Payroll Back In-House

Small companies moving away from outsourcing; new tools help save money, offer control, flexibility.

For years, few other business processes were outsourced with as much verve as the lowly task of payroll. Indeed, the function of paying employees has long been targeted as a time-consuming effort that robs a company of resources better committed to core competencies. Payroll was outsourcings poster child.

But as software tools become easier to use and vendors start to focus on smaller businesses, a shift is taking place. Enterprises are finding that payroll, the process that gave birth to BPO (business process outsourcing), can often be done better—with more flexibility and less expense—in-house.

The growing change is taking some users away from outsourced payroll stalwarts such as Automatic Data Processing Inc., of Roseland, N.J., and Ceridian Corp., of Minneapolis, with claims that the big players just cant—or wont—serve the specialized needs of small and midsize businesses.

"Cost was a big issue, but the bigger issue was we had no control over the payroll, and [difficulty] making changes," said Kathy Broker, grants/ fiscal manager for the March of Dimes California Birth Defects Monitoring Program, in Davis, Calif.

Broker, after working with ADP for 12 years, this year switched to in-house payroll processing to lower costs and improve the quality of the work. She said she expects to save the program $3,000 a year in fees. "Their fees were extremely high," she said.

"Our payroll costs were spiraling," echoed Kevin McLeod, chief financial officer at Carolina Meadows Inc., a continuing care retirement community in Chapel Hill, N.C. McLeod, a certified public accountant, said he and other CPAs are championing the trend of bringing payroll back in-house after recent price increases among major outsourcers, including two hikes by ADP within 18 months.

By taking back their payroll processing and implementing Best Software Inc.s Abra Suite Human Resources Information System, Carolina Meadows has saved 87 percent—or $40,000—on its payroll processing costs in the past year, according to McLeod.

Best Softwares easier-to-use tools and an improvement in the breadth of functions available for small businesses made the switch possible, he said. "The bulk of the work is setting up your rules and tables. Once thats done, you run test payrolls, change what needs to be changed and youre set," McLeod said.

"Regardless of whether the technology is easier to use, [small companies] are probably being engaged in the discussion much more often because the scope of HR applications for the smaller organization is greatly expanded," said Kirsten Recknagel, an analyst at Gartner Inc., in Stamford, Conn.

Ultimate Software Group Inc., of Weston, Fla., maker of the HR and payroll suite UltiPro, has customers including the Arizona Diamondbacks baseball team and Benihana Inc. restaurants but has recently begun focusing on midtier companies as well.

For the Allen Samuels Auto Group, a collection of car dealerships based in Houston, adopting UltiPro resulted in an 85 percent decrease in payroll processing time. The tools allow Allen Samuels to keep payroll in-house, yet still concentrate on more strategic endeavors, according to Gail Hegar, HR and payroll administrator for Allen Samuels.

For any type of processing, "the more uniqueness there is, the less value an outsourced solution will deliver," said Lisa Stone, also an analyst at Gartner.

"ADP, Ceridian—those types of companies have a set way of doing things, and they have proprietary programming," said Carolina Meadows McLeod. That typically leaves smaller organizations—especially those with unique requirements—out of the equation.

"If you have specialty items, it makes sense to do it in-house," McLeod said. The labor-intensive nature of senior housing requires that Carolina Meadows closely monitor its costs and use a variety of such "specialty items."

Such items can create errors in the process, which arent caught with an outsourcer until after an employee receives his or her check, according to the March of Dimes Broker. "There were always a couple of things every month with ADP. We have cafeteria plans; we do a cost allocation where [employee accounts] are broken down into [separate] funds—it was complicated. We were told they could handle these options," she said.

"Certainly, every company is different," said Ceridian spokeswoman Candy Patrin. "We have found that ... offering a bundled HR solution that realizes the benefits of integrated data will result in savings in data entry time and report writing. Ceridian also takes on the burden of compliance for our customers."

In addition to the inflexibility, small organizations often get less attention from outsourcers than larger accounts do. "They did admit to us that were a very small account, so we were not a priority for them," said Broker. "When you are paying for something, you feel you should get some level of service. But they couldnt generate reports that met our needs. We were always dealing with customer service, and they didnt have knowledgeable people in those positions ... and it did cost us more."

Broker, who also chose Best Softwares Abra products, said she believes any small company with fewer than 250 employees can benefit from keeping payroll in-house, but finding the appropriate cutoff is up to the organization.