HR outsourcing 101: What it is, how it helps and what to consider

In today’s fast-paced work environment and ultra-competitive labor market, many small- to mid-sized businesses grapple with these issues:

• Managing growth and scaling up in a sustainable way
• Dealing with a multitude of laws and regulations, especially as businesses expand in size, scope and geographic reach
• Controlling employee-related expenses, particularly health care costs
• Finding and recruiting the right people
• Improving the employee experience to keep team members engaged and productive, and retain them for the long term

Does this sound familiar to you?

Meanwhile, you’ve probably heard a lot of buzz about human resources (HR) outsourcing. But what exactly is it, why is it impactful to your business and how does it address the common challenges that business leaders face? Furthermore, how do you even get started?

What is HR outsourcing?

HR outsourcing is simply hiring experts from outside your company to perform a specific set of HR services for you. These services are defined within a contract to prevent any ambiguity in establishing the obligations and expectations of both parties.

Typically, this assistance can take the form of:

• Supplementing the efforts of your existing HR team and taking your game to the next level
• Providing additional day-to-day support for smaller HR teams
• Replacing an internal HR team, if desired
• Relieving a single employee – often an executive assistant – from serving as your HR point person, especially when it’s not their area of specialty

Which tasks are often outsourced? Here are some common examples:

• Payroll and benefits administration
• Policy creation
• Employee relations
• Training and development
• Performance management
• Compliance
• Recruiting, hiring and onboarding

5 big benefits of HR outsourcing

To start with, what are the general reasons why a company might consider an HR outsourcing partner?

1. Save time and enjoy the ability to focus on your core business

Most people don’t start a business because they want to dabble in all the tedious work related to managing employees. Instead, they’re passionate about providing a much-needed product or service to their target customers.

However, HR consumes a lot of time – one of our most precious and limited commodities. There really aren’t enough hours in the day for you to be both a visionary business leader and an adept HR practitioner without overlooking some details and allowing errors and oversights to happen. Trying to juggle both roles is a recipe for inefficiency, chaos and (your) frustration.

Outsourcing HR responsibilities can take all these burdens off your plate – not to mention a big weight off your shoulders – and enable you to focus more of your energy on your actual business, including all the big-picture activities that attract customers, increase market share, improve profitability and drive growth. You also don’t want to be so mired down in the weeds that you miss critical business opportunities.

Ultimately, HR outsourcing frees you to work ON your business rather than IN your business.

2. Save money while reducing overhead

Internal HR can be very expensive. Consider the annual salaries and benefits expenses associated with having an experienced and knowledgeable HR team – particularly if you have HR generalists as well as specialists who focus solely on a certain area within this field. HR outsourcing offers you the opportunity to obtain varied HR assistance without having to recruit, hire or maintain a multi-person HR team to address all your needs – letting you operate leaner and more efficiently.

And when it comes to employee-related costs that tend to rise year over year, such as health insurance and other benefits, HR outsourcing can help contain these costs and make them more predictable. (This depends on the type of HR outsourcing partner and level of service you choose.)

3. Scale efficiently

If your business is growing fast, an internal HR department may not be able to keep up with the pace of change. HR outsourcing offers a quick and cost-effective means to scale your efforts.

4. Help decrease risks

Employers face a number of risks, whether it’s payroll errors that carry tax ramifications and damage employee relationships or an employee termination that devolves into a charge of discrimination. One error can lead to costly investigations, litigation and fines, not to mention the loss of time and production. An HR outsourcing partner can provide guidance and implement best practices to reduce the chance of making mistakes and to minimize your company’s exposure to liability.

And, in general, compliance with local, state and federal employment laws can be a complex endeavor, especially as businesses grow in headcount and expand to new territories. The legal landscape is constantly evolving and staying apprised of new developments is a full-time occupation on its own. An HR outsourcing partner can help your company monitor changes and stay ahead of the curve so you’re never out of comopliance.

5. Get the most out of your people

An HR outsourcing partner can positively impact your employee experience, which has a downstream influence on employees’:

• Engagement
• Satisfaction and fulfillment
• Morale
• Productivity
• Retention

From offering a convenient self-service portal to a well-conceived training and development program, or offering a top-tier suite of benefits to helping you foster an outstanding culture, an HR outsourcing partner can have a significant effect on how employees feel about your workplace. If they enjoy your workplace and feel a sense of commitment and loyalty, your company is more likely to leverage them to their full potential and reduce the costs of constant turnover.

Businesses who use a PEO

These stats come from NAPEO, who also shares that annual median growth for PEO users is double than that of comparable non-PEO firms.

5 challenges and risks of HR outsourcing to consider

Although all these benefits listed above are important, there are also some pitfalls your company should look out for when considering outsourcing HR.

1. Misplaced employee anxiety

Your HR staff may be concerned at the news that you’re considering outsourcing some HR functions. Understandably, they may worry about:

• How their job will be impacted
• Whether you think they’re incapable
• If they might be let go

When left unchecked, these fears can escalate into disengagement, low morale and a premature exit from your company.

Proactive, open communication can help alleviate these tensions. Explain to them:

• Your overall vision for the company and where it’s headed
• Why you’re making this change
• How you expect this change to affect – and even benefit – them
• How you’re prepared to help them adjust to this period of change

Depending on which type of HR outsourcing partner and level of service you choose, there should be a process in place to guide your company through this transition and make it seamless.

2. Diminished employee relationships

When working with an HR outsourcing partner, many companies perceive a loss of control to varying degrees. In some cases, companies relinquish direct management and oversight of critical HR responsibilities, including employee relations and performance management. It’s a common concern that, as a result of this lack of personal touch, distance may develop between employers and employees, leading to an adverse impact on company culture. Be sure to keep an open dialogue going with employees.

3. Cybersecurity

Any HR outsourcing solution will have access to sensitive employee data and personal information. Data breaches that may occur within their systems can cause your people irreparable harm and can also hurt your company’s reputation. Carefully assess the HR provider’s cybersecurity measures, audits and personnel training to determine how well they prevent unauthorized access to their systems.

4. Hidden costs

At first, the administrative fees associated with your HR outsourcing partner may look great. However, evaluate whether there are add-on fees for essential services, which can make initial administrative costs appear artificially low yet, ultimately, erode any anticipating savings. To get the full picture on total expected costs, dig deeper and confirm which services are included.

5. Difficulties switching HR providers

Closely review your contract to find out how complex it may be to terminate your relationship with your HR outsourcing partner if you’re unhappy with the services they provide. For example, confirm whether there is a cancellation clause in your contract that dictates certain obligations on your part. Also consider the tax implications of changing providers or risk of service disruption.

Types of HR outsourcing

With all the benefits and challenges of HR outsourcing in mind, which type of HR provider is right for your company?

There are three main types of service to choose from.

1. Human capital management (HCM) software

HCM is a general category of software provided by many different vendors and adopted by companies of all sizes. The purpose of this software is to help companies manage people more efficiently over the course of the entire employee lifecycle by streamlining and automating many HR processes and day-to-day functions so that HR personnel are freed to focus on strategic, value-add activities.

Before hire, HCM software can include an applicant tracking system and tools to manage interviews and rate and compare candidates.

During an employee’s tenure, HCM software can serve as a centralized place to store comprehensive employee records. It can handle many tasks such as payroll, benefits administration and performance management. In some cases, advanced HCM technology can even have predictive and analytical functionality that helps business leaders recognize and evaluate workforce trends so they can take proactive measures.

After an employee leaves the company, HCM software can assist with tasks that still touch former employees, such as 401(k) management.

However, HCM software offers the narrowest HR outsourcing assistance. After all, it’s just technology – there are no HR professionals on hand to answer questions and provide advice when needed. And if you don’t have anyone on staff to operate the software on the back end and manage it over time, you’ll have to find an external resource to assist with this.

Note: HCM software can be bundled as part of the other two primary HR outsourcing options.

2. Administrative services organization (ASO)

With an ASO, companies can receive assistance with administrative services only, such as:

• Day-to-day tasks like payroll and benefits enrollment
• Special projects like the creation of an employee handbook or distribution of employee surveys

An ASO can also help companies by answering HR-related questions and providing advice. However, with an ASO there are no shared employment responsibilities between the HR provider and client company. This means that the traditional relationship between the employer company and their employees is maintained. For example, employees are paid under their employer’s tax ID and employers sponsor their own benefits plans and workers’ compensation policy. In this way, the ASO is truly a third party.

Although an ASO can be a cost-effective means of outsourcing HR with a people component, the service offerings may not be as broad or deep as some companies may prefer. This is why an ASO is often considered a mid-tier option for HR outsourcing.

3. Professional employer organization (PEO)

A PEO is the most comprehensive option for HR outsourcing, giving companies a one-stop shop for any HR service or support a business may need – far beyond what an ASO delivers. Which HR services get outsourced are described in a client service agreement.

This can enable employers to take a completely hands-off approach to HR, instead relying on what amounts to a fully plug-and-play HR infrastructure.

The other big differentiator of a PEO is the concept of shared employment responsibility – also known as co-employment. When your company partners with a PEO, the PEO employs your workforce while you maintain a separate employment relationship with your employees as well as operational control of the business. This means that a PEO:

• Pays employees under its own tax ID
• Administers benefit plans (often giving companies access to higher-quality plans with a greater variety of benefits)
• Assumes greater liability in the event of certain legal problems

As a result, client companies can offload much of their employer liability to PEOs – a huge advantage of the co-employer partnership. PEOs are willing to accept these liabilities because they trust that their expertise and breadth of services helps to mitigate employers’ risks.

Callout on Specific PEO Benefits:

PEO BENEFITS

• Available for one comprehensive monthly or annual administrative fee (often calculated as a flat fee or percentage of employee payroll)
• Streamlines and bundles the widest range of HR services under one umbrella, thereby offering the greatest amount of flexibility in support
• Covers both strategic and tactical HR services
• Provides employees with superior benefits
• Frees business leaders from researching plans and policies, or negotiating insurance prices
• Helps to improve budgetary predictability for employers
• Assumes a significant portion of employer liability
• Reduces employer risks the most, and includes employment practices liability insurance (EPLI) coverage
• Delivers a nimble, scalable HR infrastructure

4. Certified professional employer organization (CPEO)

A CPEO offers the same level of service and support as a PEO, except that this type of HR provider has achieved certification with the U.S. Internal Revenue Service (IRS). This certification allows the CPEO to assume greater responsibilities around payroll administration and federal tax reporting. Achieving this certification involves rigorous background checks, financial audits and more.

The additional safeguards and advantages of working with a CPEO:

• CPEOs are solely responsible for payment of federal employment taxes on wages they pay to worksite employees. This way, customers no longer worry about potential liability for unpaid payroll taxes if the CPEO fails to make such payments.
• The law governing the CPEO relationship allows customers to keep specified tax credits for which they would otherwise be ineligible.
• There are no more wage-based restarts for new customers – even during the year.

Choosing the right HR outsourcing partner

The type of HR outsourcing that your company selects will depend on your:

• Budget
• Current HR situation, including the challenges and opportunities before you
• Level of assistance needed (your must-have HR features)
• Desire to be involved in any HR activities
• Business goals for the future

Considering a PEO/CPEO? They’re not all created equal. Here are some other PEO-specific issues to consider:

• How does the PEO structure, deliver and price their services?
• Does the PEO specialize in or prioritize certain services over others?
• Which HR services are covered?
• How much will service fees increased each year?
• Is the PEO local/regional or are they national in reach?
• Is the PEO financially strong? (Review their annual report and financial statements.)
• Does the PEO have references you can check?
• How experienced are the team members?
• What is the PEO’s staff support ratio?
• Is the PEO web based or are their offices fully staffed?
• Will you have a dedicated team and points of contact, and can you meet these HR professionals?
• How will the PEO communicate with you and how often?
• Does the PEO carry employment practices liability insurance (EPLI)?
• Which benefits are offered and how are they funded?
• What is the PEO’s HCM software like?

Technology and HR outsourcing

Nowadays, HR technology is no longer an option – it’s a necessity for doing everything from basic HR tasks to advanced analytics.

However, many businesses doing HR on their own struggle with common HR technology woes:

• They often have to use multiple systems (and multiple vendors) to handle different tasks, which is inefficient and confusing.
• Their systems aren’t fully integrated, which means they don’t interface with each other and require too much manual effort, introducing the possibility of errors.
• Systems are overly complex and require costly IT support to operate and manage them.
• Systems are limited to in-the-box capabilities, which prevents you from using them the way you need to.
• Systems have limited storage, requiring additional costs to upgrade or customize software to incorporate all employee data.
• Disruptive system upgrades cause interruptions, outages and lost data.
• Systems lack scalability.
• A standalone HCM system is pricey and requires ongoing maintenance and support fees.

Your optimal HR outsourcing partner can resolve these issues and help you fully leverage the power of HR technology to your company’s benefit. Ideally, your HR provider will enable access to HCM technology that captures your important employee data and HR processes and stores them into one central, secure, cloud-based system while automating a wide range of tasks. Furthermore, the HCM technology from your HR provider can support extensive reporting and analytics and can scale with your organization.

The future of HR outsourcing

What does the future of HR hold?

Companies will:

• Continue to become more distributed, with hybrid employees and remote employees located in other states and even around the world
• Have to step up their competitiveness in attracting and retaining the best talent, paying ever more attention to employee priorities such as culture, wellbeing, work-life balance, flexibility, top-tier benefits and development to align with their expectations
• Rely even more on data to help them glean more workforce insights, predict near-term outcomes, make better HR decisions and enhance their people strategy

These scenarios all point to increased HR complexity and, with it, greater demands for specialized expertise and a smart, strategic approach. An HR outsourcing partner can guide your business and help it thrive in the modern workplace.

Summing it up

For many small- to mid-sized businesses dealing with the realities of operating in today’s fast-paced and ever-evolving work environment, HR outsourcing just makes sense. Hiring experts with both general and specialty knowledge to do HR for you can benefit your business in myriad ways, from saving you time and money to enabling you to scale efficiently, reduce employer risks, maximize the potential of your people and just make life less complicated for you. Although there are some drawbacks to consider and prepare for when outsourcing HR, the advantages of taking HR off your plate are well worth it.

Out of all tiers of HR support you can procure, a PEO/CPEO – or co-employer – is the most comprehensive and in depth. As you consider which HR outsourcing partner to collaborate with, ask critical questions and probe further to determine whether the HR provider is the optimal option for your budget, needs and goals. With the right HR outsourcing partner at your side, your company will be set up for success now and into the future of HR, which is only getting more complex.

To learn more about HR outsourcing, download A step-by-step guide to HR outsourcing.