So, you’ve made the decision to outsource at least some of your company’s human resources (HR) needs. Likely, one of these broad scenarios aligns with your business situation:
- You have a robust HR team, but you want to take your HR game to the next level.
- You have a small HR team that needs additional day-to-day support.
- You only have one employee – such as an executive assistant – serving as your HR point person and it’s not their primary area of specialty.
Regardless, you’ve done your research and you know you need help. You’ve evaluated the benefits, including both the hard and soft cost savings of HR outsourcing.
But then there’s the next major decision: what type of HR outsourcing is best for your company and the unique circumstances your business faces?
Did you even know that there are several outsourcing options you can choose from?
Let’s discuss the main options, how they differ from each other, and why you might consider each.
Three main types of HR outsourcing
1. Human capital management (HCM) software
As a whole, human capital management (HCM) is dedicated to the idea that there’s a better, more efficient way to manage people – and HR technology can play an important role in facilitating this.
To that end, HCM is a general category of software provided by many different vendors and leveraged by companies of all sizes. Essentially, it’s a program that contains information about a company’s workforce.
HCM software helps HR teams operate more effectively and covers the entire employee lifecycle.
Before hire, it can include an applicant tracking system and tools to manage interviews and rate and compare candidates. During an employee’s tenure, it can serve as a centralized place to store comprehensive employee records and grant efficient access to authorized HR personnel. It streamlines and automates HR processes, and can handle day-to-day functions such as payroll, benefits administration and performance management.
After an employee leaves the company, it can assist with tasks that still touch former employees, such as 401(k) management.
However, the full functionality of an HCM system extends far beyond these basic components. Advanced components include predictive functionality that can help business leaders recognize and analyze workforce trends. In fact, some systems are so sophisticated that they can, for example, identify employees who are likely to quit!
The pros of HCM software:
- Streamline and centralize employee records
- Automate administrative tasks and help HR teams to be more efficient
- Free HR teams to focus more on strategy and value-add activities
- Offer many modules and functionalities – some of which are quite advanced
- Boost analytics capabilities, which can lead to proactive prevention of workforce problems and recognition of opportunities to make positive changes
- Can be the most cost-effective HR outsourcing option (if you have someone on staff to manage it)
The cons of HCM software:
- It’s just technology – there’s no people component. It doesn’t replace having HR professionals on hand to answer questions and provide advice.
- 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 help with this.
- The abundance of functionalities can be a positive and a negative. Sometimes, additional functionality can just mean more complexity. If you don’t invest the time and resources for your HR personnel to learn about all your HCM system’s capabilities and train on how to use them, they won’t leverage it to the maximum extent and you won’t get your full return on investment.
2. Administrative services organization (ASO)
To remember this easily, think of an ASO as administrative services only. An ASO is simply an outsourced HR resource that companies can rely on to:
- Handle day-to-day administrative tasks
- Oversee special projects (for example, the creation of an employee handbook or conduct employee surveys)
- Answer questions
- Provide advice
- Assist with challenges
HCM software capabilities can come with ASO services – and now you get HR professionals to help you manage your system!
With an ASO, there is no shared employment responsibilities between the HR provider and the client company. In other words, the traditional relationship between the employer company and their employees is maintained. Employees are paid under their employer’s tax ID, and the employer sponsors their own benefits plan and workers’ compensation policy. The ASO is truly a third party.
The pros of ASOs:
- Obtain HR guidance and expertise without having to hire or maintain a larger HR team
- Enjoy peace of mind that administrative, day-to-day tasks are handled and your company remains in legal compliance
- Can be a cost-effective means of obtaining HR assistance with a people component
- Don’t have to change your benefits plan or insurance policy when you hire an ASO
The cons of ASOs:
- Service offerings aren’t as broad or deep as some companies may prefer.
- The employer continues to be responsible for obtaining, managing, and funding its benefit plans, although ASOs can help with management responsibilities.
- Lack of shared employment responsibilities means that an employer’s exposure to liability is not limited – you are 100% responsible for liability in the event of any legal problems.
3. Professional employer organization (PEO)
As with an ASO, HCM software capabilities are typically bundled within PEO services along with the critical people support.
What really differentiates a PEO is 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 the PEO:
- Pays employees under its own tax ID
- Administers the benefit plans
- Assumes greater liability in the event of certain legal problems
Generally, the co-employment model of a PEO represents the only way for employers to offload liability, which is one of the biggest advantages that PEOs offer to companies. As an employer of your employees, PEOs undertake some liabilities as an employer. They are willing to accept these liabilities because they trust that their expertise and breadth of services helps to mitigate employment-related risks, which also benefits their clients by helping them to avoid legal issues in the first place.
Which HR services get outsourced and which liabilities are shifted to the PEO are spelled out in your client service agreement.
Note: You should also know about certified professional employer organizations, or CPEOs, which is simply a PEO that has achieved IRS certification, allowing it to assume greater responsibilities around payroll administration and federal tax reporting.
Many misconceptions about PEOs exist among business leaders who aren’t familiar with the service model. They think they’ll lose control of their business, have to fire their existing HR team or won’t be able to make hiring or firing decisions independently. They also assume it’s always the most expensive option. None of these things are true.
Pros of PEOs:
- Streamline and bundle the widest range of HR services under one umbrella
- Provide employees with access to higher-quality and a greater variety of benefits
- Free business leaders from researching or selecting plans and policies, negotiating prices and dealing with any day-to-day HR minutiae that they wish to avoid
- Offer companies EPLI coverage and support in the event of certain legal problems
- Provide flexibility – a PEO can effectively serve any business size, either complementing an existing HR team or acting as a completely outsourced solution so companies don’t have to maintain an in-house HR team
- Set companies up for growth
Cons of PEOs:
- In some circumstances, it can be the most expensive HR outsourcing option. (Of course, other times, when employers consider the costs of running their business and the results they’re trying to accomplish, working with a PEO makes the most financial sense.)
- The PEO’s benefit plans may use different insurance carriers, or offer different plan designs, but most PEOs will allow you to keep your existing plans and opt out of the PEO’s benefit plans.
- Some business owners view having all services bundled under one umbrella negatively. They like to be involved in decision making behind each HR solution and want the flexibility and freedom to make changes, and may even prefer to continue to sponsor their own benefit plans so that they can select the coverages and manage the benefits however they choose. With a PEO, particularly when the PEO provides the benefits to the employees, the business owner will not have this level of control.
How to decide?
Think of HCM software, ASOs and PEOs as accumulating levels of service. HCM offers the narrowest form of support, an ASO is the mid-tier option, and a PEO offers the most diverse and comprehensive form of support via a co-employment model.
The type of HR outsourcing that your company ultimately selects depends on your:
- Current HR situation
- Goals for the future
As you evaluate HR providers, remember to check licensing and accreditation, review references and research the company’s history and security.
Summing it all up
There are three types of HR outsourcing you can leverage: HCM software, ASOs or PEOs. Each option provides an increasing level of support. HCM software is the most limited. An ASO brings together both the tech and people resources to provide a more robust, third-party HR solution. Building on what an ASO offers, a PEO provides the most comprehensive suite of services under a co-employment service model. What you choose depends on your budget, current HR situation and goals.
For more information about the different types of HR outsourcing available to you, download our free magazine: The Insperity guide to HR outsourcing.