Which is the best option for me?
Let’s start with definitions. On-premises software (sometimes abbreviated as "on-prem") is installed and runs on computers in the facility of the person or organization using the software, rather than at a remote facility, such as at a server farm or cloud - somewhere on the Internet.
Off-premises software or Cloud delivery model in which software is purchased on a subscription basis and is centrally hosted. It is sometimes referred to as "on-demand software" or “computing in the cloud”. Cloud is typically accessed by users via a web browser.
Outsourcing or “business processing as a service” (BPaaS) involves the contracting of the operations and responsibilities of a specific business process to a third-party service provider. This model is very common with payroll and tax services.
SaaS or “software as a service” is a licensing model that can be used to finance both Cloud or On-Premises solutions.
Many business owners, HR and payroll professionals interviewed raise the same question when we discuss HR and payroll software: Do we choose an on-premises solution or a Cloud solution or should we outsource?
There are many variables to consider when choosing a software model that includes: - Which costs the most? - Which has the fastest setup? - Which option is most reliable? - Which option is most secure?
Each of the three options has their merits and deficits. What’s right for your company might not be right for another. As you consider the best solution you will need to evaluate your level of risk aversion, your current investments in infrastructure and staffing, and projected growth of your operation.
How Much? On-Premises vs Cloud vs Outsourcing
With an on-premises solution, your initial investment costs are almost always going to be higher. With a Cloud solution you pay a subscription fee each month/quarter/year (depending on your provider), rather than ‘buying’ the software outright. With an outsourcer you’ll typically pay a fee per employee per pay period. The first year or two will likely cost you more with an on-premises solution however, that monthly subscription fee or outsourcing fee is almost always going to cost you substantially more than paying the on-going maintenance fees for the software you have bought – so in that respect, an on-premises solution works out more cost-effective in the longer term.
General Pros & Cons of a Cloud Solution
Cloud is sometimes confused with SaaS stands for Software as a Service – this means that you pay a subscription fee to use software that another company maintains. If it is hosted, then you have a Cloud solution. If it is not hosted or in the cloud, then you have an on-prem solution. SaaS is a financing arrangement. .
1. Low Cost of Entry
Cloud costs far less to get started – especially if you factor in the infrastructure costs to host an on-premises solution.
2. Faster Time to Market (TTM)
When you choose a Cloudsolution, the platform has already been prepared, configured and implemented by the solution provider – all the user needs to do is acquire their subscription and then log in. This cuts down the TTM significantly – sometimes hours instead of weeks.
3. Low Risk
You can sometimes opt for a rolling monthly contract, meaning if you suddenly have no need for the software, you’re not left paying for it. Plus, you are not responsible for any of the infrastructure if something goes wrong – your provider deals with that.
4. Automatic Upgrades
If the system needs updating or maintaining, your SaaS provider will take care of everything, normally within short, pre-notified windows of time that fall outside of business hours.
1. Higher Total Cost of Ownership (TCO)
As compared to on-premises, SaaS reduces your Capital Expenditure (Capex) and increases your Operational Expenditure (Opex), and therefore costs more in the long-term for your organization. That TCO difference increases as time goes on and the cost to add employees is higher with a SaaS solution so the gap widens even faster as you grow.
2. Internet Dependent
SaaS software requires an internet connection – if your organization operates from places where connectivity to the outside world is patchy at best, then an on-premises solution might make more sense.
3. Less Control
With a SaaS solution, you must be comfortable trusting a third-party vendor with the responsibility of looking after your data. Despite the fact that a SaaS provider will likely have security and contingency measures, this can still be a big mental barrier to come to terms with.
4. Less Customization
If your organization has plans to customize the software you’ll be using, then you’ll be sorry to hear that with a SaaS solution, it’s impossible – the best shot you have is by making a feature request to the company providing it, and hoping it gets taken on-board. Only if a provider has everything you want is this not a concern.
5. Hidden Fees
With SaaS or outsourcing, you pay for each special report, data extract or special payroll run like bonuses or terminations. These fees are not included in your regular subscription fee.
Why choose in-house (on-premises) payroll?
For small to mid-sized businesses, processing payroll in house can offer a number of important benefits, including:
- Maximum flexibility over last-minute changes prior to a payroll run.
- Comprehensive, customizable reporting to help you analyze compensation and plan for the future.
More accurate data through integration with internal HR, accounting, and timekeeping systems. Depending on your company’s internal resources and the complexity of your payroll, it is likely that in-house payroll software can produce long-term savings over the cost of continual outsourcing fees. Payroll software also increases your control over employee data and the payroll process itself, so you can protect private information, including wage and salary details.
For many businesses, the greatest drawback to outsourcing is feeling that you have little control over the payroll process, your payroll data, and the accuracy of employee paychecks. Huge enterprises are able to quickly produce mass files and send them to the outsourcer for processing. But smaller businesses are often required to use an online interface and enter some of the payroll data manually.
Regardless of how an outsourcer processes a file, it’s a guarantee that you or someone on your staff will have to provide the payroll data (time-sheet info, paid time off, salary information, and so on). If you already have to collect and compile that information, how many extra steps do you save over completing payroll with in-house software?
When you own your payroll software, you also own your payroll database and all of your employees’ history. A payroll outsourcer may require you to jump through hoops to get your payroll information back if you want to leave the service, and the information you receive might not be in the format that is best for you.
Common misconceptions with outsourced payroll
The hassle of tax compliance is one of the reasons that some small to mid-sized businesses decide to outsource payroll. But many don’t realize that outsourcing doesn’t eliminate your compliance responsibilities. If the outsourcer fails to file your forms or deposit tax payments, the IRS will come looking for you.
In order to make timely tax payments and filings on your company’s behalf, you must supply the payroll outsourcer with adequate payroll information. Instead of having to meet the government’s filing deadlines, you’ll need to provide data to your outsourcing provider to meet even earlier deadlines. If you miss a deadline, pull the wrong data, or make errors in the data you send to your payroll service, your company will be liable for any and all resulting fines and penalties.
- If you’re looking purely at first-year cost, Cloud or outsourcing is a no-brainier
- If you want to get started as fast as possible, thenCloud or outsourcing is the easy choice
- If you’re looking at ROI over 3 or more years time-frame, on-premises is the clear winner
- If you are based in the middle of nowhere (or have poor internet connectivity) you should consider on-premises solution first
- If you want the flexibility to make customizations or changes to the software, you should choose an on-premises solution (or write a very compelling letter to the SaaS provider’s Head of Development!)
- If you want greater control over the payroll process, better payroll accuracy, more flexibility to react to last-minute changes, on-demand access to payroll information and history, powerful reporting and analysis, strong data security capabilities, internal control over tax compliance, and increased efficiency due to integration between systems, then you should go with an on-premises HR and payroll solution.