Why do almost 50% of businesses fail within the first 5 years? One reason is neglecting their HR functions. Companies which ignore their HR are likely to face compliance issues and have lousy hiring practices, high turnover rates, and a toxic work environment.
All these issues hurt their bottom line. Research shows that businesses with ineffective HR practices have up to 3.5 times less revenue growth and half the profit margins of companies with more capable HR practices. It’s not surprising that half of them end up shutting up shop.
This leads to a crucial question: should you outsource the HR department or remain in-house? If your in-house HR capabilities fail to catch up with your HR needs, we recommend you put your weight behind outsourcing. Read on to know why.
What is HR Outsourcing?
HR outsourcing is when a businessperson strikes a contractual agreement with a third-party provider to transfer the management of (and responsibility for) some or all of their company’s HR functions.
You can outsource your business’s talent acquisition, payroll processing, employee benefits administration, risk management, and more operations.
Types of HR Outsourcing
If you intend to outsource your HR department, you have two options: HR outsourcing (HRO) and personal employer organization (PEO). The services each of them provides overlap extensively. What differentiates them is the way they’re legally structured.
Personal Employer Organization
A PEO relies on a co-employment model. This means that while your employees will appear on the PEO’s books for tax and legal purposes, you’d still have control over their promotions, layoffs, etc.
Most PEOs handle all of your HR tasks. Some, however, let you pick and choose operations you want them to handle. But both share the entire financial and legal weight of your business’s employment practices.
Human Resource Outsourcing
Human Resources Outsourcing (HRO) won’t use the co-employment model. This means that your employees will remain exclusively on your company’s books. You’d thus bear the full legal responsibility for their actions.
However, HRO offers more flexibility than a PEO when it comes to the operation they can handle for your business. You can assign specific tasks to them, or you could outsource the entire HR department.
Why Outsource HR?
Here are key reasons to outsource your HR department:
HR Outsourcing Saves You Money
According to an estimate by Glassdoor, an in-house HR manager earns $80,000 per year. Throw into the mix a few additional employees that your HR department might need to manage benefits and payroll, and you’re looking at a figure north of $100,000. That’s not all.
The Society for Human Resource Management (SHRM) has estimated that it costs businesses more than $4,000 to hire a new employee. The number might be higher for small and medium business owners who don’t have much expertise in recruiting. Outsourcing HR benefits you on both counts.
When you outsource your HR department to a PRO, you end up saving up to $450 per employee, per the National Association for Professional Employer Organization (NAPEO). Outsourcing the onboarding process, meanwhile, can save you $400 per new hire, according to HROnboard.
HR Outsourcing Saves You Time
Your in-house HR employees have to wear many hats at once. They have to oversee recruitment efforts, handle payroll services, take care of employees’ benefit procurement, keep an eye on employee performance, ensure workplace safety, among other tasks.
Needless to say that all these tasks are enough to consume the majority of their working day. If you outsource some or all of these tasks, you’re not only freeing up time for your in-house HR staff. You’re also allowing them to focus on more important matters.
This way, they’d be able to devote more of their time to grow your business operations and, in turn, your bottom line. All the abovementioned tasks can be taken care of by specialists, and usually, at a fraction of the cost, you’d otherwise be paying to your in-house HR staff.
HR Outsourcing Helps You Stay Compliant With Regulations
Employers need to verify that their company complies with state and federal regulations to avoid compliance issues. They also have to make sure that it is abiding by innumerable hiring, benefits, and insurance regulations, among others.
Keeping up with these regulations can be tricky, especially since existing regulations are routinely updated, and new rules are constantly implemented. However, not keeping up isn’t an option, given that it could lead to serious financial consequences for your business.
You can stay on top of all relevant regulations by outsourcing your HR department. The PEO or HRO will carry out regular audits to ensure compliance while also carefully combing through your employee management practices to ensure they’re within the ambit of the law.
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Drawbacks of Outsourcing HR
Having looked at the benefits of outsourcing HR, it’s time we turn our attention to the drawbacks:
It May Take Longer to Make Corrections
For instance, if one of your employees notices an error in their payroll, you’d have to contact the HR outsourcing firm to request the necessary change. Then, depending on the number of clients your HR firm might have, they may or may not make the needed change as soon as you want.
You’ll Give Up Some Control
If you’re using a PEO, another company will legally be on the hook for what happens in your business. This means that they may require you to implement specific policies or take certain measures to reduce the risk of a lawsuit, labor, or safety violation. This is less common with an HRO provider.
You’ll Be Sharing Sensitive Information With a 3rd Party
HR firms deal with a certain amount of sensitive information, like employees’ medical history, bank account numbers, schedules, etc. Having these details on their system potentially increases the risk of a data breach. Be sure to review their security policies before moving forward with an HR firm.
What Kinds of Businesses Should Outsource HR
Small Businesses – 0 to 10 Employees
If your business is recently funded or still in the pre-investment stage, you can easily convince yourself that you can do it all on your own. After all, there are not many of you, so what’s the worst that could go wrong? A lot, as it turns out.
Between managing time-off, benefits, hiring, and everything else that might be going on, how will you be able to clear some time to build the product, talk to investors, or make decisions that could help your bottom line? That’s why we suggest that you outsource the HR department at this stage.
Growing Businesses – 10 to 50 Employees
Your business has taken off and is humming along every day. At this stage, you need to make sure it stays compliant. You have lots of recruitment to do, and the number of people in your organization looking up to you to get paid has significantly increased.
Consider using a PEO to manage compliance, benefits, and payroll. This will give your HR manager enough time to focus on culture and recruiting. They will then be able to spend time on tasks that cannot be automated, and you’ll save significantly on the cost of benefits and insurance.
Medium and Large-Sized Business – 50 to 500 Employees
If your company is trying to scale, recruiting is likely to become a top priority, and you’ll be facing headaches you didn’t know existed when it comes to compliance and expansion.
At this point, leveraging an HRO or PEO will help you scale effectively. You may choose to divide responsibilities between your in-house HR team and an outsourcing company. This will allow you to maintain growth and compliance without taking your foot off the gas or neglecting more strategic HR initiatives.
Businesses with 500+ Employees
Many companies with 500+ employees feel the itch to bring many HR functions back-in house. They think that doing so would give them an advantage over competitors. Still, there are areas that larger companies can outsource to prevent their in-house team from getting bogged down.
Ensure your HR department focuses on tackling strategic projects, finding quality talent, and being the link between the rest of your team. As for the nitty-gritty, leave it to outsourced HR and payroll providers.
Which HR Functions Can Be Outsourced?
One of the biggest challenges HR professionals at work is running accurate, on-time payroll. Luckily for them, outsourced HR firms provide online solutions designed to help them automate direct deposits, record-keeping, paying hourly employees, among other payroll processing tasks
Employee Benefits Administration
Creating an employee benefits package isn’t easy. Apart from researching plans offered by your competitors, you also need to ensure that your plan complies with benefits regulations. That’s precisely the reason why many businesses outsource their employee benefits administration.
Outsourcing your talent acquisition process not only saves you from the time-consuming task of scouring through stacks of resumes. Research shows that it also brings down your cost-per-hire and time-per-hire. All that while helping you find that ready-made new employee.
Are you thrilled with the thought of salary negotiations, annual reviews, and similar performance-related conversations? Neither do we. Outsourcing your performance management tasks to a 3rd-party HR firm can help you determine disciplinary routes for poor performance and performance goals.
Employee and Management Training
Developing your team is critical to keeping your company healthy and retaining your best employees. In addition, there is a host of training that you may be legally required to provide you’re your employees or managers. A 3rd party HR firm can help you develop a robust training program and ensure that the right employees receive the proper training regularly.
Employment Law Compliance
Business owners don’t only need to comply with tax and benefits laws. You also have to follow workers’ compensation regulations and equal employment opportunity (EEO) laws, and a host of state and local laws that can vary by city. Hiring 3rd-party HR compliance experts can keep you on the right side of all these regulations on a day-to-day basis and reduce your exposure to fines, penalties, and lawsuits.
Human Resource is an essential – yet often overlooked – department of any company. Mainly because, unlike some other departments, it doesn’t generate any revenue. However, it performs so many critical functions, such as payroll processing, talent acquisition, etc., that are critical to your business’s health.
That’s why we recommend you save your in-house team from getting bogged down under the weight of administrative HR tasks and outsource your HR department. Pairing them with a 3rd-party HR will free up the time they can go on and dedicate to projects that improve your business’s bottom line.