What is HR outsourcing?

The Milestone Team July 16, 2021
what is hr outsourcing

When it comes to running a business, there aren’t a lot of founders who are excited about the idea of managing their human resources function. Most don’t like dealing with a lot of paperwork and complicated rules and regulations. On the other hand, for many small- and mid-sized businesses, having an HR team or department simply isn’t in the budget, so owners or employees have to add those tasks on top of their long list of responsibilities. Because of these factors, many businesses look to human resource outsourcing for their HR needs.

What is human resource outsourcing?

The idea behind outsourcing hr functions is similar to any type of outsourcing: Instead of hiring employees internally to deal with these tasks, you hire an external firm that specializes in human resource management to deal with all of your HR needs. There are generally three different types of hr outsourcing

  1. Human Resources Organization (HRO)

These types of firms typically specialize in partnering with large businesses with 1,000+ employees and allow them to choose which HR services they would like to outsource. This can be a co-management relationship or the HRO may take full responsibility for all HR functions.

  1. Professional Employer Organization (PEO)

Many small and medium sized businesses choose to use this type of outsourcing organization because of the many benefits. The PEO and the small business enter a co-employment relationship where the PEO is the employer of record and the business is the on-site employer. This means that the PEO is responsible for taxes, workers’ compensation, and other aspects of the potential liabilities that can occur. Because PEOs combine employees from all of their clients, they can often negotiate reduced rates on health benefits and retirement packages. 

  1. Administrative Services Organization (ASO)

ASOs tend to offer similar services to PEOs, but the major difference is that they focus on administrative services like processing payroll, filing payroll taxes, answering questions about compliance, helping with insurance and benefits, etc. Some ASOs will work directly with your team, providing a much needed employee relations role and helping to guide HR Strategy. Unlike PEOs, there is no co-employment relationship, and all filings and business is conducted under your federal employer ID number. ASOs tend to be best suited for mid-sized companies of around 50 employees, although many smaller businesses greatly benefit from them as well. 

The idea of outsourcing is sometimes seen as a solution that only giant corporations use. A small business owner may be wondering, can you outsource human resources? Is this a realistic solution for my small business?

Absolutely! Outsourcing HR functions is a fantastic solution for businesses of all sizes, and in fact, small and medium sized businesses tend to utilize these solutions the most. With our interconnected world, having an external HR department can (and should) feel and function just the same as handling it in-house. It has become increasingly easier to utilize outsourced solutions as the world has become more virtual during the 2020 pandemic. There are many human resource outsourcing examples that are greatly successful in every industry and size of business. 

While it is possible to outsource human resources, another commonly asked question is: what are the advantages and disadvantages of outsourcing HR functions? The advantages of outsourcing are discussed in the following section, and while there are some potential drawbacks to outsourcing, a good and reputable outsourcing company will be able to work with you to solve those problems.

Why do companies outsource human resources?

There are many reasons for HR outsourcing, ranging from small to large, and they vary from company to company. Some of those reasons may include:

  • Expert advice and experience

Small- and mid-sized businesses tend to have more limited resources when it comes to bringing on new team members. The overhead involved with hiring just one HR expert, let alone an entire team, can be completely out of reach. For example,the average salary for an HR manager is around $68k per year, and like every area of expertise, you have to offer higher salaries and better perks to attract and retain talent. However, outsourcing allows you to do this without the hefty price tag. 

  • Ability to focus on core competencies

Odds are that your business is not in the HR industry, so why waste your valuable time and effort on figuring out how to run HR? Outsourcing your HR functions allows you to focus on what you do best—building and running your business. Focusing on your core competencies is a huge benefit when it comes to outsourcing HR functions. 

  • Access to perks and benefits for employees

Outsourcing these aspects of your business often gives you the opportunity to provide better benefits and perks to your employees. HR firms have the connections, relationships, and expertise to find the best vendors, plans, and rates. Taking care of your team gets a lot easier when you are able to give them the benefits that they deserve, and outsourcing puts that within your reach. 

These are just a few of the reasons that companies outsource human resources, and as you explore the idea of outsourcing your HR, you will discover what benefits will have the greatest impact on your team.

Do small companies outsource HR?

Yes, many small companies outsource their HR functions. In fact, this form of outsourcing can be hugely beneficial to smaller businesses due to their limited budgets and unique needs. Outsourcing allows you to get more for your dollar, and puts a team of experts within your reach. At Milestone, we do what we do because we love working with small businesses and helping them realize their dreams. Our approach is simple: provide you with C-level leadership at a fraction of the cost of a full-time resource. 

Outsourcing your HR doesn’t have to be scary or feel impersonal—we believe in true business partnerships and work with you to make your life easier, give you access to information, and help you build a more successful business. Experience the difference today with Milestone and discover our flexible, no hassle, outsourced HR solutions and how we can work together to fulfill your HR needs.

Related Content

compensation and benefits for startup companies

Compensation and Benefits for Startup Companies

At its core, your startup or small business should include the following benefits: Health Insurance (vision and dental), paid time ...

how to pay employees in a startup

How To Pay Employees in a Startup

At a fundamental level, HR management includes any tasks that help optimize your most valuable resource—your people!

What are the 4 fundamentals of HR

What Are the 4 Fundamentals of HR?

At a fundamental level, HR management includes any tasks that help optimize your most valuable resource—your people!

Stay in the know