As we’ve seen in this series
on HR for small business, there are some very important human resources
requirements for small business. You need to hire the right people, offer
competitive pay and benefits, provide effective training, and much more.
Yet in most small businesses, resources are quite limited. With few reserves to draw on and a lot of competing priorities, it can be hard to justify the cost of hiring a dedicated HR team. So HR functions can become a part-time responsibility for the owner or another manager, with the result that they don’t always get the attention they deserve.
In this scenario, outsourcing some or all of your HR functions to an external provider can make a lot of sense. It’s a solution that’s growing in popularity—HR reported 27% growth in 2016, according to a PrismHR report. And the most popular category of target customers for these firms was small businesses with 16 to 50 worksite employees.
So in this tutorial, you’ll learn all about HR outsourcing for small businesses. You’ll learn how it works and why you should consider it, and then you’ll get details of some of the top HR service providers. You’ll also get guidance on how to make the decision and when it makes sense to outsource HR vs. keeping it in-house.
1. How HR Outsourcing Works
You’re probably already familiar with how outsourcing works in general. You take some functions that used to be performed by staff in your own company, and pay an external company to do that work instead.
With HR, it works the same way. Pretty much any of the activities we’ve looked at in this series can be outsourced, from hiring and firing to managing payroll and employee benefits.
It doesn’t have to be all or nothing, either. Although you can outsource everything to an HR service provider, you can also choose from a menu of options, outsourcing some functions while keeping others in-house.
Here are some examples of the different offerings available:
Professional Employer Organization (PEO)
With this model, you enter into a kind of partnership, in which the outsourcing provider becomes a co-employer of your staff members. You still keep managerial control over the work your people do, but the other company is responsible for paying their salaries and benefits as well as other HR functions.
Business Process Outsourcing (BPO)
Whereas PEO is generally quite a comprehensive solution, some firms just want to outsource a particular function or process. That’s where BPO comes in. You could choose to do most of your HR work yourself, and just hire a firm to handle a particular task, such as benefits administration, to a third party.
Software as a Service (SaaS)
The first two options have involved working with companies that provide personalized assistance with HR tasks. This model is somewhat simpler in that it just involves using software applications that are hosted remotely by the service provider and made available to your employees via the internet.
You could use a SaaS solution for training, for example—your employees would log on to an external site to devise training plans, complete the training they need, and track their progress.
2. Why Outsource Your HR?
So now that you know what HR outsourcing is and some of the forms it can take, let’s talk about why you might want to do it. What are the benefits?
According to research by ADP, the top reasons are to stabilize costs, reduce risk, and increase employee productivity.
These three are quite understandable. Let’s look at them in detail.
When you contract with an outsourcing provider, you should be given a clear idea of the costs, so it will be much easier to plan and budget. Your costs may increase if you hire more staff or require more services, but generally you’ll be able to control costs more easily than you would if you did everything yourself.
As we saw in our tutorial on HR requirements for small business, you have a lot of important responsibilities as an employer. You have to keep your employees safe, comply with all the relevant employment laws and regulations, keep the appropriate records, and much more. The rules are changing all the time, and you have to keep on top of it all. Outsourcing your HR work to a specialist provider can reduce the risk of dropping the ball on any of these important requirements.
Increase Employee Productivity
By outsourcing HR to an external provider, you can often provide a more effective service to your employees. The company you work with specializes in doing HR, after all, so they can probably provide more effective training, more efficient pay and benefits administration, more helpful HR software, and so on.
That can make your employees more productive by saving them time and giving them access to better resources. And on top of that, if you currently have some of your managers performing HR functions, you’ll free up their time to focus on the core functions of your business.
There are other, related advantages to outsourcing HR. ADP also did research focusing particularly on benefits administration, and it gives more detail on some of the additional perks of outsourcing.
3. Top HR Service Providers and What They Offer
So who should you choose? Here are five popular options to get you started, with some details of their services.
Keep in mind that there are lots of other providers out there, and I encourage you to do your own research to find one that’s right for you. These are US-based providers, so if your business is based elsewhere, you should see what firms are available in your country.
Despite the name, Paychex offers a lot more than just processing paychecks. It offers a range of solutions for different businesses, including a simple product for small businesses of just 1 to 9 employees that includes:
- recruiting and applicant tracking
- time and attendance tracking
- health insurance
- payroll services
- benefits administration
- and more
For slightly larger businesses of 10 to 49 employees, the Paychex Flex service offers a similar range of solutions with the option to have a dedicated HR professional working with your company. There are options for larger companies too.
Insperity offers a full-service HR package using the PEO model we talked about earlier. Its services aimed at companies with 5 to 149 employees include a wide range of services, such as:
- benefits management
- payroll processing
- retirement services
- performance management
- government compliance reporting
- training and development
- and more
You can also cherry-pick individual solutions if you don’t need the full package.
The good thing about Jumpstart is its flexibility. You can continue to do HR in-house if you want, and just get important questions answered by signing up for a certain number of monthly phone calls or hours of support. Or you can hire the company to complete particular HR projects like creating an employee handbook or writing job descriptions. Or you can pass over a large proportion of your regular HR work with the “HR Strategic Partner” package.
XcelHR works with large businesses of up to 1,500 employees, but it also has offerings for small to mid-sized firms of 1 to 250 employees. You can opt for a bundled PEO product or individual services such as:
- payroll services
- HR administration (including compliance with labor laws)
- benefits administration
- talent acquisition
- risk management
- HR audits and consulting
There’s also a useful “Resources” section on the website where you can get guidance on everything from overtime rules to employee engagement strategies.
ADP is a massive company that often provides HR solutions for large corporations, but it also has a dedicated small business offering aimed at firms with 1 to 49 employees. So you get the benefit of sophisticated systems and a wealth of experience, but with solutions aimed at small businesses.
You can get a combined package of payroll and tax filing services bundled with hiring and HR management services, which includes:
- job posting and applicant tracking
- background checks
- employee handbook wizard
- HR forms and documents
- HR training and toolkits
- and more
As with the other providers, pricing is customized for each client and is not quoted publicly, but you can currently get two free months of payroll services when you sign up.
4. Insourcing or Outsourcing?
As we’ve seen in this article, HR outsourcing can make a lot of sense and provides some benefits for small businesses. And there’s quite a range of different options available. But it’s not right in all situations. In this section, we’ll look at how can you make the decision about whether to outsource or not.
First of all, you need to get a clear idea of what you’re doing currently and who’s doing it. Small businesses often do things informally, so take some time to make sure you’ve fully accounted for everything. Look at all the different HR functions within your business (you can use the articles in our HR series for reference, to check that you’ve covered all the areas).
Then make an estimate of how much time each person spends on those functions, and what that time is worth. For example, if your office manager spends five hours a month on payroll processing, and that person is paid $30 an hour, then the cost of doing payroll in-house is $150 a month.
That’s important because it helps you to assess the value of the outsourcing services you’re investigating. In the simplified example I just mentioned, if you can find a provider who offers payroll processing for less than $150 a month, it would be worthwhile to make the switch.
Also consider the size of your business and how much you expect to grow. For small businesses with just a few dozen employees or fewer, outsourcing can make a lot of sense because it’s hard to justify the cost of having a full-time HR professional on staff. For very small firms with just a few employees, an online software solution is probably enough.
But if you have more employees, or if you plan to grow quickly, keeping HR in-house can make a lot of sense. The size of your company can easily keep an HR professional busy, and you can gradually build a whole department as you continue to grow.
Employees may value having a friendly face within the organization as a regular point of contact—it’s more personal than a software solution or a distant HR company accessible only online or by phone. That person can help with things like resolving employee disputes and arranging morale-boosting events, really helping to bring everything together.
If you do decide to outsource, remember to research lots of different options to help you find the right arrangement for your business, with the appropriate levels of cost and service.
And when you’ve decided on a provider, make sure you have a clear understanding of the level of service that will be provided, what will happen if the provider falls short, and how you can terminate the arrangement if you need to.
In this tutorial, you’ve learned all about HR outsourcing for small businesses. You’ve seen what it is, how it works, and what the benefits are. You’ve learned about some popular providers and what they offer, and you’ve seen how to make the decision on whether outsourcing is right for your business or not.
There’s still more to come in this comprehensive series on HR for small business, so stay tuned to find out about small business HR software solutions and more!
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