourced, while others are outsourced but where all payrolls use a common true cloud-based technology platform.

This enables common reporting in a base currency. Most importantly, if the company experiences problems with an insourced payroll for a myriad of reasons, that payroll can immediately be “transferred” to an outsourcing model. This also furnishes the company with an insurance policy against key man risk- Axiomatic provides a parachute in case the payroll manager and/or staff resign.

To reiterate – this arrangement is almost like having a free insurance policy, a free put option or a golden parachute which leads to a seamless transition between the two models ensuring that employees do not experience any delays to their pay.

The success of the hybrid model is attributable to flexibility

Payroll, like any other process, is simple:

Input – Process – Output

Input – Most systems and providers are working with integrations and/or AI to minimise manual processes in the collection of Input. Axiomatic via our innovation called AxioOnline, aims to not only provide greater flexibility in the collection of input methods from the client but also to automate validations to ensure the accuracy of the source data.

Process – Payroll systems are embroiled in a race to achieve better automation and speed of processing. Many vendors are claiming AI automated checking will replace payroll managers in the immediate future.

We estimate that our AxioOnline system, in conjunction with integration, will decrease administration processing by 90%.

Output – Payroll systems have made tremendous strides with reporting. The emergence of BI tools, coupled with APIs, has enhanced reporting to unprecedented levels. A word of caution- before embarking on these projects scrutinise the costs to determine if they do provide an ROI.

Will continued technological advances spell the death knell of outsourced service providers? Cognisance must be taken of the following:

No matter how sophisticated automated checking processes become, you will still need highly experienced professionals to support this process.
No matter how good automated input and processing systems get, you will still need highly experienced professional to back this process up.
No matter how hi-tech payroll systems get, you will still need highly experienced professional to back this process up.

Systems enable compliance and, accuracy and the on-time nature of payroll they do not ensure it.

We posed the question at the beginning of this article- which is better – insourcing or outsourcing? The unfortunate conclusion is it depends.

Your Payroll, Your Way Why settle for a one-size-fits-all solution? Axiomatic offers customized payroll services designed to fit your business. Get in touch today to find out more!

Services

Payroll

Benefits

Reward

Payroll Insourcing vs. Outsourcing: Which Is Best for Your Business?

There is no generic correct answer and/or better option

Services

Need Any Consultations

Quick Links

Corporate Governance

Our Location

Subscribe Our Newsletter

COOKIE POLICY

Welcome to our website.

1. Introduction

2. What Are Cookies

3. How We Use Cookies

4. Your Cookie Choices

5. Third-Party Cookies

6. Updates to This Policy

7. Contact Us