Reasons for HR Outsourcing
The advantages of human resources are numerous, and thoughtful HR policies and programs give businesses a leg up on their competition. Let’s explore what HR outsourcing is, what functions HR should be covering, and look at the answer to the question, ‘why do organizations outsource HRM functions?’
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Reasons for HR Outsourcing
Running a business is difficult, and the daily tasks build up quickly. Even when business owners appreciate the critical importance of human resources, HR is one of those tasks that can easily fall by the wayside if there isn’t someone dedicated to the work of recruitment, employee engagement, and everything else involved in taking care of a business’s vital workforce.
However, the advantages of human resources are numerous, and thoughtful HR policies and programs give businesses a leg up on their competition. After all, the top three attributes that potential employees seek are salary and employee benefits, long term job security, and a pleasant working atmosphere. Having robust HR practices, attractive employee benefits, and a strong company culture give the organization a competitive advantage.
One solution that many small businesses turn to is human resources outsourcing. Let’s explore what HR outsourcing is, what functions HR should be covering, and look at the answer to the question, ‘why do organizations outsource HRM functions?’
What is human resource outsourcing?
The process of human resource outsourcing is similar to other types of outsourcing. The general idea of outsourcing is to take certain functions of your business and transfer the execution of those tasks to an external company with a particular expertise. Human resources has turned into one of the most frequently outsourced departments, and outsourcing human resources functions globally grew at a rate of 5% from 2017-2019. This trend is expected to continue over the next few years, with the market breaching $5 billion by 2021. In order to understand why human resources outsourcing has become an important business solution, first let’s look at the categories of HR functions that can be outsourced.
What are the 7 categories of HR functions?
1. Recruitment and Talent Selection
Your people should be your best asset, and finding the talent and personality fit for your business can be difficult. HR is responsible for attracting the best people and finding the right person for each role. Since bringing on new hires can be costly, you want an HR department that can get it right the first time.
2. Onboarding and offboarding
Once that talent is identified, HR makes sure the transition into your workplace is smooth and efficient. From all the paperwork that needs to be squared away to employee handbooks and explaining job roles, HR helps these new employees feel at home and get the information they need to hit the ground running.
Another reality of HR is the process of offboarding. Employee turnover does happen for a variety of reasons, and HR makes sure that transition is also handled consistently and efficiently. There are many tasks that need to be done when employees leave, ranging from securing company equipment to conducting exit interviews.
3. Initial and On-going Training and Education
Providing your employees with the tools they need to do their job well includes giving them comprehensive initial and on-going training and education. A well-rounded HR training program should include a schedule of refresher training and development sessions where employees can learn new skills, as well as culturally critical trainings such as sexual harassment and discrimination avoidance, and DEI (diversity, equity, and inclusion) training.
4. Benefits and Perks
Taking care of your employees is one of the purposes of HR. Selecting benefit plans, helping employees enroll, providing education and training, and answering their questions are all functions that fall under the scope of human resources. Designing perks and rewards for employees who go above and beyond is also a great way to help your employees feel recognized for their hard work.
5. Workforce Engagement and Company Culture
Keeping employees engaged is an important aspect of HR which can lead to higher productivity and less employee turnover. Providing employees with activities and positive reinforcement helps to foster a positive relationship. Creating a company culture where employees feel listened to and respected is another important function of HR.
6. Payroll Management
Running payroll and managing all the related tasks can get complicated quickly, especially if your business has a mixture of salaried and hourly employees, or has employees based out of multiple states. HR takes care of the paperwork and keeps your payroll running smoothly, even if you have to deal with situations like pro-rating paychecks or garnishing wages.
7. Compliance Management
Keeping up with all the rules and regulations is vital for your business to stay compliant. HR tasks include maintaining and updating employee records, I9 compliance, labor law postings, policy creation and review, creating standardized HR forms for common situations, and updating and distributing employee handbooks.
Why do organizations outsource HRM functions?
With so many vitally important tasks that are critical for business success, some people may wonder, “why would a business outsource the human resource function?” While each business is different, there are a few common reasons why businesses choose this solution:
Did you know that a survey conducted by The Alternative Board found that the average small business owner works about 50 hours per week, yet only 32% of that time was spent working on the business itself? Business owners also shared that the biggest drain on their time is administrative tasks, which prevent them from focusing on important strategic tasks. With only so many hours in the work day, many business owners turn to outsourcing to free up critical time and give them back hours in their day. Another benefit of outsourcing HR is that it allows you to focus on your core competencies instead of being bogged down with those administrative tasks.
Expertise and Compliance
Odds are that you weren’t trained as an HR specialist and your business probably isn’t primarily focused on human resources management. While you may be able to figure out the basic HR functions needed to get by, you probably don’t have the time or skill sets to keep up with all the different rules and regulations that are constantly changing. Have you heard of the Americans with Disabilities Act (ADA), Age Discrimination in Employment Act (ADEA), Equal Pay Act (EPA), or the Pregnancy Discrimination Act (PDA)? These are just a few of the regulations around workplace discrimination, and that’s not even talking about other important areas like wage and hour laws or workplace safety laws. Sadly, HR mistakes can lead to some dire consequences like financial penalties or litigation.
Outsourcing HR gives you access to professionals whose entire job is keeping up with the latest HR rules and regulations. Their expertise can help you stay compliant and reduce your risk of legal troubles.
In the end, many business decisions come down to the return on investment and the cost of each option. Hiring an HR manager or a team of experts to work internally comes with a big price tag due to salaries, benefits, onboarding, training, and overhead. Outsourcing your HR can be a cost effective option, especially with packages that start at just $500 a month at Milestone.
Another factor to consider is how much your time is worth. How many hours do you currently spend on HR tasks each week? How much do you pay yourself? Freeing up those hours and outsourcing HR tasks gives you an immediate return on investment in terms of your time and effort, which is valuable – not to mention taking away the headaches of staying up to date on complex laws.
Outsourcing your HR may lead to additional savings due to economies of scale. Many outsourcing companies are able to give you better rates and bigger benefits as they represent many different businesses, giving them the ability to negotiate and provide you with savings.
How does outsourcing affect the role of human resource professionals?
There are a few different types of hr outsourcing, and it depends on which one you select. The three main types of outsourcing are:
1. Human Resources Organization (HRO)
These types of firms typically partner 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 where the HRO handles some of those functions or the HRO may take full responsibility for all HR functions.
2. 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 things like taxes, workers’ compensation, and other aspects of the potential liabilities that can occur, although this will vary depending on the specific agreement between your business and the PEO you choose. The PEO typically provides a robust payroll and other HR related modules that increase efficiency, but the business is still responsible for entering new hires, processing terminations, updating employee information, and other operational tasks.
3. Administrative Services Organization (ASO)
ASOs offer similar services to PEOs, but the major difference is that they focus on providing administrative services like processing payroll, maintaining compliance, helping with insurance and benefits, etc. Some ASOs will work directly with the employees to answer questions and address concerns, etc. Unlike PEOs, there is no co-employment relationship. ASOs are best suited for mid-sized companies of around 50 employees, although many small businesses successfully take advantage of their services.
Some businesses may just want to outsource administrative functions like payroll or benefits, freeing up the in-house HR professionals to be able to focus more on strategy. Others may benefit from outsourcing all the functions of HR, especially if they did not have an HR professional on staff and those tasks were being covered by the owner or senior employees.
Outsourcing HR doesn’t mean that you have to fire your current HR employee. If you have one, look for a company like Milestone that offers flexible, customizable packages that provide only the services you need. This is perfect for small companies that have someone managing the HR function who might not have the depth of experience to handle all the complicated questions.
What are the advantages of hr outsourcing?
Examining the pros and cons of HR outsourcing shows the disadvantages of hr outsourcing often come down to choosing the wrong solution for your unique needs. However, there are many advantages of hr outsourcing, including:
Save Time & Money
Outsourcing your HR can help reduce costs in payroll, employee acquisition, salary and training costs, overhead, and most importantly – avoid costly mistakes. For example, it was discovered in a survey by CareerBuilder, that the average cost of hiring the wrong person is around $15,000. On the other hand, the average cost of losing a good employee is nearly $30,000! Outsourcing your HR to experienced professionals can help you avoid these costly mistakes when it comes to staffing decisions and retaining valuable employees.
Access Expert Oversight
Whether you have your internal HR work with an outsourcing firm or outsource all of your HR functions, the truth is that it never hurts to have an expert pair of eyes overseeing your human resources department. Here at Milestone, our HR team has over 80 years of combined experience in Human Resources in both consulting and corporate settings. A sad reality is that most businesses don’t have the budget to maintain a robust HR department that actually covers all their HR needs. Outsourcing your HR gives you the coverage you need, at the price you can afford – and the result is high quality and comprehensive HR policies and procedures.
HR can be a huge headache! Outsourcing your HR reduces the work on your end and can get rid of those tasks that you dread each week. No more wading through the fine print of federal and state regulations, forget about struggling to write up a clear and comprehensive employee handbook, stop worrying about those I-9 verification forms, and turnover the never ending updates to employee files. Outsourcing HR can make your life easier and less stressful by eliminating overwhelming administrative HR tasks.
Improve Employee Relations
Happy employees don’t leave their jobs, which means an engaged team leads to a reduction in those high turnover costs. According to Gallup, a conservative estimate for how much it costs to replace an employee is one half to two times the employee’s annual salary. Outsourcing your HR helps keep your employees happy due to the ability to provide them with more resources like better benefits, employee engagement initiatives, perks and rewards programs, and continuing education and training (not to mention the cost savings that can allow you to do more for your employees).
Should a small business outsource HR?
If you are looking for a solution to your HR woes, outsourcing may be the perfect solution. At Milestone, we aren’t your typical professional services team. We believe in true business partnerships and we love working with small businesses to solve your unique needs and help your business thrive.
One common concern with small businesses when it comes to HR outsourcing is the price tag – and the worry that you’ll get locked into a contract that is unsustainable. Our flexible contracts and customizable pricing (starting at just $500 a month) mean that there are no hidden surprises to worry about. Our goal is to make your life easier, give you the information you need to make smarter decisions, and help you build a more successful company.
Contact us today to discuss your individual business needs and discover how we can help you achieve your dreams!