Outsourcing has become a practice in companies that strive to streamline complicated business processes and choose to focus on key business objectives. Recently, more companies have jumped on to the payroll outsourcing bandwagon to reduce costs and, in turn, enhance their profitability. It is an activity that involves contracting with a business service to handle all functions related to payroll and can manage the process without the need to maintain a large payroll department. This paper seeks to conceptualize theory and practice by incorporating various advantages and issues associated with the payroll outsourcing process and provide an insight into the scope of payroll outsourcing. The study also suggests a few qualities needed for a new payroll vendor to enter into the payroll outsourcing field for better survival.

Outsourcing is the process of shifting tasks and services which were hitherto performed in-house to outside vendors (contracted out). This has become a practice in many companies, especially in the medium and small sized companies, which strive to streamline complicated business processes and choose to focus on key business objectives. It is a strategic decision to give a task or activity to an independent contractor to improve service and product quality, reduce production cycle times, lower costs, increase focus on core competencies, and in general, enhance organizational effectiveness (Matthew et al., 2004). In this process, the firm and the independent contractor become partners and may establish a long-term relationship for their transactions. The processes of subcontracting have come from the concept of buy or make decision and it implies substituting external services for current internal capabilities. Understanding the key challenges and ensuring whether the organization is geared to face the big question—whether to make use of an in-house payroll or outsourced payroll solution— is vital. In the past, companies hired full-time employees to do a specific job. The employees were required to have a full range of the required skills, knowledge and experience and the employer had to provide them adequate training from time to time and invest considerable time and money to maintain the staff. Thus by outsourcing some processes, the companies were able to invest more on core processes.

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