Initial Payroll Analysis for Potential Outsourcing Opportunities
Background
The HR staff, along with accounting and IT resources, support the payroll processing for
all US-based employees. This seemed to make sense since we could obtain economies of
scale by using the same processes and resources for all US payroll needs. In fact, when
we acquired companies in the past, they were converted to the centralized payroll with
the logical thought that it would be less expensive than their prior payroll processes.
As the US-based headcount has gotten smaller over the past few years, the organization is
now challenging whether we are, in fact, processing payroll at a cost that makes sense
compared with external solutions. Payroll costs that might have averaged closer to $6.00
per person per check when we were processing 3,000 employees, might now be costing
up to $10.00 per person per check now that we are processing closer to 1,400 employees.
The purpose of this analysis was to investigate the costs of providing internal payroll
services today, compared to what is available in the marketplace. As a precursor to this
analysis, a very high-level estimate was made on the cost of payroll processing. This
estimate provides the starting point for this further analysis. Our overall objectives for
this analysis were to.
1. Perform a more thorough analysis on the internal costs of payroll, so that we are
comparing a more accurate internal cost versus the cost of using outside providers.
2. Evaluate the service offerings of two national companies who compete in this space.
3. Determine the total costs for outsourcing payroll, given the residual resources we
would still need to provide for the total solution.
4. Make any recommendations for next steps.
Internal Cost Estimates – Initial Guess and Further Refined
A) The initial high level estimates that were gathered for payroll costs are as follows:
Group
HR (front end)
IT
Accounting
Grand Total
Costs per Check
Costs
Comments
$200,000 Three headcount plus minimal third party
$100,000 One headcount and no external costs
$125,000 Two headcount, plus misc third party costs for
check processing and mailing
$425,000
$12.65
1,400 people, 24 checks per year
B) After more detailed analysis and diligence, a truer picture of the internal payroll costs
emerges as follows.
Group
HR (front end)
IT
Accounting
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Costs
Comments
$135,000 Reduce to 2.00 FTE.
$75,000 Reduce to .75 FTE. We have discretion over some
of the work that we do to HR. We could cut our
personnel costs by .25 by keeping to the basics.
$90,000 Reduce to 1.5 FTE. We have some opportunity for
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efficiencies by automating the balancing and tax
reporting process, and restructuring who does
what.
Grand Total
Costs per Check
$300,000
$8.93
1,400 people, 24 checks per year
Payroll Outsourcing Option
We discussed our situation with two outsourcing vendors. These vendor have different
services and solutions they can provide, and different business models on how they
deliver the services to you. For the purposes of this analysis, we will take one estimate for
payroll outsourcing. We would still collect the timesheet information and pass a payroll
file to the payroll vendor. They would provide the following service:

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Payroll checks stuffed and ready to mail (we pay incremental for postage)
Direct deposit or manual checks
Bank reconciliation
New hire processing
Wage garnishment analysis and payment
Tax filing with all local, state and federal authorities
Year-end W2 generation
A backfeed of all the payroll information to interface to our general ledger
Standard payroll reports available on CD
The price for this service for 1,400 people ends up being $1.75 per check.
The Work that Would Remain and What Would Break
It would be very easy and very wrong to compare the $1.75 per check service against our
current $9.38 per check internal cost. The obvious reason is that the outsourced service
only solves a portion of the entire payroll process. Their solution still relies on us to send
a feed with the payroll information, and that still requires us to capture the time. HR
would still need to have resources on the front-end auditing the time entered (mostly nonexempt, paid overtime, shift and beeper pay). We would also receive a feed back from the
vendor with financial transactions and reporting. This requires the Accounting Group to
still post the information to the ledger, and make sure everything is in balance. There is
no question that the work on our end would be reduced, especially if the vendor did the
tax filing and balancing for us. However, as the next section shows, some residual costs
would remain.
The second, and not so obvious point to consider is how the rest of our systems would be
impacted if our HR system was not in place. In today’s environment, many systems are
integrated so that the system information is consistent and moved efficiently from system
to system. In this case, the HR system is used to feed an online data repository. This, in
turn, is an integral part of a number of applications, which would break if the repository
did not exist.
There are some outsourced processes that would ease the IT support costs. For instance,
the vendor could handle year-end W2s, which always require IT support help. However,
if we outsource the payroll function with as little disruption as possible to other existing
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applications, we would need to continue to run the HR system and the overall IT support
would see only marginal reduction, as noted in the following section. If we decide to
eliminate the HR system entirely, then the solution becomes more problematic in the
short term. We would need to see which applications and automated interfaces we want
to continue to run, and how they would get the appropriate data feeds they need. That
information is not clear at this point.
Estimated Costs With the Payroll Outsourced
If we outsource the basic payroll functions, but keep the current application landscape
intact, the costs would look more as follows.
Group
HR (front end)
IT
Accounting
Vendor Fee
Grand Total
Costs per Check
Costs
Comments
$100,000 Reduce to 1.50 FTE.
$50,000 Reduce to .50 FTE. Some work is no longer
required - no W2 processing, not as much support,
no check processing.
$45,000 Reduce to .75 FTE. Tax reporting goes away.
Bank reconciliation goes away. Remaining
balancing is a candidate for automation.
$58,800 1,400 * $1.75 * 24
$253,800
$7.55
1,400 people, 24 checks per year
Risks
The following risks have been surfaced by this analysis.

There is a risk of substantial short-term investment in new application programming
and testing. This cost is hard to estimate, but might be on the order of $50,000 in
internal labor. Once the interfaces are all rebuilt, they should be stable for the longterm.

Further reducing payroll resources leaves us more susceptible to a skills-gap exposure
if people leave in the future. In accounting, for instance, there are two people that
handle the payroll processing. If the headcount was reduced to one, we would be
totally exposed if that person left. The more likely scenario is to still have a primary
and backup person, with each working less than full-time. This mitigates much of this
risk, but will result in a larger residual headcount than what might otherwise be
necessary.
Recommendation
The purpose of this two-week analysis was to delve more deeply into the cost of payroll
and the potential outsourcing alternatives. We believe this information is accurate enough
to paint a picture of where we are and to make some basic conclusions and
recommendations. However, based on not wanting to raise panic from the specific people
involved, we are making some logical assumptions without every shred of evidence and a
totality of the facts. There may be other variations on these basic proposals as well.
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Based on our findings, we have the following recommendations for going forward.
1. All things being equal, there is not a compelling reason to make a radical change in
the way we process payroll today. There are potential incremental cost savings of
$9.38 per check to $7.55 per check, balanced by some fairly extensive short-term IT
costs to keep the entire environment stable.
2. On the other hand, this analysis has provided insight into two areas for further
efficiencies that must be pursued. First, there are some specific outsourcing options
that may well make sense, and would have compelling benefit on their own. For
instance, the vendor offers a standalone service to handle tax reporting, filing and
payment to every tax jurisdiction in the United States. They can provide this service
for perhaps $30,000 per year. This may be substantially more efficient that manually
processing these payments today. In another case, the vendor can handle all our yearend W2 process, which takes quite a bit of our focus for six to eight weeks. These
potential outsourced solutions should continue to be pursued, and could result in a
noticeable cost savings without breaking IT systems on the other side.
3. We should analyze the current manual processes and look for opportunities for further
automation. Reports that are balanced manually could be balanced automatically. Adhoc reports can be replaced with canned, parameter-drive procedures. Information
gathered from multiple sources can be brought together in the proper format
programmatically. A follow-up effort would include a more detailed analysis of the
work of the people involved to look for process efficiencies.
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