Most businesses get to a point when they realize they can no longer manage all of their HR functions on their own — simply put, they need a little help. Instead of taking on additional overhead and hiring someone who may not work out, many of these companies choose to outsource their human resources functions to an outside company that specializes in HR.
There are a number of human resource functions that companies can choose to outsource to an HR company:
While every company might give a slightly different answer if asked why they chose to outsource some of their HR, most of these explanations boil down to four main reasons:
Boosting the bottom line.
It’s incredibly expensive for a small business owner to build the proper HR infrastructure they need internally. Partnering with an HR outsourcing provider or professional employer organization (PEO) allows employers to lower their operating expenses without experiencing any sacrifices in quality.
Access to high-quality benefits.
Outsourcing HR needs can allow you to gain access to Fortune 500-level benefits at an affordable rate. Employers who do engage an external HR company are able to take advantage of the firm’s buying power on medical insurance and other employee benefit plans.
Expert HR guidance on complying with labor laws and regulations.
The costliest common HR mistake business owners make is waiting until something goes wrong to make an investment in their human resources functions, or dismissing the importance of new regulations until they are levied fines for noncompliance. Outsourcing HR functions allows businesses to get expert help dealing with the complexities of human resources compliance and the hundreds of federal, state and local labor and employment laws, as well as to reduce their own risk by engaging with a partner that will share some of the liability of being an employer.
Freeing up time to focus on your core business.
Human resources management is an essential component of any business’ success, but HR isn’t typically a company’s core business. Instead, companies are involved in manufacturing goods, marketing products or delivering services. Outsourcing those functions to a PEO or HR provider allows businesses to redirect and refocus the time and resources that had been previously dedicated to managing HR, payroll and benefits to other areas of their business.
Companies who outsource HR can choose to partner with one of four types of HR providers:
HR Consulting Firms
This arrangement works best for businesses that need limited assistance or assistance with a specific project. Similar to other business consultants, HR consulting companies help businesses identify problem areas or weaknesses they may have in regards to human capital management, and then work with the company to develop a plan to address those issues. Once the project or issue is resolved, the partnership ends.
HR Technology Vendors
Some companies have the infrastructure and resources to manage their HR functions internally, but just lack the tools or technology to do so efficiently. In these cases, the businesses engage a third-party vendor to provide access to a program or online platform. The HR function most often outsourced in this arrangement is payroll processing. Businesses who use HR technology vendors are still required to do most of the heavy lifting when it comes to whatever they’re outsourcing, however.
HR Outsourcing (HRO) / Administrative Services Organizations (ASO)
Companies who decide they need more expertise or ongoing service may choose to outsource all or some of their HR functions to a human resources outsourcing (HRO) firm or administrative services organization (ASO). Under this arrangement the outside provider actually takes over one or more of tasks associated with human resources, including but not limited to: payroll processing, benefits administration, regulatory compliance, etc.
Professional Employer Organizations (PEO)
Companies looking for a turnkey HR department often choose to partner with a PEO. In a professional employer organization (PEO) arrangement, businesses enter into a co-employment relationship with an HR company, naming the PEO as the “employer of record” for the organization’s employees. This designation allows the PEO to perform employment-related tasks for the employees on the company’s behalf, like procuring and administering health insurance and other employee benefits, file payroll taxes, manage unemployment insurance claims, and more.
Still a little unclear about the differences between ASO and PEO service models? Check out this blog post all about the subject: ASO vs. PEO.
Deciding to outsource any business function to a third-party is often a difficult process for businesses. Even if they believe outsourcing HR will almost surely result in cost savings, business owners and executives are often hesitant to make what they see as a dramatic change to how their company operates.
The truth is there is no one-size-fits-all solution or easy answer when it comes to deciding whether to outsource a business function or keep it “in-house.” Here are four questions to ask yourself when considering outsourcing HR, or any business function:
Is there a real, tangible benefit to performing this function in-house?
If your core product or service offering doesn’t involve HR, why spend large amounts of time or money managing it? Having a robust in-house HR department is unlikely to help you sell more of your product or garner a bigger market share. What will help you increase sales and market presence is shedding the administrative liabilities and tasks associated with human resources management and refocusing those resources on revenue-generating activities.
Could an outside vendor manage this function more effectively or efficiently than your internal staff?
Almost 75% of an in-house HR professional’s time is spent on transactional tasks like payroll processing and benefits enrollment. HR outsourcing providers have the tools and proven processes in place to streamline human resources and free up your (most-likely) overworked HR manager to design and implement more strategic HR initiatives.
Are your employees struggling to keep pace with all of the current and expected demands of this function?
In addition to cost savings, one of the main reasons companies begin looking into HR outsourcing is that they want more from their human resources staff. With the ever-changing state and federal regulations being passed and the rising costs of health care coverage, companies are finding they don’t have the resources to keep up with the growing demands of their workforce. If your company is considering hiring additional staff or contracting out bits and pieces of HR to outside vendors, consider partnering with a professional employer organization. PEOs offer comprehensive HR and administrative services that touch every aspect of HR including payroll, regulatory compliance, employee benefits administration and workplace safety.
Is your organization expending valuable resources on HR that could be better spent elsewhere?
To put things into perspective, the average mid-sized business spends $2,000 per employee, per year on HR and related administrative functions when they manage them in-house. Depending on the level of service provided and the number of employees a business has, the price range for outsourcing those same HR functions typically ranges between 3 to 8 percent of a company’s total payroll. The cost for PEO services, specifically, is usually anywhere between $100 and $150 per employee, per month.
The decision to outsource HR is not one that should be taken lightly, and that choosing the right provider is essential to the decision-making process. When choosing an HR outsourcing provider, small business owners should primarily look at five main aspects: reputation in the marketplace; average client turnover rate; the breadth of available services; the technology platforms used to deliver services; and, of course, the price of services.