Amid Complexity, SMBs Benefit From Outsourcing

Earlier this month, Paychex, which provides payroll, human resources and benefits outsourcing solutions, released a study that found a lot of owners are still tied up in the minutiae of back-office functions.

Of the 300 business owners surveyed, 56 percent are handling payroll on their own, 65 percent juggle HR admin and 59 percent oversee benefits administration. PYMNTS spoke with Andy Childs, vice president of Paychex’s marketing division, to get his insight on how those hours spent poring over the ledgers can be salvaged with the aid of technology.

PYMNTS: What are the common errors that take place when smaller companies keep their payroll in house?

AC: With small businesses, generally those with fewer than 20 employees, there are usually three ways they are going to be doing payroll, and that is software, manually or the third way is outsourcing. And with those first two, there is the higher level risk of errors. Especially in the case where they are doing it manually, there is the danger, and sometimes the reality, when executives are not calculating the payroll properly or the taxes properly. That comes from actual calculation errors or with misunderstanding some of the rules that are in place. Especially with some states, there are local issues tied to taxes and compliance, notably in states such as Pennsylvania and Ohio, where on the tax side there can be real complexity. In other places there are proposals that can change the way overtime is calculated and compensated.

The smallest companies, we find, are doing payroll manually with Excel spreadsheets or, in some cases, even a pad of paper. Those people who are using software may find that they are not taking into account the costs in terms of time or actual money it takes to maintain the software to run it or to upgrade it. So there are real costs not just with mistakes that can be made in the actual numbers but in productivity, too.

PYMNTS: What about paying employees on time? What are the most common points of friction that should and can be addressed by outsourcing in general?

AC: With small companies, of course, the most pressing issue is, “Will you get payroll done on time?” In some cases it may indeed be the head of the company, the owner, who is doing payroll. Or there may be one single person who is in charge of the data and its entry and when it gets done, and they may be the sole person in the company with the knowledge of how to do it — and then they get sick.

One of the key advantages of outsourcing payroll and other functions is that you as, say, a client of Paychex can do as much or as little as you want in automated form or that we take care of, which takes some of the management time away from routine tasks. You focus on the business, rather than the processes that are in the business.

One of the things we find with smaller business owners is that they may do certain functions manually because they have the mindset that by doing so, “Well, it’s free” and they do not have to pay. Yet, the question becomes what you do when you get a notice from the IRS that says you did something wrong? Now, you must either contest it or pay the fine, but either way you’ve got to spend time on the matter, at least investigating what’s at issue.

PYMNTS: What about the payments piece of automation?

AC: Well here, the benefits to the client that outsources with a company such as Paychex satisfy both the employer and the owner, and the key here, as we found in our study, is piece of mind. The movement is ever toward electronic payment, direct deposit into accounts, using ACH, which allows for reliable movement of funds. We do still have some clients who want paper checks, and, of course, we will do that, but there’s been a steady decline in demand there, and the vast majority is for electronic fund transfer.

On a separate note related to payments, within the past few years, we’ve been seeing increasing interest in electronic pay cards, which as an industry has been around for about 15 years. The traditional employee in this case has been unbanked or underbanked and thus not really candidates for direct deposit. The cards themselves have been a way for them to avoid high check cashing fees. But more recently, we’ve found that there is interest from employers and employees for these forms of payment, as it helps avoid interchange fees, and many of these cards have rewards programs.

PYMNTS: Are there any specific industries that are relatively quick to adopt outsourcing?

AC: As you start to go beyond that 20 employee threshold and get to 30 to 40 employees, you, of course, have a larger payroll. At this level we start to see more movement toward outsourcing. And there are a couple of industries where you start to see compliance issues, and some tax regulations come into play that add to complexity and then a desire to outsource.

In restaurants, for example, there’s the issue of accounting for tips. But regardless of the industry, our own systems ensure that matters such as insurance, state unemployment insurance, or overtime or even garnishment of wages are taken care of.

For other types of outsourced or automated administration on the benefits side, we see uptake in industries where there is a high value employee scenario, where there’s a significant level of benefits offered to and also expected by employees. That would be, for example, in technology firms or law firms — and in those cases, companies might be operating across multiple states. There’s also always the need to be tracking new hires, especially as organizations grow.

By outsourcing some functions such as retirement benefits, or a 401(k) plan administration or health care, a point of friction is removed, as employees know what they have and what they can expect. From the company perspective, the complexity, also a point of friction, is removed as you don’t have separate functions and people in those functions across payroll, HR and benefits administration.

PYMNTS: What should payroll execs take away from your study? What does it imply for innovation?

AC: The fact remains that there’s still a significant percentage of the smallest business owners (56 percent) still doing payments and other processes manually, and they should have access to best practices. Outsourced payments and other administrative functions ensure that people get paid even if there’s a power outage, if there’s a natural disaster or some other unforeseen event. That means, as we found, peace of mind.

From our side, in terms of innovation, we’ve spent the last few years rebuilding our technology and moving most payment functions to a single platform. Mobility is also becoming key for our clients and for their employees — to check the status of benefits and payments on a device wherever they may be — and this amounts to what can be thought of as a “self-service model.” We find there is also a movement toward satisfying simpler needs from the smaller business owners, who may just want a portal with which to interface and do a basic level of payroll processing but have a flexible solution that they can scale into later.