Self-hosted vs cloud-based payroll software

The global cloud-based payroll software market, whose value was estimated at around USD 7.34 billion in 2018, is expected to reach a value of USD 17.39 billion by the end of 2027. The prognostics are backed up by recent studies which show that 40% of organizations are planning on modernizing their current payroll systems by moving their payroll from on-premise software to the cloud. 

But what are the reasons for moving payroll to the cloud? And are there any cases where it’s still better to self-host payroll software? Read on as we discuss the differences between self-hosted and cloud-based payroll and highlight the different advantages and drawbacks.

With regard to software, self-hosting refers to a system that is installed and hosted on an organization’s own server. Opting for self-hosting means that the business itself is responsible for system administration, maintenance and more. The costs of self-hosting therefore include the server costs as well as the maintenance costs. 

Cloud-based software, on the other hand, is hosted on the server of an external service provider and accessed via the cloud. When using cloud-based software, the service provider is basically paid for taking care of the server, the software, security updates and everything that comes with it. 

Other commonly used terms for cloud-based software are hosted software or managed software. They all fall under the umbrella term Software-as-a-Service (SaaS). Based on this basic information, self-hosted and cloud-based payroll can be defined as follows: 

Running payroll on the cloud comes with multiple benefits for the business, including increased efficiency and productivity, fast deployment, enhanced security and more. The advantages of a cloud-based payroll system include:

No upfront or hidden costs

Self-hosting payroll software requires heavy upfront investment and often entails hidden costs (costs for backups, domain name registration, etc.) which can quickly exceed the initial budget plan. When opting for a cloud payroll system, businesses simply pay a monthly (or annual) subscription fee and that’s it. That’s why, in many cases, investing in cloud-based HR and payroll works out cheaper than self-hosting.

Fast deployment and convenience

Self-hosted payroll software requires a lot of preparation to set things up, which slows down deployment and discourages many companies from replacing their outdated payroll management systems. The servers need to be bought and set up, the security features need to be installed and troubleshooting protocols need to be developed, to name but a few. 

A cloud-based payroll software solution can be deployed much faster, since all it takes is to subscribe to the managed payroll software and to configure the system to the business’s individual needs. Cloud payroll services also have the benefit that they are far more convenient. The software can be accessed via the online login function at any given moment without having to worry about updates, maintenance and so on.

Freed-up resources and less worries

Having all the maintenance, updates, security patches etc. taken care of is a strong argument in favor of cloud-based payroll solutions. Using a cloud solution for payroll means not having to deal with anything related to system maintenance, security or software fixes. 

Not only does this free up valuable resources in the IT and payroll department, but it also means less worries. With a managed software solution, cyber attacks, outages and troubleshooting are the service provider’s responsibility. In case of problems, the 24/7 technical support is there to help. 

Increased productivity and efficiency

Since implementing cloud technology to manage payroll frees up resources and reduces the manpower needed to keep the systems up and running, it also helps increase operational efficiency and productivity in the organization. Not having to worry about security patches, system downtime and other tasks that come with self-hosting means that the internal team can focus on more important things. 

Enhanced compliance

Using an externally managed payroll software allows businesses to always work with the most up-to-date version of the software that is in line with the latest regulatory changes and payroll rules. This ensures that all compliance requirements are met at all times. What’s more, cloud payroll systems usually reflect the latest technological developments and are designed to optimize efficiency. 

Remote accessibility

Cloud-based payroll software solves the problem of remote accessibility, since they can be accessed from employees anywhere, which makes it the preferred choice for remote-first businesses. Since remote and hybrid work models have become the norm, remote accessibility is an increasingly critical feature businesses should look out for when implementing new software solutions, including payroll. 

Improved data security

Concerns about data security used to be the main reason why businesses held back from using cloud-based payroll services. However, the assumption that payroll on the cloud is less secure than when processed on internal servers has long since been proven wrong. Payroll data stored on the cloud is generally more secure than when stored on-premise, since data centers are typically equipped with multiple electronic and physical safety features which, in most cases, are far more sophisticated than anything a normal business could provide on-premise.

Built-in employee self-service functions

Creating a positive employee experience across the entire employee lifecycle is crucial. For payroll, this not only means making sure employees have financial stability and are paid on time, but it also means giving them access to their payslips and data online whenever and from wherever they want. Cloud-based payroll and HR solutions accomplish this through built-in self-service functions which allow employees to view and update their data and more.

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Easy integration and scalability

Payroll software is easier to integrate with other tools and systems when cloud-based. Payroll integration simplifies data exchanges between different departments and allows everyone to be on the same page. For instance, SaaS payroll solutions like Lano come with their own API which allows its integration with other HCRM and workforce management tools. What’s more, cloud solutions are easily scalable, which means that the business doesn’t have to worry about running out of server capacity with an increasing number of employees.

The numerous benefits of managing payroll on the cloud make a clear business case for SaaS when it comes to payroll management. But there also are some issues and limitations that may make self-hosting the preferable solution for a business. These include: 

• Limited number of users for cloud plans: Depending on the subscription plan, there may only be a limited number of users who can access the software. However, since having too many people accessing the system and data can compromise payroll security, this shouldn’t be a decisive argument against a cloud-based payroll solution.

• Strict privacy policy or compliance requirements: For businesses that have a very strict privacy policy which prohibits storing sensible data on third-party servers, cloud-based payroll is not an option. The same goes for organizations that are subject to external compliance requirements that don’t allow data storage or processing on external servers.

• No ownership of the server and data: Some businesses clearly prefer being in control of their data security and privacy and don’t want to entrust an external service provider with their data. Such businesses will typically shy away from cloud payroll and opt for self-hosting instead. However, data security concerns can be eliminated by carefully choosing the right payroll software that comes with strong data protection standards.

The question of whether to use a cloud-based payroll software or to opt for self-hosting can’t always be answered based on the benefits and drawbacks of the respective payroll management option alone. Team size, IT capacities and other factors can have a major impact on which option the business should choose. 

In most cases, small and medium-sized businesses neither have the necessary IT infrastructure nor the manpower to self-host payroll; therefore, cloud-based payroll is often the better option for SMBs. Large enterprises with strong IT teams and large server capacities, on the other hand, are generally in a better position to self-host their payroll, which means that both options should be carefully evaluated and weighed against each other.  

The cost of the respective solution is another factor to consider. Depending on the number of employees, it may actually work out cheaper for the business to invest into a self-hosting set-up once and then only pay for maintenance and patches, compared to paying a monthly SaaS subscription fee which is typically higher the more employees are on the payroll. Also, compliance requirements and privacy laws may prevent organizations from entrusting external payroll software providers with their data.