Payroll was the first accounting process to gain popularity in outsourcing. A 2014 survey claims 48% of companies under $25 million in annual sales outsource their payroll. I couldn’t find a more recent number, but I’m confident it has continued to climb.
The technology for data-sharing wasn’t there, but payroll was painful enough that businesses worked around it. Even before the days of personal computers and the internet, it was worth the trouble to fax payroll reports back and forth to a payroll service provider. So what drove the outsourcing of payroll?
- Payroll is a detailed, time-consuming, menial task that takes staff away from higher-level planning or revenue-generating activities.
- Payroll tax compliance is complicated and the risk of non-compliance is quite high to a company and its owner.
- Payroll is a predictable activity that occurs in much the same way on a very set schedule. It was one of the first accounting processes to be automated with computer technology.
- Economies of scale allow a payroll service provider to process hundreds of payrolls for a similar cost to running just a few, saving the client money.
Following that logic, what if you replaced Payroll in the above list with the accounting processes of “Accounts Receivable”, “Accounts Payable”, or “General Ledger Updates”?
I think technology and other business factors have come together to create the “perfect storm” and make it time to re-evaluate how you handle your company’s accounting.
Of course, you don’t have to fax your payroll reports any more, so the data-sharing hindrances to outsourcing have been eliminated. But, beyond just data-sharing, I think technology and other business factors have come together to create the “perfect storm” and make it time to re-evaluate how you handle your company’s accounting.
1. The costs of employing people are going up, not down.
Employees cost money from the moment you decide to recruit one. Your reward for a new hire is to pay for onboarding, training, and keeping them happy. We all know that payroll taxes, paid time off, and insurance benefits all add to the cost of an employee. But don’t forget the more unpredictable costs of your liability as an employer- worker’s compensation, unemployment insurance, and potential lawsuits for your hiring and firing practices.
2. Reliability and speed of the modern internet is amazing
The availability and speed of the internet has created a demand for mobile access to data and developers have responded, increasing the opportunities to share data and collaborate with people at any location.
3. Current economic conditions have compelled businesses to look carefully at their core competencies
What an advantage for your business if your accounting data is better and more timely than your competitors, but costs 20% less. Does it make sense for your business to include in its core competencies the ability to collect and manage accounting data? You can gain a competitive advantage with your analysis and use of the data, not the handling of it.
4. Security issues come from external and internal sources.
There are certainly security concerns regarding cloud-based applications and exposure of data to external parties. However, small businesses are beginning to recognize the security concern they have inside their business: employees. The three main concerns with employees are disclosure of confidential accounting information to other employees, incompetence or negligence that leads to a liability for the company, such as sales tax compliance, and finally, outright fraud. Particularly in small accounting environments, it can be difficult to achieve the separation of duties that is recommended to prevent fraud and instead, businesses must rely on the owner’s oversight and employee trustworthiness.
5. Software as a Service (SaaS) model has changed everything.
No, I don’t think I overstate it- this is a game changer. Instead of businesses spending hundreds or thousands (or more) on software to automate accounting processes, most solutions are available as monthly services. Often with no or a small up-front investment and a user-based pricing model, the cost grows only as the business grows.
6. SaaS means your data is portable.
In the past, if a business outsourced a process like payroll, the outsourced provider most often used a proprietary software application not available to your business. That means your business could never take that data in usable form to another provider. (It could sometimes be exported to a raw form, which would require translating and importing into a new solution.) Not so with the SaaS model. You can “move” the data in its current form to another provider or bring it back in-house. And you don’t really move the data at all, you just disable one user and add another. This makes the service less sticky, giving your business more flexibility.
If you are in the beginning stages of your business and have not yet hired an in-house bookkeeper or accountant, think if you could grow a better business faster with outsourcing. If you already have accounting staff, think if you could re-deploy the most talented and knowledgeable employees to more strategic positions and away from collecting and managing data. The current conditions make outsourcing of your accounting processes a viable, efficient, and cost-effective alternative.