HR Software: Technology to Manage People

By Michelle V. Rafter

The most common human resource services outsourced today are payroll and benefits administration, and some vendors offer these through a software-as-a-service delivery method. What’s the benefit for your business?

The Internet has changed a lot about how small businesses handle human resources back-office processes, starting with how employees get paid. Today, companies can use a payroll service bureau with a Web-based front end, or an online payroll provider. Or they can turn over their entire payroll department to a preferred provider organization to manage.

Companies have been farming out payroll since the advent of the first computers back in the late 1940s, and payroll continues to be one of the most commonly outsourced business practices at companies of all sizes. Lisa Rowan, human resources (HR) technology analyst at

at IDC, the Framingham, Mass. market researcher, estimates 53 percent of companies with 1,000 or fewer employees use an outside service. It’s not uncommon for companies with five employees -- or even one -- to use an outside payroll provider, according to Rowan and payroll service vendors.

One reason: small businesses would rather reserve their time and resources for revenue-generating activities. “There’s a war for talent, a shrinking labor pool, rising costs for health care benefits, more regulations to deal with. At the end of the day, more demands are being put on them to do more with less. It’s a natural fit to outsource,” says Rich Watson, major account division vice president of marketing at ADP, the national payroll processor.

Another bonus: outsourcers figure and pay payroll taxes, so business owners don’t have to. “There’s no upside to running perfect payroll, people expect it. But there’s a whole lot of downside if you don’t pay people or your taxes,” Watson says.

Different levels of service

Once business owners decide to ditch spreadsheets or Quickbooks, they have to decide what to use instead. According to industry analysts and other experts, their choice will depend on:

• How much, or little, they want to be involved in the process
• What they want to spend
• What, if any, other HR functions they want to outsource too, such as benefits, workers compensation, time and attendance and recruiting.

After making those determinations, they can choose between the following:

Payroll service bureaus

At this most basic level of payroll outsourcing, companies send timecard data to a service bureau that calculates payroll and withholdings and either sends back paychecks -- or deposits them directly into employees’ bank accounts -- or sends payroll data to companies who cut their own checks. National service bureaus such as ADP, Ceridian, and Paychex account for 40 percent of the payroll industry, with the remainder made up by local vendors, according to analysts and industry experts. These days, many service bureaus use a Web-based interface, and provide online training and support. Service bureaus charge monthly fees based on the number of employees covered and how many other services a customer signs up for.

Online payroll providers

Think of online payroll providers as the do-it-yourself alternative to a payroll service bureau. Small businesses license Web-based software and pay a flat monthly rate of anywhere from $30 to $65, according to Rowan. Software-as-a-service (SaaS) payroll software is best suited to companies with at least several hundred employees because they need some level of HR and IT staff to provide services and tech support to go with the software, she says.

The buzz over SaaS means lots of companies are offering online payroll, including startups such as PayCycle and SurePayroll, and Intuit, which just introduced its service. Banks, which once sold payroll services but got out of the business, are offering it again as a way to lock in local business customers. Bank of America and other top institutions offer online payroll and use online payroll vendors like PayCycle to run it for them, Rowan says.

Preferred provider organizations

Companies that don’t want the hassle of managing a payroll department can outsource the entire thing to a third party. Referred to as preferred provider organizations (PPO), these companies become co-employers of a business’ employees. In the arrangement, a PPO becomes the employees’ employer of record, handling payroll along with health benefits administration, workers’ comp, and payroll taxes, while the business continues to manage the employees’ daily activities. Some companies that provide total outsourcing include ADP, TriNet, and Gevity.

By aggregating thousands of employees from dozens of clients, PPOs can offer prices for payroll services and other HR processes at rates significantly lower than an individual small business owner could find on their own, says Nov Omana, product manager at TriNet and an HR industry veteran. Covering so many employees also means companies like TriNet can afford to build a back-end HR platform that rivals those found at much larger companies, another advantage for small businesses, Omana says. TriNet’s customers aren’t just mom-and-pop shops but professional and financial services and technology companies, including “lots of venture-based startups,” he says.