Bringing Outsourced Payroll In-House

Crucial Steps When Moving From an Outsourced to In-house Payroll System

The challenges of bringing payroll in-house for small and midsize businesses (SMB) that are currently outsourcing this function are many, but so are the benefits. To make the transition smoothly—and to achieve the savings that prompted the move in the first place—companies will need the full support of their payroll vendors, support that in the age of web-based technology solutions is not as forthcoming as it used to be.

Many small businesses initially outsourced their payroll operation for the sheer convenience of relying on a payroll specialist to get it done on time and done right. Not only are checks issued regularly, but the outsourcer can handle payroll taxes, SDI and SUI filing, W-2 and 1099 printing, W-2 electronic filing and more. Outsourcing this housekeeping chore allows nascent companies to focus on their core business, devoting staff and energy to innovation, bringing new products to market and servicing customers.

As the company matures, however, and management is able to step back and take a closer look at its expenses, the cost of outsourcing payroll may come under scrutiny. Despite the convenience, the fees associated with outsourcing are ongoing and often challenge cost containment efforts. As SMBs begin to consider other models, especially cloud payroll and integrated Human Capital Management (HCM) solutions, the outsourced payroll option with companies like ADP and Ceridian may lose some of its charm.

Still, the decision to bring payroll in-house is not an easy one. Not only must payroll software be evaluated and implemented, the company is going to have to hire expertise it doesn’t currently have on staff, especially if the outsourcing company handled a full range of payroll and HR functions. And then there’s the issue of the transition itself. Running payroll on a new system for the first time has the word "headache" written all over it.

Which brings us back to the issue of payroll software selection and vendor support.

Payroll Software Selection

Today the payroll software selection process has evolved from solely consisting of interaction with vendor representatives to vetting cloud payroll systems in online forums, social networks and trials available from payroll software vendor websites. The product demonstrations that used to be presented in your office by a vendor representative who was personally vested in the sale are now often served up on the vendor’s website via an interactive demo or webinar, especially in the early evaluation stages. You will usually hear from a vendor rep after viewing an online demo or signing up for the 30 day trial. This person will help you evaluate the system in terms of your company’s needs, and generally explain its operational and financial benefits. For hosted, modular-based solutions they will normally encourage you to start with payroll to solve your immediate problem and then grow into a full suite of HR integrated modules.

Vendor Support for the Payroll Transition

As you narrow down your choices to a few top contenders you will want to focus on customer service, especially during the transitional period when you are training staff to use the new software and most especially when you run payroll for the first few times. Ask about the level of expertise you will need in-house beyond just entering data into the system. Ask about the standard warranties the various vendors offer for the training and implementation process. If you are not confident that the support will be adequate, negotiate a service contract with a greater level of support, even specifying that a vendor support agent be in the office for the transition period, working hand in hand with your payroll employee.

Running Parallel Payroll

When transitioning payroll from an outsourced to an in-house system it is recommended that you run two sets of payroll for at least two cycles or until all the bugs have been worked out. This is called "parallel payroll", and form of parallel processing, and it is a standard practice when transitioning to a new mission critical system.

"It’s very wise to run a parallel system," says Jan Fretwell, HRIP, of Beachside Consulting Group, an HR consulting firm. "The outsourcer is running it and you're running it on a parallel set basis and you're comparing the results and reconciling any differences. You would continue to send checks out via the outsourcer and keep the results of the new system in-house." The number of cycles you would continue to run parallel payroll depends on the complexity of the system and how many modifications you have to make. Two complete cycles is the norm.

The question is whether you will have a vendor rep on site during this operation. Fretwell says that vendors do not always feel the need to be on site during the cut-over. With hosted or cloud payroll solutions, the vendor is maintaining the system anyway and may be able to provide adequate support from afar.

Cris Madden Elfine of HRMS Solutions, however, says that while implementation for companies with fewer than 50 employees is commonly done remotely, a company is perfectly justified in insisting that the vendor be on site for the running of the first payroll. "Yes, when you go 'live' for the first time, a vendor rep should be on site," she says. "If it is not included in the contract, you may have to pay expenses, but it is well worth the money to ensure a smooth transition." The consequences of payroll mistakes are extremely visible so up-front prevention is a sound investment.

The important point is to plan and address the issues of transition and support before signing a contract. Payroll is not an operation which you want to revert if things don't go well as personal and company credibility will most certainly be tarnished. For all of the employees of the company, no system is more important than the payroll system.