Payroll Solution Options: Cloud, Hosted and On-Premise

New Software Deployment Choices Offer New Benefits

Payroll. Just the word conjures up notions of accountants bending over desks, writing checks to employees or contractors, surrounded by books containing rows and columns of numbers.

Okay, so that image is a little old-fashioned. But for many companies today—especially those who have performed the same tasks the same way for decades—it’s not far from the truth. Sure, they probably have automated many of the tasks through software.

Many have graduated from spreadsheets to either standalone payroll systems or payroll processing applications integrated with accounting, ERP or human resource applications. But these are all too often one-size-fits-all approaches, and often not designed to fit the needs of a specific company or vertical market. What’s more, they may not adequately take into account current rules, labor allocation for project costing, burden allocation for job costing, time & materials for client billings or regulations related to Social Security and Medicare deductions; local, state and federal taxes; unemployment insurance, retirement plans and health insurance. On the other hand, these payroll systems tend to be fairly easy to use, and many allow integration of payroll processing with finance systems and other critical internal applications.

Then, of course, there is the growing area of outsourced payroll. Many companies consider it a godsend to offload a task they regard as labor-intensive and non-core to the business. If it were that simple, maybe even more companies would do it. But of course, it’s not.

Payroll software deployment and delivery options have expanded. In addition to payroll services, there is hosted payroll, Software as a Service (SaaS) or cloud payroll, and other outsourced models that make things seem complicated. But in reality, these alternatives bring new choices with new benefits. To consider your choices, start by evaluating the three basic payroll processing options:

• Payroll service. The company supplies payroll data and the service bureau prepares and distributes the payments, keeping track of tax and other information. This is generally done online, and the service bureau securely stores the company’s data on its servers. Small and midsize businesses tend to opt for payroll services.

• Hosted Payroll: With hosted payroll, the company’s payroll data and functionality are hosted by a third party in a remote data center than can be accessed by the company’s internal payroll staff from any PC at any time. That means that the company no longer has to own or service hardware or software. Hosted payroll effectively outsources the IT operations and management to a third party provider.

• Cloud Payroll. Software as a Service or cloud payroll is an extension of hosted payroll. In this software deployment model, the company’s data is stored on remote servers in the “cloud”, accessed via the Internet and generally managed directly by the payroll software publisher. It’s done on a pay-as-you-go basis more often than not priced by the number of employees in the company or the number of HR and payroll users accessing the application.

So how do you choose? The choices can seem dizzying. In-house or outsource? And if you outsource, how does a hosted model compare and contrast to a cloud payroll model? How do you ensure you are comparing apples with apples?

You might think that cost is the first frontier, but putting cost in front of objectives can take you down a wrong path. First, know your company inside and out—its top objectives, its culture, its tolerance for outside intervention, and the intricacies of your IT infrastructure and vertical market. Just because option A works for a competitor in your industry doesn’t mean it will work for you. If your IT culture is do-it-yourself, you might want to go with an in-house or hosted solution. If you don’t have a large IT or payroll staff, the cloud may be a good option.

Next, create a "short list" by asking specific questions about scalability, flexibility and security. And ask to talk to current and former customers.

Now we get to the elephant in the room: cost. Of course it’s important, but it’s complicated. For example, cloud payroll models are often pay-as-you-go. But what exactly does that mean? Get specifics. Are there per-employee or per-time period processing costs? Does it cost extra for them to prepare tax forms and additional payroll reports? Are there add-on fees for extra storage? There are normally several additional fees based on utilization, so its important to evaluate them up front, as opposed to being surprised with additional recurring fees in the future.

But cost is relative. Dana Gardner, principal analyst at Interarbor Solutions, notes that the monthly cost for Web-based payroll services may be more than the extrapolated cost of a packaged payroll program, but that’s not the only cost you have to consider. Consider the cost of internal employees who have to process payroll, hardware that needs to be purchased and maintained, and the inevitable troubleshooting and upgrades.

There is no doubt that over the past several years, the complexity of HR and payroll choices have increased. The good news is that if you align these new choices to your business goals and environment, you’ll generally find more choices result in more good options and ultimately a better fit payroll solution.