What Is HR Outsourcing (HRO)?

Types of HR Outsourcing

For businesses, having a strong human resources presence has become increasingly important. Indeed, employers with a strong human resources division could see benefits such as higher employee satisfaction and retention due to workplace engagement, an element that’s often led by human resource professionals. While making employees feel valued is important, HR can improve a company’s bottom line, too. A recent study by Gallup found that highly engaged teams result in 21% greater profitability.

Generally speaking, human resources, or HR as it is more commonly called, is a term that accounts for the people-focused aspects of a business or organization, including hiring, training, and administration. But what is human resource outsourcing? Human resource outsourcing is the act of outsourcing some or all of a company’s human resource tasks to a third-party firm. When outsourcing HR functions, a company and an external firm enter into a contract for specific services. This contract will include the types of HR services the firm will provide and the types of HR services will provide along with the fees associated with that scope of service.

This article will explore the types of HR outsourcing and common reasons for outsourcing HR services. It will also provide tips to help business owners decide which of the many human resource outsourcing companies available is the best fit for their business.

What are the Objectives of HR Outsourcing?

There are many reasons a business owner might decide to outsource one or more functions of their HR. outsourcing can offer a myriad of benefits to business owners and their employees, including:

1. More time for other business functions. HR functions require a lot of time. Seeking assistance from a third-party firm can allow business owners to spend more time growing and managing their business
2. Better compliance with government regulations. There are several different federal, state, and local regulations and policies that businesses must follow. HR outsourcing firms are experts at understanding and implementing these requirements.
3. Expert support and guidance. Having a partner in human resources provides expert support and guidance to new and existing employees.
4. Innovative perspectives and advice. HR professionals can support small business owners and executive leadership in implementing best-practices and policies that are designed to boost employee morale and company culture.

Why Should a Business Consider HRO?

HR outsourcing can offer numerous benefits to businesses of all sizes, making it a strategic choice for those looking to enhance efficiency and competitiveness. Here are the key reasons why a business might choose to outsource its HR functions:

• Efficiency in Resource Allocation:
  • Focus on core business activities by outsourcing time-consuming HR tasks.
  • Enhance operational efficiency and prioritize growth-driving efforts.
• Expertise and Compliance:
  • Navigate the complexities of HR functions with specialized knowledge.
  • Ensure compliance with federal, state, and local regulations, mitigating risks.
• Access to Expert Support:
  • Gain expert guidance and strategic advice on HR policies and best practices.
  • Improve employee satisfaction, retention, and company culture.
• Cost-Effectiveness:
  • Benefit from economies of scale and access high-quality resources at lower costs.
  • Offer competitive benefits and attract top talent, especially beneficial for small businesses.
• Strategic Advantages:
  • Leverage external expertise to implement innovative HR practices.
  • Achieve a competitive edge in talent management and operational excellence.

Opting for HR outsourcing allows businesses to not only streamline their HR operations but also to reinvest their focus and resources into areas that directly contribute to their success and growth.

What are the Different Types of Human Resource Services?

Once you understand what is meant by HR outsourcing and some of the benefits, it is important to explore the different types of services, options, and products available to business owners seeking HR assistance. As with many outsourced business functions, there are several different types of HR outsourcing. Once you understand the different types of HR services available, you can better understand which services might fit your HR needs.

First, let’s examine what an HR outsourcing model is and the three main types of models available to business owners. An HR outsourcing model is a term used to describe the type of framework or approach an outsourcing firm uses when offering services–some models approach HR outsourcing as a true partnership, while others offer their services as a trusted consultant or vendor. There are three main models: Professional Employer Organization (PEO), Administrative Services Organization (ASO), and Human Resources Outsourcing (HRO).

Professional Employer Organization Outsourcing (PEO)

Professional Employer Organization outsourcing is a contract or agreement between a third-party firm and a business in which the two entities enter into a co-employment relationship. In this type of business relationship, the third-party firm becomes the employer of record and pays wages and taxes, collects and reports tax information to government agencies, and maintains a sustained relationship with the employees. In return, the business, which still manages the day-to-day activities of employees, reimburses the PEO for these expenses in addition to an administration fee charged by the PEO. 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.

Although PEOs are available to most businesses seeking the opportunity, PEOs specialize in working with businesses under 50 employees. One of the benefits of PEO outsourcing is that it can allow businesses, especially small-businesses, to access more competitive benefits due to joining a larger firm.

Administrative Services Organization Outsourcing (ASO)

Administrative Services Organizations offer a full-service suite of HR services to businesses. Unlike a PEO, however, businesses retain their employer of record status. Under this model, the ASO manages all the administrative HR functions, but they remain a wholly separate, third-party vendor. They act as more of a trusted partner than a co-employer, and will often work directly with your team to answer questions and address concerns.

If you are happy with your current benefits and wish to maintain more direct authority over your company while wanting more operational support and a collaborative, customized approach, choosing an ASO may be a better option than a PEO for you. This option will give you the support and expertise you need for HR functions while still allowing you to retain your own benefits and utilize your preferred technology solutions.

Human Resources Organization (HRO)

Human Resources Organizations are generally preferred by large companies that have the bandwidth to handle some HR. Instead of managing all, or most of, the HR functions, HROs provide a selection of services for business owners to choose from. Think of this like an a la carte menu where companies can decide which functions to outsource.

HROs often specialize in one or more areas, such as recruitment and hiring or employment law. HROs are best suited for companies that have the capacity for general HR functions but need targeted help with one or more areas.

What are Common HR Outsourcing Strategies?

In addition to looking at what is meant by HR outsourcing models, another way to categorize types of outsourcing services is by looking at how they are provided to business owners. PEOs, ASOs, and HROs may use one or more of the following strategies when providing outsourcing services.

Software-as-a-Service HR Outsourcing (Saas)

In this type of HR outsourcing, a software program is used to automate basic HR functions. This software is typically hosted and managed by a third-party vendor or service provider. SaaS HR outsourcing can be an excellent solution for companies seeking greater organizational support and flexibility, especially for those companies that prefer to keep some HR functions in-house. This type of outsourcing can also provide cost savings for companies, as the overhead for SaaS HR outsourcing can be relatively low.

SaaS HR outsourcing functions typically include applicant tracking systems (ATS), training and performance tracking, and payroll and benefits management.

Businesses that are interested in SaaS HR outsourcing should keep in mind that most SaaS HR outsourcing solutions regularly issue new updates, features and fixes. Maintaining up-to-date products will help ensure you’re getting the most out of your product while also ensuring any new security protocols are properly in place. Keep in mind, though, that access to software may streamline the workload and introduce efficiencies, but it won’t eliminate the operational requirements. Someone—whether it’s an internal HR person or an outsourced HR partner—will need to actively utilize, manage, and champion the software and determine its functional strategy within your business.

Business Process HR Outsourcing (BPO)

With business process outsourcing, a business or company outsources a single HR function to a third-party firm. This is a step up from SaaS HR outsourcing because the third-party firm provides personalized support and service management, often in addition to a software solution to support that need.

BPO HR outsourcing is a commonly-used approach for businesses looking to outsource complex functions including benefits administration. BPO HR outsourcing can provide time savings for businesses by removing the specialized function of managing and administering such a complex process. As an added benefit, many outsourced HR firms have strong relationships with benefits providers, so they can provide expert-level knowledge about benefits enrollment and administration.

Single Source HR Outsourcing

In a single source HR outsourcing contract, a business outsources all of their HR needs to a single third-party service firm. With single sourcing, businesses receive support for the full employee life cycle, including talent acquisition, time and labor management, payroll and benefits administration, performance management, employee separation or termination, and other functions. It’s important to note that the business acquiring the services can dictate exactly how involved the HR outsourcing firm is, especially with big decisions like hiring and releasing employees.

One of the primary benefits of single source HR outsourcing is the opportunity to build a long-term relationship. By working with one firm, employees at all levels can build a solid, professional relationship with the outsourced HR professional. Some single source HR outsourcing firms also provide other outsourced functions, like accounting, making it easy for small businesses to access assistance with multiple business functions.

Shared Services HR Outsourcing

Shared services HR outsourcing is a unique approach to outsourcing which seeks to centralize HR-related tasks that are shared by multiple departments, like payroll, benefits, and other administrative tasks. Rather than have several employees from several departments working on one task, shared services HR streamlines the process. Technology and sophisticated software solutions have made it easier—and more affordable—for companies seeking shared services HR outsourcing.

One of the benefits of shared services HR outsourcing is that it can create greater efficiencies by assigning all aspects of a task to a single person or unit. In addition to this, it can lower costs associated with these types of administrative functions.

Are Companies Outsourcing HR?

In short, yes. HR Outsourcing costs are generally lower than in-house costs. Outsourcing is an increasingly common practice in the business world—especially amongst small- and mid-sized businesses. In fact, more than half of all small businesses in the United States planned to outsource at least one business function in 2019. HR outsourcing is one of the most common business functions to outsource, with the global HR outsourcing market projected to reach more than $45 billion by 2027.

But the better question is, which types of human resources should you consider using? Use this list of questions to determine which option might be right for you.

Which HR functions require additional support, and which can you handle internally?

Maybe you are looking for guidance with one particular task or area. Maybe you are looking for support with several HR functions. Determine which functions need support to guide the process of selecting an HR outsourcing type.

How much money can you dedicate to HR outsourcing?

Pricing for HR outsourcing varies by a number of factors, including the amount of employees and the scope of services. Some companies charge a flat fee per employee—around $50-200 per employee per month—while others charge a percentage of the employees’ salaries, ranging between 2 and 10%. Alternatively, some firms have a fixed monthly fee based on the scope of work.

What kind of relationship are you seeking with a third-party vendor or firm?

If you’re looking for a close relationship with an HR outsourcing firm, something beyond basic SaaS HR outsourcing is probably your best bet as you’ll have access to one or more HR professionals to develop a long-term, sustained business relationship.

How accessible is customer support?

Having access to support staff during your working hours can make-or-break a deal for some business owners. If that’s you, research HR outsourcing firms in your area to find local solutions to your needs.

What tools or benefits will be available to your team?

Some HR outsourcing types may provide tools or perks, like performance management tools or better insurance premiums. Before signing a contract with a third-party vendor, understand what you’ll have access to.

Can you scale up or down your services, as needed?

As your business grows, it may become necessary to add or remove HR functions to your suite of services. If you’re a growing business, be sure to seek out a firm that will allow you to grow your services as time goes on.

Reimagine your Back Office with Milestone.

If you’re looking for HR expertise, more time to focus on your business, and the peace of mind that comes with knowing your house is in order, look no further than Milestone. Whether you’re looking for monthly HR support, strategic initiatives, or payroll services, Milestone can provide your business with a refreshingly forward approach to human resources.

In addition to experienced HR services, Milestone also offers outsourced accounting services including bookkeeping, monthly accounting, cash flow forecasting, outsourced CFO services, and operational support. For businesses looking to outsource accounting and HR functions, Milestone is a one-stop-shop for both solutions, offering a unique opportunity for business owners to work with one small team for both functions—ensuring cross collaboration and open lines of communication.

Reach out to us today to start a discussion about how Milestone can meet your HR needs.