Human Resources is one of the most critical functions for a small/mid-size business. HR Compliance alone presents so much risk and liability as an owner builds and grows an organization. One violation could cost an employer thousands, sometimes enough to put them out of business. The legalities involved with having employees are so cumbersome that they can legitimately occupy a full-time job, in addition to the administrative burden that occurs as a result.
The question then becomes, “Does a company hire someone to handle this function or do they outsource?” Or a combination of both? HR administration does nothing for a company’s bottom line – but it is necessary. In fact, many companies view HR as simply a cost center that adds no value to an organization, thus making an argument that HR is the poster child for outsourcing. Why hire someone or add additional headcount when you can outsource for a fraction of the cost? This may be true in some scenarios.
There are 3 main forms of outsourcing in the HR space. One form of total outsourcing could include a co-employment arrangement with a Professional Employer Organization or PEO. Many small to mid-size employers have found value in this type of arrangement. The four main benefits of co-employment include:
- Shared Risk – the PEO shares in the compliance aspect of the HR function. It reduces the exposure and risk an employer bears by incorporating the business under their tax ID. The PEO sets strict guidelines for hiring and termination practices and ensures that you operate within the guidelines of governing bodies including the IRS, DOL, EEOC, OSHA, ERISA, COBRA/HIPPA.
- Administrative Relief – the PEO brings robust technology for managing payroll processing, HR, and benefits administration to the small market. These HRIS systems are not affordable for a small business on a standalone basis. The automation that these systems create add value by elimination of redundant processes and improve consistent employee communication through employee and manager self-service. Benefits administration is a key component in the deliverables of a PEO’s technology offering because it is such a compliance driven and error prone process.
- Improved Insurance Offerings – the PEO provides access to quality insurance options not readily available to the small market at an affordable rate. Employers enjoy the buying power of the larger organization to obtain health and worker compensation insurance. Many times the rates through the PEO are far less than what an employer could obtain on their own. Through economies of scale a PEO also protects an employer from hefty increases related to workers’ compensation claims.
- Access to HR professionals – the PEO provides employers resources for managing day-to-day employment issues and best practices for keeping your employees happy and productive. The PEO provides an outlet once an employment issue arises. They deal with lawsuits involving wrongful termination, discrimination, harassment, unemployment, etc.
Many PEO’s are becoming more flexible with their clients to allow certain components of the PEO to be “carved out” of the co-employment arrangement. These include health insurance, 401(k), and workers compensation. The employer may be able to obtain better arrangements as their own entity and don’t need the economies of scale that the PEO can offer.
Another form of outsourcing is an Administrative Services Outsourcing or ASO arrangement. Similar to a PEO, an ASO incorporates best of breed HRIS technology alongside a menu of additional HR services including COBRA, FSA administration, Unemployment Management, 401(k), Time and Attendance, and Recruiting. The ASO model seeks to eliminate or automate the transactional components of HR Administration. Many ASO’s will also do fractional HR or project work for an additional fee. The main difference is that the employer remains under their own tax identification number. This scenario allows the employer access to high touch HR expertise, thus potentially eliminating the need for added head count in the HR department while still allowing internal control.
The final form of outsourcing is Human Resource Outsourcing or HRO. This may also be referred to as BPO, Business Process Outsourcing. This has traditionally only been available to larger organizations; however, many outsourcers are bringing this model to the mid-market. Like an ASO, an employer remains the “employer of record” in this type of arrangement. In an HRO model, the solution focuses on managing the entire HR business process. The provider manages the HR function by utilizing their own tools on behalf of the client. This includes payroll processing, new hires/terms administration, and benefits administration. In a sense the HRO becomes the HR department, and employees communicate directly with the HRO provider as if they were internal HR. An Employee Call Center is inherent to the solution within an HRO offering.
Each form of outsourcing is very different and has the potential to bring unique value to a company whose goal is to improve the overall efficiency of the HR function. The entire premise behind outsourcing any or all of HR is to allow an organization to spend more time on meaningful tasks that are core to the business. It is paramount to partner with the right HR services provider. This relationship is critical to experience success in the entire business today and to be better positioned for growth in the future.