Outsourcing payroll: beyond transaction‐cost economics

Abstract

Purpose

There are continuing pressures to improve administrative efficiency in human resource management (HRM). Following the professional and academic literature, proposes “payroll” as an ideal candidate for outsourcing in order to drive costs down.

Design/methodology/approach

The research uses a transaction‐cost‐economics perspective to identify efficiency implications of varying governance decisions. Ten distinct payroll activities that account for a generic payroll workflow are identified. Then the costs of carrying out these distinct payroll processes, either market‐ or hierarchy‐based, are analysed in 20 case studies of UK‐based organisations.

Findings

While key payroll activities were more costly when outsourced, there were efficiency gains in supplementary activities and lesser investment in IT software and maintenance.

Originality/value

These insights are important for cost‐based make‐or‐buy decisions. Influence factors on governance decisions, however, went beyond considerations of transaction costs, quality and risks to include historical, political and individual rationales. They are depicted in a framework of outsourcing motivations.

Citation

Dickmann, M. and Tyson, S. (2005), "Outsourcing payroll: beyond transaction‐cost economics", Personnel Review, Vol. 34 No. 4, pp. 451-467. https://doi.org/10.1108/00483480510599770