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HR Outsourcing

Human Resources…otherwise known as HR. It’s one of those terms everyone has heard, but means something different to everyone. You could ask 10 different HR professionals and come away with 10 different definitions of the role.

Human resources departments handle everything from recruiting, to hiring, to employee benefits, to training, to conduct policies, to compliance…the list goes on and on. And for most businesses, having a qualified person to manage the list also adds up. First, there are existing employee needs and concerns to address. Then, a competitive talent market means proactive HR concerns like company culture, employee recruitment, and retention are more important than ever.  And that combination results in different needs and priorities for each organization.

So how can business owners and company leaders balance it all to everyone’s satisfaction? HR outsourcing means drawing on outside, third-party expertise to support some or all of the functions of human resources. When handled properly, this move can be a major win for organizations of all sizes. Let’s review everything you need to know to make the right move for your business and use human resources outsourcing to your advantage.

Outsourcing HR Functions

Before we start exploring what the ideal HR outsourcing configuration looks like for you, let’s get back to that complicated definition we were discussing and shed some more light on it. Here are the 7 basic functions of human resources:

  1. Employee Recruitment and Selection: Finding, interviewing, and selecting the top talent to work for your business is one of the most important and visible roles of human resources. This task can be a job in itself, including writing and posting the job description, screening candidates through interviews and assessments, coordinating with internal stakeholders like hiring managers and executives, conducting reference checks, and more.
  2. Compensation and Benefits: Another basic and highly-impactful role of human resources is managing employee compensation and benefits. This starts with the negotiation of initial salary for a new hire but continues throughout the employee’s tenure at your company. Human resources must make sure pay and benefits are fair, equitable, and competitive through practices like benchmarking. Human resources departments are concerned with salary, health benefits, paid time away from work benefits, and retirement plans, as well as secondary benefits like employee subsidies for daycare or transportation, or company devices like laptops and phones.
  3. Performance Management: A third pillar of human resources is performance management, meaning giving employees the processes, tools, and insight to do their best work. This includes receiving regular feedback on their performance through one-on-one reviews, peer reviews, and other methods. In this capacity, human resources professionals collaborate with managers and department leaders to help employees reach their full potential and improve the bottom line of the business.
  4. Learning and Development: Related to performance management is learning and development. These are the resources and policies that help employees skill up, maintain or gain certifications, and generally grow the employee as an asset for the business. Often, part of the work of human resources is to determine which high-performers among employees will receive additional investment like leadership training. They also create development plans for lower-performing employees to improve and work better on the team.
  5. Information Management and Documentation: Whether it’s new hire information, benefits and paid time off details, payroll, or employee feedback and development plans, an important element of HR is keeping track of and securely storing information. Depending on your industry, regulations detail how much and what kinds of documentation are needed, as well as how information should be stored in preparation for annual audits.
  6. Succession Planning: Succession planning allows you to have a backup plan ready should a key employee give notice. Performance reviews and learning and development efforts allow human resources to create an internal talent pipeline of employees ready and willing to fill these key positions. Recruiting and hiring efforts may also identify external candidates to apply for a position should one ever become available.
  7. Data and Analytics: In recent years, learning from data and analytics to improve processes and achieve efficiencies has become an added layer of responsibility for human resources. Using data about the current and past state of the organization, human resources may be able to make and act on predictions about employee turnover, necessary changes in benefits and policies, and so on.

Among these seven human resources functions are many opportunities for achieved efficiency through HR outsourcing.

Reasons for HR Outsourcing

The reasons for HR outsourcing are as diverse as the companies who choose this solution. Your company’s unique culture will define some of the answers to the question, “What are the advantages and disadvantages of outsourcing each of the HR functions?” At some companies, one function might be easily outsourced that could never be outsourced at another business. Below, we’ll go through advantages and reasons for outsourcing each of the seven functions of HR, then talk about which ones are generally considered better options for outsourcing than others.

What are the advantages of outsourcing HR Functions?

Here are some of the commonly-realized advantages of outsourcing HR functions:

  • More Time: Outsourcing HR functions like recordkeeping and managing claims allows you to win back time. These tasks are often repetitive and time-consuming, especially if you are not as familiar with legal forms, protocol, or recent changes in requirements.
  • Better Compliance: When you start to work with an outsourced HR vendor, they can provide insights into which policies and processes need to be updated in your organization. This can bring you into better alignment with local, state, and Federal requirements.
  • Expert Support: Your new human resources partner can build more efficient processes, from employee onboarding to developing training and ensuring you are informed about relevant policy changes.
  • Innovative Perspective: HR outsourcing also gives you access to a partner who has worked within a wide array of organizations, and industries, providing similar support. This means they may have innovative ideas about how to change and improve company policies in a way that positively impacts culture and employee morale. These initiatives often result in greater talent retention and improved productivity.

Which HR functions should not be outsourced?

Traditionally speaking, many business owners have hesitated to outsource functions like succession planning and some elements of performance management. If you are working with a larger HR outsourcing provider, this makes sense. But in cases where you can develop a close personal relationship with a single point-of-contact, it may eventually be possible to turn to them for all aspects of human resources support as a trusted extension of your team. Still, the human resources consultant should not themselves be in charge of making any decisions like hiring and firing without the input of key stakeholders at the company; that’s just good common sense.

Types of HR Outsourcing

There are several types of HR outsourcing strategies you can use to improve operations at your business:

  • Software-as-a-Service HR Outsourcing (SaaS): SaaS HR outsourcing means using a computer program to automate some of the more basic HR functions. These commonly include operations like applicant tracking, training and performance tracking, and payroll or benefits management automation.
  • Business Process HR Outsourcing (BPO): In a BPO HR outsourcing agreement, a third-party vendor is hired to complete a single HR task, like payroll or benefits administration. These vendors usually provide software as well as service management.
  • Single Source HR Outsourcing: In single source HR outsourcing, one third-party company takes over managing aspects of the entire employee life cycle, from hiring and onboarding to benefits management and payroll. This even includes the processes surrounding separation of employment, though the vendor may not be directly involved in the decisions about hiring and releasing employees.
  • Shared Services HR Outsourcing: Shared services is a cross-functional approach to HR outsourcing, where functions shared by multiple departments are outsourced. Examples include training and professional development or administrative functions like accounts payable and receivable being folded in with payroll administration.
  • Professional Employer Organizations HR Outsourcing (PEO): PEO HR outsourcing is an agreement between a third-party and a company, where the third-party assumes co-employment for employees. This means they share responsibility for benefits, taxes, payroll, and compliance. This arrangement may allow small businesses to access more competitive benefits than they would if they did not join the PEO. In these cases, the PEO may have their own standards and rules for employees and retain the right to hire and release employees.

HR Services for Small Businesses

HR outsourcing companies for a small business can be an especially useful asset because they help business owners balance time and investment. Small businesses have a need for all seven of the human resources functions, but depending on the size of the team, may not be able to justify the expense of a full-time human resources professional on staff.

Common benefits and efficiencies achieved by outsourcing HR services for a small business include:

  • Accessing enterprise-class human resources solutions
  • More effective recruitment and hiring efforts
  • Keeping up with compliance and regulations
  • Allowing owners to fully focus on the product or service line
  • Developing and implementing workplace safety programs
  • Easier and more consistent access to on-site trainings
  • Problem resolution and employee relationship prioritization
  • Improvements to the employee handbook
  • Employee benefits management and better benefits for small business employees

How Much Does Outsourcing HR Cost?

Pricing for outsourced human resources can occur in one of three primary ways. Some companies will charge a flat fee per employee, referred to as Per Employee Per Month (or PEPM). This can range anywhere from $50-$200 per employee per month.  Others will charge a percentage of the employees salary, ranging between 2% and 10% of annualized salaries. 

Other HR outsourcing providers will charge a fixed monthly fee to provide a scope of defined services. This can include operational, administrative tasks or can expand to include strategic services and ad hoc projects. 

HR outsourcing average costs fall along this spectrum depending on the functions you want to outsource. If you only choose to outsource HR functions as-needed, these will come with one-time fees. For instance, if you only want to pay for manual auditing once a year, that might be a rate of anywhere from $500-1500. Paying for individual employee background checks during hiring will run you anywhere from $50-100 per person.

If you’re thinking these costs can add up quickly, you aren’t wrong, especially if your company is experiencing growth and making lots of new hires. But at the same time, it’s worth noting that in a survey by Deloitte, 78% of respondents said their outsourced human resources provider either met or exceeded objectives related to cost.

It can be helpful to compare these prices to the average cost of an HR department. The average national salary of a human resources professional is $63,998. The salary of a dedicated human resources manager is just the initial expense. Starting your own internal human resources department also means expenses like software and technology, as well as potential changes to your existing benefits and policies depending on the best practices recommended by the individual you hire.

The best practices recommendation for human resources in 2021 is to hire 1.5 human resources staff for every 100 employees. This means if you do not have at least 100 employees, the expense of your own human resources department may not be necessary. But if your industry has heavy regulations or your business has a complicated structure and wants to invest in lots of training you may justify this expense sooner for the benefit of your business. And just because you hire one person internally doesn’t mean some HR functions won’t still be outsourced. There is no one-size-fits-all human resources solution!

Other HR Outsourcing Statistics

Here are some more HR outsourcing statistics to inform your decision-making and help you visualize how this service could benefit your business:

  • Only 20% of businesses find working with an outsourced human resources provider challenging or difficult
  • 44% say their biggest challenge working with outsourced human resources is that vendors take a reactive versus proactive approach to issues.
  • 76% of businesses want outsourced human resources providers to provide innovative ideas, especially around compliance and risk management, adapting to market changes, and addressing organizational challenges.
  • The ability to make a greater focus on core business challenges is the primary factor that motivates business leaders to consider HR outsourcing.
  • 40% of companies with 1,000 or more employees outsource at least some of their HR functions, especially regulated or complex aspects of HR like FMLA. 27% of companies with 50 or more employees outsource at least some HR functions.

HR Outsourcing Best Practices Examples

Depending on the functions you are thinking you want to outsource, it can be helpful to review HR outsourcing best practices examples. These help businesses understand what services to expect and support the effort to choose the best outsourced human resources provider near you.

  • Outsourcing Compliance: When choosing to outsource compliance, it is important you enter into the process with a full understanding of your legal obligations as a business. This will allow you to determine if the services provided by the vendor will fully protect you against liability. This is especially important if your state has adopted different and more strict requirements than Federal policies. Additionally, you must understand the processes and procedures the HR provider will use to document your compliance and prepare you for an audit. You should be able to check in at any time and see your alignment with industry standards, as well as be provided with a single point-of-contact who can address questions, concerns, and changes in standards as they arise.
  • Outsourcing Employee Administration: Outsourcing employee administration means outsourcing a lot of the recordkeeping and information systems management that is the foundation of HR. Sometimes this means working with a SaaS provider to set up a self-service portal for employees, and the provider is responsible for the functionality, security, and maintenance of that software. This could include payroll, benefits, paid leave, and more. In other types of agreements, this extends to in-person support for employees and managers to understand and navigate company policies. This is the foundation of an HR outsourcing arrangement that gives your employees a more streamlined and simple experience. With that in mind, it’s important to make sure any software being installed integrates with other platforms you already use, and that employees will receive training in how to use the systems.
  • Outsourcing Compensation and Benefits: Managing benefits and compensation is one of the most time-consuming parts of human resources that is also most closely linked to employee satisfaction. When choosing to outsource compensation and benefits administration, it’s important to understand key factors like whether or not the HR outsourcing provider helps with open enrollment, how they deliver advantages and efficiencies, and the customer service that will be available to employees. Outsourcing this function can be a big time-saver, but if it only leads to bad experiences or a sense of detachment from employees, it will not be worth the investment in the long run.
  • Outsourcing Talent Acquisition: Successful HR outsourcing of talent acquisition is supporting many businesses to find talent in a competitive market. But before hiring a vendor to take on these duties and help you win a great hire, it’s important to explore how they will source talent differently. This can include defining certain roles the HR outsourcing provider will recruit for first as a “test-run” to see if they will find better candidates for your team. It’s also a good idea to define and clarify when and how your company will be involved in the vetting process, and the standards you are non-negotiable on when it comes to new hires.
  • Outsourcing Performance Management: Outsourcing performance management often works best when the HR outsourcing company takes on a supporting role. In between performance reviews, the vendor can collect data and document milestones so that when the time comes, your internal team has high-level insights about how an employee has been performing. The HR outsourcing company can assist with scheduling the performance reviews in a recurring cycle and can provide training to managers about how to approach these reviews in a proactive and supportive fashion.

Overall, the best practices for outsourcing human resources boil down to establishing a clear understanding of each party’s responsibilities and having a plan for accountability. The contract should also include provisions for “insourcing,” if you decide to bring the functions back in house, as well as language about the vendor’s permissions to “re-source” your HR functions. You do not want to be surprised to learn that the HR provider has passed your administrative work or compliance documentation down the line to another company. Lastly, a final best practice of HR outsourcing is documenting the “base line” where your company is starting, so that improvements and the return on investment of HR outsourcing can be monitored and celebrated.

Achieve Benefits of HR Outsourcing With Milestone

Milestone approaches every client interaction with the intention to make your life easier, provide you transparent access to information, and ultimately improve your business. We truly see ourselves as an extension of your team and work accordingly.

Every business, no matter their size, deserves access to top-tier expertise and compassionate, detail-oriented HR support. That is why we have developed flexible monthly HR outsourcing packages, with no long-term contracts, only long-term connections. Your single point-of-contact is dedicated to handling the details and letting you focus on growing your business.

Whether you already have an internal human resources professional who would benefit from additional support or want to unleash your back office by having the Milestone team manage your strategic and operational human resources initiatives, we are committed to serving as a resource of expertise for your entrepreneurial journey.  Contact us today to share your story. Let’s explore together how our support can give you and your employees the HR experience you all deserve

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