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Bloomberg BNAsGUIDE TO PAYROLL OUTSOURCINGMaximizing the AdvantagesAvoiding the Pitfalls>>>>>>>>>>>>>>>>>>>>>>>>>>>>>AGuide to Payroll Outsourcing:Maximizing the Advantages,Avoiding the Pitfalls201 The Bureau of National Affairs, Inc. Arlington, VirginiaGuide to Payroll OutsourcingISBN 978-1-61746-800-1This publication is designed to provide accurate and authoritative information in regard to thesubject matter covered. It is sold with the understanding that the publisher is not engaged inrendering legal, accounting or other professional service. If legal advice or other expert assistanceis required, the services of a competent professional person should be sought. From aDeclaration of Principles, jointly adopted by a Committee of the American Bar Association and aCommittee of Publishers and Associations.For inquiries about purchasing multiple copies of this report, pleasecontact:Matthew Sottong, Surveys Manager(msottong@bna.com)s Table of ContentsAbout the Authors ............................................................................................... viIntroduction ......................................................................................................... 1Figure 1. Where Does the Payroll Department Report?........................................ 4A Note About Terminology .................................................................................... 5Chapter 1: Payroll Outsourcing: An Overview ........................................................ 7Many Options Are Available .................................................................................. 10Figure 2. Outsourcing of Payroll Process, by Workforce Size................................ 11Menu Is Expanding .......................................................................................... 12Outsourcing Terminology: A Language of its Own .................................................. 13Vendor Market Expands to Small and Large Organizations .................................... 16Payroll Outsourcing A Growing Market ......................................................... 16Costs of Producing Payroll ............................................................................... 17Benchmark: Staff Efficiency ............................................................................. 17Figure 3. Payroll Staff Ratios, by Workforce Size................................................. 18Benchmark: Budgeted Staff Costs .................................................................... 18Figure 4. Payroll Cost Per Employee, by Workforce Size....................................... 19Benchmark: Cost per Paycheck ........................................................................ 19Drawing Conclusions ........................................................................................ 19Fees that Vendors Charge .................................................................................... 21Per-Paycheck Fees .......................................................................................... 21Discounted Fees .............................................................................................. 22Management Fee Plus Incentives ..................................................................... 22Chapter 2: Why Should an Organization Consider Outsourcing? ............................. 23Benefits of Payroll Outsourcing ............................................................................ 26Taking a Closer Look at Cost Reductions .......................................................... 27Figure 5. Payroll Cost Per Employee, by Workforce Size....................................... 282012 The Bureau of National Affairs, Inc. Arlington, Virginia iiiAccess to Expertise ........................................................................................ 29Flexibility ........................................................................................................ 29Downsides of Payroll Outsourcing ......................................................................... 31Higher Costs .................................................................................................... 31Loss of Control ................................................................................................ 32Database Not Linked ........................................................................................ 32No Opportunity to Develop Internal Payroll Expertise ........................................ 32Combining Alternatives ........................................................................................ 33Chapter 3: When to Outsource Payroll .................................................................. 35When Payroll Outsourcing Makes Sense ............................................................... 38Outsourcing to Address a Business Problem ..................................................... 39Outsourcing When Organizational Changes Occur ............................................. 39Outsourcing When External Conditions Dictate a Decision ................................ 40Chapter 4: How to Outsource ............................................................................... 41Step #1: Build the Team .................................................................................. 44Step #2: Determine Whether outsourcing Makes Sense for the Organi-zation ........................................................................................................... 45Step #3: Identify Possible Vendors ................................................................... 47Step #4: Create the Request for Proposal (RFP) Document ............................... 48Exhibit 1: Contents of a Request for Proposal.................................................... 49Step #5: Review Bids and Screen Candidates ................................................... 50Step #6: Select the Candidate or Candidates ................................................... 54Step #7: Negotiate the Contract ...................................................................... 55Step #8: Communicate the Change .................................................................. 59Why Do Some Outsourcing Relationships Fail? .................................................... 61Ten Factors That Result in a Poorly Performing Outsourcing Relationship ............. 62How to Remedy Poorly Functioning Outsourcing Relationships .............................. 64Vested Relationships: The Ideal Partnerships? ...................................................... 66Performance-Based Outsourcing Focuses on Eliminating Waste ............................ 68Making the Change to a Vested Relationship ........................................................ 69Guide to Payroll Outsourcingiv 2012 The Bureau of National Affairs, Inc. Arlington, VirginiaSingle Vendor vs. Multiple Vendors ....................................................................... 71Chapter 5: How to Evaluate the Vendors Performance .......................................... 73Evaluation Is Not Merely a Thumbs up or Thumbs Down Proposition ...................... 74Evaluation Is a Continuous Process .................................................................. 74The New Face of Outsourcing Evaluations ........................................................ 74The Evaluation Process .................................................................................... 75Computing Return on Investment ......................................................................... 76Exhibit 2: Metrics to Look at to Evaluate a Payroll Solutions Efficacy................... 76Figure 6. Comparing Payroll Solution Results to the Industry Mean...................... 77Figure 7. Level of Payroll Department Automation............................................... 78Figure 8. Payroll Department Automation, by FTE Payroll Staff............................. 78Keys to Success in Vendor Management .............................................................. 79Ensuring Legal Protection .................................................................................... 81Organizations Need to Manage Responsibility for Compliance ............................... 82Incidents of Employment Tax Fraud ...................................................................... 84Chapter 6: Best Practices and Case Studies ......................................................... 89Case Study: The Lorenzi Group ............................................................................. 91Case Study: Guiseppes Restaurant & Piano Bar ................................................... 94Case Study: The Childrens Home Society of New Jersey ....................................... 96Case Study: Microsoft ......................................................................................... 98Conclusion .......................................................................................................... 105Resources ........................................................................................................... 109Appendices .......................................................................................................... 115Appendix A: Sample Outsourcing Contract #1 ....................................................... 117Appendix B: Sample Outsourcing Contract #2 ...................................................... 124Appendix C: List of Payroll Outsource Vendors ...................................................... 128Appendix D: Futrell v. Payday California, Inc........................................................... 1382012 The Bureau of National Affairs, Inc. Arlington, Virginia vs AuthorsMatthew R. SottongDirector of Surveys and Research ReportsHanna PillionSurvey Research AnalystJoyce Ann GrableConsulting EditorElaine StattlerConsulting EditorThe authors would like to thank Carla Wheeler and Fonda Jarrett of BloombergBNA for their diligent, conscientious, and professional work in designing andlaying out this report.Guide to Payroll Outsourcingvi 2012 The Bureau of National Affairs, Inc. Arlington, VirginiaIntroductionIntroductionAThe practice of outsourcing the payroll function has grown in recent years, both interms of the usersthe number of organizations that are choosing to outsourcepayrolland the suppliersvendors that have entered the market and areoffering services.Since cost reduction has become a major concern for organizations, there isincreased focus on outsourcing single processes as well as enhancing existingoutsourcing functions. The global human resource outsourcing market, of whichpayroll outsourcing is a major part, is expected to grow to $162 billion worldwideby 2015, according to the website Seeking Alpha (seekingalpha.com).As it pertains to outsourcing the payroll function, the cost of administering payrollin-house, compared to outsourcing, is often the primary consideration. Researchby PriceWaterhouseCoopers, The Hidden Reality of Payroll & HRAdministration Costs, conducted in 2011 in conjunction with ADP, analyzed thecosts associated with payroll and HR administration when done in-house, ascompared to when outsourced. According to the study, organizations that retainpayroll, workforce administration, time and attendance, and benefitsadministration in-house, spend on average 18 percent more than organizationsthat are outsourcing.In addition, larger organizations spend 27 percent more than smaller sizedorganizations, and organizations using software vendors spend 32 percent morethan those that use web-based solutions. The report reveals that despitesignificant technological advances in payroll administration software, the costs forpayroll administration continue to increase.According to a study by Bloomberg BNA, 64 percent of organizations locate thepayroll department within finance/accounting, 25 percent of organizations place itin human resources, 7.5 percent of organizations put it in shared services, and 4.5percent of organizations choose some other department (see the chart below).Introduction2012 The Bureau of National Affairs, Inc. Arlington, Virginia 3The Society for Human Resource Management (SHRM) posits that where payrollresides within an organization may have some bearing on the likelihood of it beingoutsourced. If payroll is in human resources, outsourcing may be more likelybecause human resource departments use outsourcing more commonly than otherdepartments. If payroll is in finance/accounting, on the other hand, outsourcingmay be less likely because those areas traditionally use outsourcing less oftenthan human resources.Also of note is the manner in which payroll tasks are outsourced. For example,the American Payroll Association found, in a recent survey, that the later the taskfalls in a payroll cycle, the more likely it is to be outsourced.While organizations vary greatly in how they generate paychecks, all must do soon time and in compliance with the law.Its important to understand that while outsourcing can be defined as any workdone by someone other than the organizations employees, freelancers,independent contractors, and subcontractors are not necessarily outsourcingvendors.Typically, outsourcing involves a more substantial commitment of resources thanthe use of individual contractors. Independent contractors are generally asked totake on tasks that are project based, with a well defined beginning and end.Arrangements are usually short term, and are easily terminated. By contrast,outsourcing generally refers to a strategic partnership between an organizationand a vendor and requires that the organization make a long term decision toFigure 1Where Does the Payroll Department Report?63%25%7.5%4.5%Accounting/FinanceHuman ResourcesShared Services CenterOtherSource: Bloomberg BNAs Payroll Benchmarks and Analysis 2011 A BNA Graphic/pocc1001Guide to Payroll Outsourcing4 2012 The Bureau of National Affairs, Inc. Arlington, Virginiadivest itself of large, often unwieldy business functions. Functions that have beenoutsourced are often unwieldy or expensive to bring back in-house, soarrangements with the provider are necessarily more long term.Organizations began outsourcing as a means for offloading one or more businessprocesses to a third-party to reduce costs or to gain efficiencies. As the practice ofmoving to outsourcing spread, so too did the scope of activities that were beingoutsourced.Today, almost every business responsibilitycustomer service, logistics,information technology support, finance and accounting, editorial services,research and development, and legal services, to name but a fewis capable ofbeing outsourced in one form or another.As a 2011 Bloomberg BNA survey reveals, almost half of US businesses haveengaged in some form of payroll outsourcing.A Note About Terminology: A number of terms are used to describe those thathire outsourcing services and those that provide them. For example, those thatacquire outsourcing services are often called employers, companies,businesses, and clients, among other terms. In this book, they will be calledorganizations. This is an all-inclusive term that encompasses all forms ofpublic and private corporations, partnerships, governmental entities, andnot-for-profits.In addition, the providers of outsourcing services have been called serviceproviders, vendors, solution providers, or outsourcers, among other terms.Throughout this book, they will be referred to primarily as vendors oroutsource vendors, to eliminate any possible confusion.Introduction2012 The Bureau of National Affairs, Inc. Arlington, Virginia 5About Bloomberg BNABloomberg BNA delivers specialized information to human resources, legal, business, and government professionals at every level of expertise. As the leading independent publisher of print and electronic news, analysis, and reference products, Bloomberg BNA has provided intensive coverage of new developments for more than 75 years.An extensive network of more than 500 Bloomberg BNA editors, reporters, and correspondents, posted at federal, state and international government offices, courts and other key locations, ensures that you have timely information and expert analysis of the issues that matter most. Our authoritative, nonpartisan publications are recognized for their editorial excellence and objectivity.See why Bloomberg BNAs fast, reliable HR answers make us the most trusted information leader in the industry. Visit www.bna.com/HR to learn more.1801 S. Bell Street Arlington, VA 22202800.372.1033bna.com 2013 THE BUREAU OF NATIONAL AFFAIRS, INC.PayrollOutsourcing_2013_entire_book.pdfipp_front_2012_ipar_01.pdfSummaryipp_user1_2012_ipar_01.pdfIntroductionIntroductionipp_chapter1_2012_ipar_01.pdfChapter 1: Payroll Outsourcing: An OverviewChapter 1:Payroll Outsourcing: An OverviewMany Options Are AvailableOutsourcing Terminology: A Language of its OwnVendor Market Expands to Small and Large OrganizationsFees that Vendors Chargeipp_chapter2_2012_ipar_01.pdfChapter 2: Why Should an Organization Consider OutsourcingChapter 2:Why Should an OrganizationConsider Outsourcing?Benefits of Payroll OutsourcingDownsides of Payroll OutsourcingCombining Alternativesipp_chapter3_2012_ipar_01.pdfChapter 3: When to Outsource PayrollChapter 3:When to Outsource PayrollWhen Payroll Outsourcing Makes Senseipp_chapter4_2012_ipar_01.pdfChapter 4: How to OutsourceChapter 4:How to OutsourceThe Payroll Outsourcing Decision Making Process Why Do Some Outsourcing Relationships Fail?Ten Factors That Result in a Poorly Performing Outsourcing RelationshipHow to Remedy Poorly Functioning Outsourcing RelationshipsVested Relationships: The Ideal Partnerships?Performance-Based Outsourcing Focuses on Eliminating WasteMaking the Change to a Vested RelationshipSingle Vendor vs. Multiple Vendorsipp_chapter5_2012_ipar_01.pdfChapter 5: How to Evaluate the Vendor's PerformanceChapter 5:How to Evaluate a Vendors PerformanceEvaluation Is Not Merely a Thumbs up or Thumbs Down PropositionComputing Return on InvestmentKeys to Success in Vendor ManagementEnsuring Legal ProtectionOrganizations Need to Manage Responsibility for ComplianceIncidents of Employment Tax Fraudipp_chapter6_2012_ipar_01.pdfChapter 6: Best Practices and Case StudiesChapter 6:Best Practices and Case StudiesCase Study: The Lorenzi Group LLCCase Study: Guiseppes Restaurant & Piano BarCase Study: The Childrens Home Society of New JerseyCase Study: Microsoftipp_user4_2012_ipar_01.pdfConclusionConclusionipp_user2_2012_ipar_01.pdfResourcesResourcesipp_appendix_2012_ipar_01.pdfAppendixAppendicesAppendix A: Sample Outsourcing ContractAppendix B: Sample Outsourcing ContractAppendix C: List of Payroll Outsource VendorsAppendix D: Class Action Suit Against a Payroll Company