Outsourcing your payroll as part of your risk management strategy

By Peter Ibbotson, CEO, Praxima Africa Payroll Systems

In the last decade, the advantages of outsourcing a range of services to specialists – everything from IT to customer service, marketing, security, Human Resource (HR) services and more – have become clear. The recent economic downturn further bolstered outsourcing’s popularity,  as businesses felt the pressure to not only cut costs where they could, but also to keep – or gain – a competitive edge by putting increased focus on the improvement and innovation of core functions. However, outsourcing non-core functions offers more than the above benefits. It also forms part of an organisation’s risk management strategy. One such area where outsourcing significantly lowers risk is payroll.

Payroll is also often the most logical function to outsource due to the fact it is a specialised function, which is usually not one of the core competencies within an organisation. At the same time advances in technology, should the organisation choose the correct service provider, have meant that customised payroll services can be affordably outsourced no matter how complex the organisation’s requirements might be.

Payroll, often seen as a tedious, administrative headache, plays an integral part in the efficient running of an organisation – and contributes significantly to its risk profile.  It is not merely the possibility of human error that could put your organisation at risk- there are numerous payroll-related risks that must be considered, and mitigated.

Fast is fine, but accuracy and timing is everything

Accuracy and reliability are the most important aspects of payroll, a process that underpins the bond of trust between the employer and the employee.  It is vital that staff are paid the correct amount, at the right time – without fail.

Some organisations often cannot afford the services of a dedicated payroll administrator, often placing the responsibility in the hands of someone not specifically trained in the field of payroll. In the past, this has had to suffice, but the increasing complexity of tax legislation has given rise to an increased need for payroll to be handled by specialised staff. It is in these scenarios where reliability can also become an issue. If the employee who handles payroll is ill, absent or resigns unexpectedly, it is likely to impact the payroll process as well as risk to the organisation.

An additional worry for organisations operating their payroll in-house is the possibility of computer infrastructure downtime (can cause delays in the payroll process.  Organisations should have a disaster recovery process in place, which should include  offsite storage of backups and a “warm site”.

If the payroll solution falls short of being accurate and reliable, potential repercussions are the frustration and degeneration of morale that can be expected when staff are paid late or incorrectly; and substantial – even crippling – penalties as a result of late or incorrect tax submissions or non-compliance with important legislation. Even small glitches can lead to substantial problems.

Outsourcing the payroll function means that payroll specialists, highly familiar with the changing tax and labour legislation are responsible for the organisation’s payroll – at a more affordable rate than hiring in-house staff with similar experience and training would be. When payroll is handled by an outsourced vendor, a team of specialists is at hand should the dedicated resource be unavailable. Since payroll is handled by a third party off site, downtime within the organisation will not affect the payroll process. To ensure your payroll is in safe hands, one should look for a vendor with a disaster recovery process in place should their infrastructure be compromised.

Prevention is better than cure

Fraud is rife in many organisations, and it is staff within the payroll department of an organisation that stand the best chance of committing the fraud without being detected. It is easier to commit fraud within organisations where one person is solely responsible for the payroll process, as this person often handles both the accounting and payroll function, making it easier to cover their tracks.

In bigger organisations, collusion remains a risk, and larger, more complex payroll systems often make it easier for fraud to go unnoticed for longer periods of time. In these large organisations, where in-house systems are used, the age old trick of ‘ghost’ employees being created is often used to siphon money out of the business.

Aside from the potential financial losses, the discovery of fraud by an organisation and the subsequent processes that need to be followed in order to deal with the employee in question are lengthy, costing the HR department valuable time and money. Outsourcing the payroll process can mitigate the risk of fraud, as specialised providers are trained to implement the necessary technology checks and balances; are skilled in identifying irregularities and will provide transparency to the organisation in their workings.

Keeping it confidential

Payroll confidentiality is vital, and breaches can have disastrous effects on business. Payroll administrators have access to the company’s most sensitive information, and there are significant risks associated with this information being kept in-house.

Aside from breaches by employees handling payroll information, there is also the additional risk of data breaches caused by employees within the organisation gaining access to sensitive information via company intranets, email or computers.

To ease the worries of confidential payroll information falling into the wrong hands, it makes good sense to keep it outside of the organisation, with an outsourced payroll provider. If confidentiality is a top concern, it is advisable to choose a payroll service that offers additional data security – for example, the use of a password protected web portal to receive information rather than via email. This further wards off the possibility of confidentiality breaches through emails being hacked, intercepted or read by unauthorised persons.

Hassle-free scalability

Growth means change, and change means risk – even when it comes to an organisation’s payroll system. The expansion and growth of organisations means that a scalable payroll solution is needed. Often, mergers and acquisitions lead to the creation of disparate payroll systems. A decentralised payroll solution brings with it a host of risks – from governance issues to overall accountability.

Outsourced payroll solutions take the hassle out of the centralisation of payroll systems, as this process is managed by specialists who are well-trained in ensuring that changes to the organisational structure are executed smoothly.

Conclusion

The advantages of outsourcing payroll to improve an organisation’s risk profile are clear. It’s easy to see why payroll is one of the most matured outsourced industries, and why globally, the trend towards outsourcing the payroll function is on the upward spiral – in both large and small organisations.