Payroll: Outsourcing or In-House?

Category: Surveys

In-House Payroll

Let us talk about expenses frankly. The cost of implementing a process is the main “Pro” or “Con” argument in considering any suggestion for its optimization. To get a clear idea of whether it is worthwhile to outsource payroll, let’s consider the expenses of having this function performed by in-house specialists or by those of the provider.

Let’s state right away, that the comparison cannot be exact, if only because the cost of an in-house expert to the employer is comprised of three types of direct and indirect costs: expenses for employee salary, HR expenses (hiring, adaptation, training, motivation, etc.), and expenses for possible employee mistakes – financial risks. If the amounts of the first and second expense components can be approximated, the latter is unpredictable and may vary from zero to quite substantial amounts. When outsourcing, damages caused by the provider are covered by its insurance – the provider is fully responsible. Let’s keep that in mind, but for the sake of the experiment, let’s assume that our supposed in-house payroll officer is a competent and attentive specialist who does not make mistakes.

How Much Do In-House Payroll Officer and In-House Accountant Cost?

Now, if we trust the current job offers on the market, the salary of a payroll accountant for a service company is on average 40 rubles a month, 480 thousand a year.

 

Cost of Maintaining an In-House Payroll Accountant, including HR expenses

TOTAL 878 – 906
Expense Item Thousands of rubles/year
Payroll budget 480
Fund contributions 144
Replacement during absences 60
Continuous education 32
Financial incentives 108 – 80
Benefits – Voluntary Health Insurance 30
Rent 52

As far as various fund contributions are concerned, the employer contributes 22% (16% – insurance and 6% – savings parts of the pension) of each pay-check to the Pension Fund of the Russian Federation and 5.1% – to the Federal Statutory Health Insurance Fund. Contributions to the Social Security Fund for temporary disability and maternity are 2.9% and 0.2% are for Work-related Accidents and Occupational Disease Insurance (the minimum rate for office workers). Altogether, employer contributions for one payroll accountant are 30.2% of his/her salary, in our case – 12 thousand rubles monthly, 144 thousand annually.

An important part of expenses that is usually ignored is compensation paid to the employee who is replacing a colleague on vacation or on sick leave. The employer spends at least an additional one and one half times the salary of each employee annually (with 28 vacation days and two-three weeks of sick leave).

The cost on the market of continued education courses for a payroll accountant run anywhere from 10 thousand rubles and up, and seminars run on average four thousand. Let’s assume that our expert takes two courses and three seminars a year. That comes to 32 thousand rubles.

The amounts paid within the framework of a financial incentive program depend on the type of bonuses adopted by the company. Often, a payroll accountant is given a quarterly bonus or a fixed salary percentage for timely reporting and absence of fines at year-end. Let’s estimate the two alternatives. The first one is a bonus at year-end in the amount of two monthly salaries – 80 thousand rubles. The second one is a monthly performance bonus. Let’s assume that if employee performance is at least 90% he/she receives a bonus of 1.9 of the salary. Let’s say that our payroll officer has three especially productive months (36 thousand for each “impact” month). We will not accrue an education bonus since all training is paid for by the company. So we have the financial incentive spread from 80 to 108 thousand rubles.

As for non-financial incentives, let’s take into account the employee Voluntary Medical Insurance (VMI) that it has become common courtesy for employers to have. The average cost of a VMI policy for one employee in Moscow today is around 30 thousand rubles per year. If you wish, you can estimate yourself the cost of other benefit options, such as co-financing of fitness or transportation to vacation destination, payment for mobile communications, meals, etc. For greater result validity, you can take into account expenses for one employee for special events – holiday celebrations, visiting sessions, team-building, etc.

There is also a whole range of irregular expenses, such as payment of one-time newborn benefits, bereavement benefits, etc. One-time expenses also include furnishing the workplace with furniture and office equipment, purchase of licensed software and its support. We will not take these one-time expenses into account, but if you wish to estimate them yourself – an average computer and monitor cost around 25 thousand rubles; an office desk, chair, and filing cabinet – around 15 thousand (at least, these are the prices on websites of furniture manufacturers). In other words, furniture and office equipment cost altogether around 40 thousand rubles.

Finally, we have the cost of rent of the space occupied by an in-house payroll officer. The rent for one square meter in a V-class business center, let’s say around metro station in Moscow, costs 13 thousand rubles annually. Now, scientifically, each employee should take up five-six square meters of space, in practice – it is usually around four. All in all, a payroll officer’s workplace costs the company 52 thousand rubles a year. By the way, in the EU countries an employee working with a computer should take up no less than 10 sq. m. No wonder outsourcing is so big there.

So, according to the preliminary estimate, one in-house payroll accountant in a service company costs the employer at least 878 – 906 thousand rubles annually. Let’s round this down to 850 thousand for convenience of further calculations.

Using the same algorithm (although, without accounting for space rent) we have estimated that a payroll officer in an industrial company, where his/her salary is somewhat less – around 30 thousand rubles, will cost the employer 640 thousand rubles annually.

Payroll is sometimes included in the job description of an accountant who costs on average 60 thousand rubles on the market, and whose complete maintenance cost is 1,300 thousand annually.

In small companies all accounting, including payroll, is often done by a senior accountant. His/her salary is on average 80 thousand rubles a year, and the maintenance cost is 1,700 thousand rubles annually.

What Does the Customer Pay the Provider for?

Let’s estimate the cost of payroll in outsourcing now. It will make sense to talk about it using UCMS Group as an example, since we have a clear idea of how it all works here.

For starters, let’s figure out what services the customer pays for. They can be divided into basic/regular (the ones that are provided permanently, regularly, on schedule) and additional (occasional, one-time, and those adapted to customer needs). The customers have an option of creating their own service packages, which include, in addition to the basic services, those additional ones that are of interest to the customer. In this case, the cost of the latter will be lower. The only condition is specifying the list of all additional services required at the negotiations stage of outsourcing migration, in order for us to estimate the volume of additional services and take them into account in our proposal.

So, payroll and advance payroll, as well as preparation of federal reporting (income tax forms, Pension Fund and Social Security reporting) are included in the basic services. When the customer orders these, the monthly receivables include:

  • A payroll register with analysis by departments, cost centers, and types of payment (depending on needs);
  • Amounts payable (information for salary payments);
  • Amounts of taxes payable;
  • Pay slips in any convenient form (to be e-mailed, to be posted on the portal in employee dashboards, in hard copy, or in an aggregate file for HR);
  • A link to any customer financial system (1C, Oracle, Scala, etc.).

Additional services include, first and foremost, off-cycle payments such as resignation payments, vacation and bonus payments. The volume of work for preparation of off-cycle payments is usually standard, so their cost is fixed. This allows including the required amount of off-cycle payments in the service package at the agreement preparation stage. We suggest that large customers have off-cycle payments on certain days – Tuesdays and Wednesdays, for example. In this case, we have a predictable work-load for our experts and the customers have a lower rate.

If required, customized (adapted to customer needs) reports that the customer wishes to have on the regular basis may also be included in the package of services during the agreement execution. For example, a monthly expense report broken down by certain types of payments by departments or payroll analysis may be included.

We also provide additional services, whose volume is hard to predict and evaluate in advance. We are talking about consultation support in cases of tax inspection visits, for example. Such support may take on different shapes: when a representative of the inspecting agency has questions our expert can prepare a letter of explanation describing the origin of doubtful figures, be present on customer site during the inspection visit, or go out to the Tax Office. Each case is individual, which is why the rate is hourly and depends on the volume of work involved.

However, while putting together the service package, consultation support may be included for one tax inspection a year to last no more than eight hours, for example.

For some additional services, using them on the “all-included” basis makes no sense. Those include certain one-time procedures: preparation of an explanation of income for government agencies, request for a demonstration of the payroll budget trends in the course of the last few years, etc. Around three years ago, legislation was changed retroactively and we prepared reassessments and adjusted reports at customer requests.

Summing up the above, not only basic, but practically any additional services may be included in the service package during the execution of the outsourcing agreement – preparation of off-cycle payments, communications of the provider with the tax office, or provision of customized reporting. It will cost less than paying for them separately when they are provided.

What the Cost of Outsourcing Is Comprised of

In addition to the list of services used by the customer, whose content and structure we discussed in detail above, the following have the most bearing on the cost of outsourcing payroll accounting:

  • Number of employees;
  • Number of legal entities/separate divisions with a separate balance sheet (each is calculated separately using a pre-defined algorithm);
  • Accounting complexity (whether there is a Performance Index system, shift-based working hours, or bonuses and various premiums in the salary);
  • The type of accounting data provided to the outsourcers (electronic data is less expensive than hard-copy due to less time spent on processing).

So, here are the rates. In our case, the cost of basic services (salary and advance salary payment, preparation of reports for government agencies, including report submission) for one legal entity/separate division with a separate balance sheet and with a number of employees under 20 is fixed. It is between 12 and 20 thousand rubles a month.

After that, the cost is calculated for each employee depending on the company size.

 

Outsourcer’s Basic Service Package Rates (Average)

Rate, rubles/person Rate applicable to:
Basic, 12,000 – 20,000 1 to 20 employees
250 21 to 100
200 101 to 500
180 501 to 1000
150 1,000 to 2,500

The fewer employees there are in the company, the higher the service rate per employee, and vice versa. If there are several legal entities/separate divisions, this method of cost calculation is applicable to each one separately.

It is simplest to prepare payroll for office workers with a fixed schedule and salary. It is more difficult for those on shifts, and the most time-consuming is to prepare payroll for industrial workers. That is why the number of employees for whom one payroll officer can prepare payroll decreases as the complexity of accounting increases, whereas in outsourcing a mark-up rate adjustment of the rate per employee is used. For our calculations, we will use a scale of one to three in estimating the complexity of accounting, where one is minimum complexity and three is the maximum, as well as specifying a number of employees per one accountant (this number may vary from 300 to 600 employees, we have taken the average number: 400 employees for the highest and 500 for the medium level of complexity).

So, for a general idea of the cost of payroll accounting function owned in-house and outsourced we have estimated the cost of a regular service package for four companies with various accounting specifics and number of employees: an IT company, a representative office, a retail chain, and an industrial company.

 

Cost Estimate of the Payroll Accounting Function Owned In-House

Cost of owning the function, thousands of rubles/year 255*** 390*** 1,700 4,500
Factor IT Company Representative Office Retail Chain Industrial Company
Number of employees 15 70 700 2,500
Title of employee responsible for payroll Senior Accountant Accountant Payroll Officer Payroll Officer
Salary, thousands of rubles/month 80 60 40 30
Complete cost of maintenance, thousands of rubles/year* 1,700 1,300 850 640
Level of accounting complexity, grade/number of employees per payroll officer 1/15 1/70 2/500 3/400
Number of employees involved in payroll (one payroll officer per 500 employees) 1 1 2 7
Time spent to perform the payroll function, % 15** 30** 100 100
Time efficiency, % - - 70 90

* The complete maintenance cost is calculated in the “How Much Do In-House Payroll Officer and In-House Accountant Cost?” section using an algorithm that is also described there.

** Approximate, estimated indices derived from the number of employees and a general job description.

*** The cost of owning the function was estimated as the cost of time spent for performing this function.

 

Cost Estimate of the Outsourced Payroll Accounting Function

Cost of ownership, thousands of rubles/year 144-240 300-420 1,800-1,900 5,160-5,280
Factor IT Company Representative Office Retail Chain Industrial Company
Number of employees 15 70 700 2,500
Level of accounting complexity, grade * 1 1 2 3
Cost of regular payroll services package, thousands of rubles/month** 12-20 25-35 150-160 430-440
Average cost per employee, rubles/month 800-1,300 360-500 210 175

* In this case, calculating the level of accounting complexity on a scale of three, where one is the minimum complexity and three is the maximum, draws attention to the fact that when accounting is highly time-consuming, the amount shown in the Cost of ownership row, will gravitate towards the upper threshold value.

** Average rates shown in the “What the Cost of Outsourcing Is Comprised of” section were used in calculating the cost of the regular service package.

 

Example of Calculating the Cost of Outsourcing Payroll for an Industrial Company with 2,500 Employees

Total, monthly

430,000 – 440,000

Rate, rubles/employee Rate applicability, emp. Number of employees Amount, rubles
Basic 1 to 20 20 12,000 – 20,000
250 21 to 100 80 20,000
200 101 to 500 400 80,000
180 501 to 1,000 500 90,000
150 1,000 to 2,500 1,500 225,000

To sum up

From the point of view of expenditures for performing the payroll function using the time of an expensive expert, a small business, similar to the IT company we have considered, where one senior accountant is responsible for all finances, is least effective. We recommend that such companies outsource their payroll, while transferring the remaining few, although more responsible, duties to another employee part-time.

In companies with headcount between 50 and 150, where the payroll function is performed by one of the accountants, instead of a special payroll officer, this function may also be outsourced, thus freeing the time of that employee. The cost of outsourcing in this case is practically identical to that of owning the function in-house; however, optimizing the headcount of the Accounting Department can be achieved in this case by re-distribution of responsibilities, which will lead to direct savings.

A medium-size company with several hundreds of employees, where dedicated payroll officers take care of the payroll, will save on the cost of having an employee by outsourcing the function. In addition, it was for a reason that we have adopted a time efficiency coefficient for companies with dedicated payroll officers. On average, one payroll officer can calculate salaries of five hundred employees. That is his/her maximum, hundred-percent load. If there are 700 employees in the company, two payroll officers are needed. In this case, each will have 350 employees and the load goes down to 70%. The remaining 30% are paid for by the company for no reason at all. This, by the way, is 216 thousand a year for an employee with a salary of 60 thousand rubles. For two employees, as in the case of the retail chain that we have considered, it comes to 432 thousand rubles. All in all, if the company needs “one and one half” accountants, outsourcing is a good way to pay for no more than that.

At first glance, outsourcing is not very cost-effective for large corporations – the cost difference is around 500 thousand rubles. However, taking into account the employees time efficiency, the view of the situation may somewhat alter. 6.25 accountants are required to calculate the salary of 2,500 employees. This does not happen in real life, so there are 7 of them and each has a 90% load. With a salary of 30 thousand rubles, the company annually pays for each of them 64 thousand “for nothing”, 448 thousand for all. This is almost half a million of ineffective expenses. There are two alternatives here: to increase employee productivity and optimize the accounting headcount or to outsource the payroll function and come to terms with the fact that this half a million will now be spent much more effectively by working for quality payroll accounting with a minimal risk of errors and missed deadlines.