Business Process Outsourcing (BPO) has been utilized by large companies for many years to accomplish day-to-day business practices. The most common outsourced functions include payroll, IT, HR and customer service. With the unprecedented advancement in technology and the Internet, strategic outsourcing for small- and medium-sized business is becoming increasingly effective and popular. The payroll and HR outsourcing industry alone is growing at a sustained annual rate over 20 percent.
When to Outsource: “Rules-Based Processes”
Most of us have seen bullet-point lists summarizing the benefits of outsourcing. These often include:
- Allowing employees to focus on core activities
- Cost savings
- Access to professional capabilities and systems
- Risk sharing.
Although these points can all be true, the overriding factor in planning and implementing a successful BPO transition is the “rules test.” In order to be feasible, any outsourced process must be at least 80 percent rules-based. For example, payroll is largely rules-based, driven by both federal and state laws, and company policies and procedures. This is why payroll is such a commonly outsourced function.
Most payroll processors handle basic payroll processing and compliance quite well. However, how a provider responds to the non-rules-based activities will determine the ultimate success of the outsourcing decision. Any in-house payroll department will tell you that dealing with managers who don’t report on a timely basis, special deductions, correcting erroneous hours from a previous payroll, non-recurring bonus payments, garnishment/child care/wage deduction orders, etc., are the special circumstances that create inefficiencies.
When analyzing an outsourcing decision, consider the “80 percent rules-based test” and then probe your potential providers about how they will partner with your staff to streamline the processing of exceptions. By using this methodology, the outsource provider can become a valued partner not only by performing services, but also by working with the company to improve its internal processes. As an added bonus, employees will often adhere to disciplined procedures they may not have followed in the past because “the third-party processor has to have it that way.”
Maximize Your Outsourcing Decision: Look for Integrated Services
Some small businesses make an outsourcing decision only to discover that the time and cost savings they were promised never really materialize. This post-outsourcing regret can often occur because the organization outsources a single function but retains in-house responsibility for a closely related process. For example, a company may outsource payroll, but retain HR responsibility for benefits eligibility and administration. In this scenario, the company must communicate employee benefit changes to both the payroll processor (for employee deductions) and to the insurance company. As a general rule, three-way communication processes are difficult to manage and can create outsourcing regret.
The second major cause of outsourcing regret is partial outsourcing. Large national processing companies typically provide Internet-based software and good back-end services but little or no front-end services traditionally performed by the in-house payroll department. A company administrator must still create employees in the software, enter deductions and all other master file info, enter/upload hours, and ultimately send the payroll file to the third-party to process. To avoid post-outsourcing regret, seek out a local or regional provider who will perform the front-end duties as well as the required back-end processing and tax compliance. IBI