Why Small and Medium Enterprises Must Outsource Their HR

Save costs, avoid legal issues, and drive higher business performance by outsourcing your HR

Did you know that nearly 50% of businesses fail within the first 5 years and nearly 90% of startups fail?

There are various reasons why a business may fail. But neglecting the HR function is a likely factor.

If you neglect HR, your business will face these issues:

  • Compliance risks
  • Bad hiring practices
  • Low morale and toxic work environment
  • High turnover rates
  • Poor performance

Make no mistake…The above issues could ultimately derail your business!

HR plays a critical role in protecting your business from legal issues and creating the right policies, programs, and culture to drive productivity, employee engagement, innovation, and business performance.

In fact, recent research shows that companies with effective HR practices have up to 3.5 times the revenue growth and as much as 2.1 times the profit margins of companies with less capable HR practices.

So the question is:

Should you go in-house or outsource your HR functions?

What are the functions and responsibilities of modern HR?

Before deciding whether to hire an outsourced HR firm or build your own in-house HR department, let’s review the roles and responsibilities of modern HR management.

Outsourced HR tasks

HR has traditionally been viewed as an administrative and compliance function. Some of the tasks of traditional HR include:

  • Processing and administering payroll
  • Ensuring compliance with local, state, and federal employment laws and regulations
  • Developing employee handbooks and contracts
  • Administering employee compensation and benefits
  • Handling worker complaints
  • Creating policies and procedures
  • Recruiting and hiring/firing employees
  • Conducting performance management

While performing the above tactical HR tasks is still an important part of HR, today’s businesses require far more from HR in order to be competitive.

The HR function today needs to be more strategic in order to help businesses adapt and respond to today’s dynamic business environment and drive better employee engagement and performance.

In other words…

Strategic HR is a must — to help your business effectively compete in today’s business environment.

A strategic HR plan involves working with other departments and the leadership team to develop proactive plans and programs aligned with the long-term strategies, objectives, and goals of the business — at its current stage and where it is headed.

Some of the things your HR strategies need to consider include:

  • Culture and employee experience to improve employee engagement
  • Competitive compensation and benefits
  • Employee development & training
  • Leadership development
  • Employer branding & talent acquisition
  • Onboarding of new hires
  • Performance management
  • People analytics
  • HR tools and technologies

If you slip up on or fall short on any of the tactical and strategic HR areas, it could lead to major legal problems for your business as well as having a negative impact on employee engagement and performance.

Why you need a team of specialists to manage all the HR functions

Having both the traditional and strategic HR components is essential to protect your business from legal risks and create a healthy work environment.

And a healthy work environment is especially critical to attracting and retaining the talent needed to compete in today’s competitive business environment.

But this requires a team of specialists in many areas of HR, including benefits and compensation, payroll, employment laws and regulations, culture, employee engagement, performance management, talent acquisition, employer branding, HR technologies, people analytics, policies and procedures. 

As you can see, managing all of the above can be complex, time-consuming, and demanding.

One or two HR generalists simply cannot handle the complexities of managing all the HR, Payroll, Technology, and Compliance issues today.

While larger organizations can build a team with all the necessary skill sets, small and medium businesses (less than 200 employees) just don’t have the resources and the know-how to properly handle all the complex, time-consuming, and demanding HR tasks and strategic initiatives.

Because of this, it is estimated that 50% of businesses outsource all or part of their HR needs.

At the minimum, a competent HR outsourcing provider can help you manage all the tactical aspects of HR, including HR and Benefits administration, compliance, payroll processing, and recruiting.

More importantly, the right HR outsourcing partner can help you implement strategic HR initiatives to help you drive higher productivity and business performance.

Benefits of HR outsourcing

#1: Get support and guidance from a team of experts without incurring the heavy overhead costs
Hiring and building a team of in-house specialists is expensive so it makes sense for small and medium-sized businesses to outsource their HR function. By outsourcing your human resources needs, you can get the support and guidance from a complete team of experienced and credentialed HR, Benefits, Payroll, Compliance, Recruiting, and HR technology specialists without incurring the heavy overhead costs (salaries, taxes, insurance, vacation, office spaces). 

#2: Outsourced HR helps you reduce HR and employment compliance risks
Employment laws and regulations are getting more complex and constantly changing. With the guidance from a competent outsourced HR provider, you can have peace of mind knowing that they have up-to-date knowledge on any recent changes to employment laws and regulations and help you stay compliant with the current state and federal rules and regulations.

#3: You can offer your people better benefits and perks
An outsourced HR firm can help you get access to the entire benefits marketplace, and give you sound advice to design a benefits and perks package that is competitive and attractive.This helps you to not only retain your best talent, but also attract new talents.

#4: An HR outsourcing firm can help you build your own HR infrastructure
If your organization wants to eventually build your own HR department, you can start building the foundation with the help of an outsourced HR firm. The right HR outsourced firm can build and manage a complete infrastructure of processes, policies, procedures, and employee communications, all bundled with the technology for a complete, efficient, tactical HR, Benefits & Payroll infrastructure that can scale with your business. And because it is custom-built for your business, you can take it over when you’re ready.

#5: Your employees will be more productive and engaged
Your people are your most important asset and your competitive advantage. In order for them to be performing at their best, they need to be in a healthy work environment where their needs are taken care of. Without adequate HR support, they may have a poor work experience and low morale, which leads to low commitment and engagement.

By working with an outsourced HR firm, they provide access to best in class technology and help create the right policies and programs to take care of employees’ needs and well-being, and set up your employees for success.

Additionally, the right HR outsourcing firm can also help you with developing the necessary HR and people strategies to engage and inspire them to do their best works. This may include implementing strategies and processes to improve hiring and on-boarding as well as improving workplace culture, training & development, and performance management.

Costs of HR outsourcing

The cost of fully outsourced HR services depends on a few different factors. Variables such as the number of employees, the range of services you choose, and geography will affect your overall cost.

Service fees charged by an outsourced HR provider is either a flat Per Employee Per Month (PEPM) (sometimes Per Employee Per Payroll (PEPP), or a percentage of payroll.

Beware of the fee structures based upon the percentage of payroll because with this structure, every increase in wages and every bonus will also increase your costs of benefits, workers compensation, unemployment taxes, and service fees.

A far more equitable way of charging service fees is based upon a PEPM or PEPP model. A typical PEPM charged by PEOs and HROs is in the range of $80 – $175 with variability based upon several factors such as company size, pay frequency, industry, expected turnover, number of exempt vs. non-exempt staff, and number of locations.

In either model, it’s important to understand what transactional or non-recurring fees will apply.

At the end of the day, it’s about finding the right HR partner that is competent and reliable. Never be penny-wise and pound-foolish and compromise quality over costs for a critical function such as HR!

What are your HR outsourcing options?

For small and medium-sized businesses that are experiencing growth and struggling to manage the HR function, outsourcing your HR can help your business run more smoothly and successfully.

Even if your business has grown to 100+ employees and you have hired a few in-house HR specialists, you should consider continuing to outsource many of the administrative HR tasks so that your in-house HR team can focus on more high value and strategic HR activities.

Now that you understand the benefits of HR outsourcing, you now need to learn about the different HR outsourcing options available out there.

You have mainly two options when it comes to completely outsourcing your whole HR, Payroll, and Benefits administration:

  • PEO (Professional Employment Organization) – A PEO company employs a co-employment partnership, and employer responsibilities are shared between your company and the PEO.
  • HRO (Human Resources Outsourcing) – An HRO company can offer a more customized solution and offers a more flexible partnership.

A PEO or an HRO company can manage all of your HR, Payroll, and Benefits administration.

The two HR outsourcing models have differing approaches to managed HR outsourcing, which have different benefits and ramifications for your business.

To determine which HR outsourcing solution is best for helping your business scale efficiently and succeed, it helps to understand how each model operates and what it can do and can’t do.

To learn more about PEO and HRO managed HR outsourcing, get our PEO vs. HRO guide.

Or you can request a free consultation from a Melita HR solutions advisor to learn which HR outsourcing solution is best for helping your business save costs and function more smoothly.

HR outsourcing guide