Outsourcing Payroll in 5 Steps


Considering outsourcing as a mere cost reduction operation is a mistake.  The decision to outsource should be addressed at a strategic level.  Before outsourcing the company must identify its business functions and separate them between strategic and non- strategic activities.  If the function under study is not considered a core- activity then the chances are that the company will benefit by outsourcing it.

As analyst Tom Osmond remarked in Employee Benefit News, “many companies have decided that transactional and administrative functions are neither core competencies nor value- added activities.” He also pointed out that some companies are using outdated technology and not complying with government regulations and a result are putting their business at risk. By using specialist service- providers this element of risk would be eliminated.

Payroll is usually considered as a non-core activity.   However, the decision to outsource and how to do it must not be taken lightly.  Payroll is central to the relationship between companies and employees. Paying company employees accurately and on time is crucial to maintain a stable working environment.

You can compare outsourcing Payroll to a journey.  You must have the starting point and the destination clear in mind. Without the adequate preparation you might be in for a bumpy ride. Here is a 5 step guide to help you arrive to your destination smoothly.

Step 1:  Preparing for the Change

  At this preparation stage you will have to:

  • Assess the current situation
  • Target the ideal situation
  • Decide to implement

Assess the Current Situation

Make a list of the current practices, processes and people in place in your company.  Then you will have to decide how much of the payroll function you want to outsource.  What expertise do you have in-house and how much of it do you want to retain?  You will also have to consider the degree of direct control you wish to maintain.  This is also the best time to consider the cost element of outsourcing.  Consider both visible and invisible costs.  For example, IT maintenance costs and License fees should also be considered in addition to the time spent by the HR staff inputting and managing the Payroll.

Target the Ideal Situation

After having assessed the current situation it is time to anticipate the changes that will take the payroll function to the desired situation.  Staff that has been freed of the time -consuming payroll can now be allocated to new projects.  Processes have now been removed creating a leaner business that can now employ its resources to activities which are more profitable.  However, some people such as Payroll Managers may be in charge of tasks that are not being outsourced.  In this case, continuity must be ensured.

Decide to Implement

Now is the time to have the set objectives validated internally.  Identify any internal resistance and ensure that the company obtains the adequate resources to implement the outsourcing plan.

Step 2: Choosing a Supplier

 Your next step is to choose a supplier who can deliver the service that you need.

Here’s a list of what to look for when making your choice:

  • Ability to help to prepare decision- making
  • Track record and proven expertise.
  • Related references
  • Proven ability to provide economies of scale
  • Latest technology which is up to date with current wages and tax legislation
  • Related potential savings
  • A clear contractual framework
  • Fees Charged
  • Training and support

Step 3: Negotiating the Contract

The contract lays the foundation of both parties’ commitment for the medium to long-term future.  It translates the outsourcing plan into tangible commitments.

At the contract stage you must:

  • Aim for a win-win situation where both parties will benefit
  • Ensure to provide enough flexibility to adapt to changing business conditions.

Step 4: Provide the Data

 It is crucial that the payroll provider is able to ensure that confidential information is safeguarded at the data transmission stage and all throughout the payroll process.  Usually a confidentiality clause is also included in the contract.

Step 5: Manage the Relationship with the Service Provider

Although Payroll is not a core activity it is still critical to the company.  Therefore, managing the relationship with your supplier is strategic.
Accounting-Services-Marika-TaboneFor a successful long-term service, the client and the service provider must agree on:

  • Good Governance – Designate a key person to liaise on matters relating to Payroll;
  • Monitor performance – Regular performance reviews are recommended monthly during implementation stage and every quarter subsequently.


Marika Tabone qualified in  BCOM Management with Honors from the University of Malta is a member of the Accounting and Payroll Department at CSB Group.