Payroll Services
Published November 10th, 2016 by

Risks and Pitfalls You Should Avoid When Outsourcing Payroll

Risks and Pitfalls You Should Avoid When Outsourcing Payroll

Outsourcing solutions lift the burdensome work of some of the tasks involved in business operations by taking on the full responsibility of utilizing their own resources, expertise and people to produce the desired outputs of their client businesses. Now that more activities occupy employees right now, outsourcing becomes a way to support them with their time management.

One of the first reasons why businesses resort to outsourcing is when they were faced with temporary, but crucial projects. It may be for implementing a new accounting system, an office renovation, adopting a new internet network provider, or for conducting massive hiring of new employees. Regardless of reasons, when the contract lapses and outputs are delivered, the business resumes its normal operations.

Today, outsourcing no longer just spans to temporary endeavors, but also to some of the important day to day tasks within a business operation. Work in certain departments like HR, accounting and payroll can be tedious, but are considered non-core tasks (without the direct influence of profit-earning activities like marketing, research and development and sales). Despite of it being a non-core task, the work involved in such departments is important and crucial to run the company and its employees well. In most cases, outsourcing becomes a solution when there is a need to cut costs, save time, or simply to make those departments more efficient in producing their outputs.

Why Outsource?

Many businesses nowadays expand the idea of delegation into a wider perspective by outsourcing. According to Deliotte’s 2016 Global Outsourcing Survey, 35 percent of those businesses that responded mentioned that they value innovation by measuring the effectiveness of their outsourced functions. And some of the key factors in this growing trend are:

  1. The lack of expert manpower for a particular position, or to handle a certain business process.
  2. More cost effective than hiring and sustaining an in-house team.
  3. Focused and expertise towards a specific department or set process.
  4. The availability of cheaper labor without compromising quality for some countries, making global outsourcing a viable option.

Some of the tasks that businesses usually outsource include IT services like mobile app development and web design and development, project management, and payroll processing and management.

Prior to outsourcing any task or department work, it is essential to know its advantages and disadvantages. It is also crucial to look for the right service provider, to maximize the benefits and lessen the risks and pitfalls you might encounter.

Challenges in Payroll Management

Greater control meant bigger responsibilities. Driving sales and keeping up with the ever-changing market trends already take up much of a company’s time and resources that somehow, along the way, some of its other aspects may be given less priority. Ensuring that work processes from front to back end are streamlined and properly managed is another story, but the former situation is already burdensome to carry for some.

Perhaps, one of those tasks that businesses would want to find some relief in, is payroll management. Why outsource payroll services? It requires tedious work of continuously keeping track of each employee’s time and calculates the right wages, applicable deductions and additional benefits at the end of each period. Add to the trouble are the complexities of tax filing, IRS compliance and additional variables of securing health care or retirement savings plans. When it happens that you didn’t hire the right people to do these jobs, chances are, it will spell a disaster; which meant higher penalties, and can cost you your company’s reputation.

With these challenges in mind, some businesses resort to payroll agencies. Many companies have attested to significant time and cost savings they experienced from outsourcing. Some have affirmed a more seamless workflow when it comes to processing and crediting employee salaries. While it earns the accuracy, convenience and accountability that businesses need for their payroll, it is not without risks and pitfalls that you must be wary of.

Risks in Outsourcing Payroll

Payroll and other business aspects that are most likely to be outsourced have more or less the same risks involved. Larger businesses that deploy employees in various states or countries tend to outsource offshore, which may pose a greater risk involving worldwide economic trade concerns such as fluctuating currency exchange rates. Tax standards and requirements for some countries may be stricter to comply with, which may affect the efficiency of payroll crediting and the accuracy of payroll remittance. Other considerations may be hard to anticipate, and strategies are a must to deploy when dealing with this kind of outsourcing situations.

Activities affecting employee-business relationships, which include HR and payroll, are one of the riskiest types of outsourcing services. Outsourcing your recruitment may affect the quality of your hires if you weren’t able to relay your actual expectations. Personal judgments may also affect it further. Outsourcing customer support may pose issues from language differences, especially when you outsource it on another country.

Exposing your employees’ personal information to third party service providers may also bring up trust issues. More so, to an extent, it may also cause legal disputes arising from data breaches and identity theft from confidential information like identification cards and financial accounts.

To summarize, the risks can be categorized into four categories:

  1. Loss of control

Generally, exposing and delegating confidential company information to third-party service providers increases your risk of losing full control over the processes associated with it. Not only the access is compromised, but potential misuse is also at stake here, wherein consequences are more severe to handle.

Losing control also applies to quality and schedule as well. When you outsource, it would be harder to mitigate anymore because you basically handled all the processes to the provider. The harm is done, as the old adage says. This degree of dependency can only reap benefits if you chose a reliable partner, but we cannot stop unforeseen circumstances to affect the processes somehow.

When the payroll processing firm is outsourced offshore, the riskier the outsourcing services gets. Some resort to offshore outsourcing for a plenty of reasons, but the risks are greater and must be dealt alongside the benefits. Some of the compromises here are coordination and communication, which may be more affected when there are language differences and even time zones.

  1. Loss of innovation

Strong dependency on external service provision loses your business’ ability to innovate, thus sacrificing the quality you want to get out of your outputs. Since there is minimal monitoring and supervision required, most likely you won’t get into a more intimate interaction with your employees, which may affect long-term relationship, increasing employee turnovers.

At the expense of cost cutting, flexibility, scalability and management ease, you sacrifice stronger relationships to be established which can be achieved through adversaries and collaborative working relationships. This can influence your company’s corporate culture, especially when there is a prolonged adoption of outsourcing conveniences.

  1. Loss of trust

Outsourcing may have direct and personal effects to employees in ways that are hard to quantify, and there are many executive-level decisions that you cannot just simply disclose to them to prove a point. Rumors may easily circulate within offices, and such company moves may disrupt the cooperative environment that your employees must have established beforehand. It can also confuse them about where the real authority lies, especially when you have given some sort of decision-making powers to your outsourcing service provider.

Aside from corporate implications, payroll outsourcing exposes your employees’ confidential information to higher risk of fraud and identity theft. Knowing that there are more people, however professional they may be, know your salary, taxes and benefits may affect an employee somehow. And in knowing that the company is risking data at the expense of savings and convenience may cause them to be demoralized as their welfare is not one of the priorities.

  1. Unanticipated costs

Costs and estimates regarding services can be quite tricky, especially on the aspect of time, hassles, and uncontrollable aspects that cannot be easily identified nor quantified. Payroll companies may ask you flat charges for some agreements, but when it comes to prolonged exposure to its risks may incur unanticipated costs to cover up lapses or misgivings.


Having less control on the payroll task itself, doesn’t necessarily mean you can forego of your responsibilities over your employees. You still have to stay on top of everything that is associated with how you run your operations, administration and management in the business, and in ensuring that the company’s best interest is on the top most priority.

With any company’s decision comes with risks and compromises, since it concerns many aspects like employees, finances, the market, etc. When it comes to outsourcing, it is critical to have a multi-faceted perspective when it comes to its long-term effects over your employees and your corporate values and culture as an organization. The benefits are real, and many businesses could attest to its effectiveness in many aspects. In fact, according to the 2015-16 European IT Outsourcing Study Results conducted by Whitelane Research, 89 percent of clients are actually satisfied with the results of their outsourcing contracts. But to maximize it, you must deal with the right service provider in the first place.

The market is robust with vendors of similar offerings, products and services to boot. A wise customer is an informed one, so make sure that you conduct careful research and comparisons of different payroll processing services available. Dealing with something so critical for your business, despite of being a non-core task, should be given the appropriate attention to arrive at the best possible solution that can help your business grow, not hinder it.

Want to know more about how the top payroll processing services caters to businesses? Check out and read on a number of payroll processing service reviews to help you decide which the right payroll service provider for you is.

Jeev Trika

Jeev is an executive leader with successful experience building research portals which recommend the best products and services in various highly competitive verticals.

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