Many businesses choose to outsource some or all of their HR functions. The primary reason they do so is to save time; by outsourcing administrative duties such as payroll, a business can free up their HR team to focus on business strategy and avoid the tendency for these functions to be delegated to people outside of HR.
So, what are the advantages and disadvantages of outsourcing HR and what should businesses consider?
What are the Advantages of Outsourcing HR?
There are a number of very good reasons why you might choose to outsource HR:
- Reduced costs. Outsourcing can save money by delaying your need to expand the HR team, reducing the costs of hiring and avoiding noncompliance penalties. If you choose a PEO, it can also save you money on benefits, especially health insurance.
- Reduced errors. When things are delegated to other staff such as the receptionist or office manager, this could lead to mistakes caused by inexperience. Best case, this means something has to be redone. Worst case, you might find yourself with a large penalty, a lawsuit, or having to pay missed wages and associated fines and penalties. Mistakes can result in pay being late which has the potential to lead to an increase in employee turnover.
- Access to expertise. By outsourcing HR to a comprehensive solution such as a PEO, you gain access to their experience and expertise. A local PEO will provide you with a dedicated HR specialist that can customize solutions based on your unique needs.
- Improved benefits. If you outsource to a PEO, you will have access to Fortune 500-level master plans at rates you would not likely get on your own. This helps attract and retain talent. You can also offer more perks and voluntary benefits.
- Improved morale. Not only are HR staff happier because they don't have to spend hours on administrative duties, but company-wide morale is also improved due to proper onboarding, competitive benefits, and more.
What are the Disadvantages of Outsourcing HR?
Let’s take an honest look at some of the problems that can show up when you outsource HR.
- Distance. Depending on who you choose, the outsourced HR personnel can end up being distant from your employees and not understanding your company's specific needs or your employee's desires. HR may become inaccessible and employees feel frustrated and under-valued. The best way around this is to choose a vendor who is local and maintains a practice of responsiveness. Working with a PEO that cares enough to learn about your issues and provide an immediate response to a problem is key, especially if you manage a remote workforce.
- Retention issues. When you rely on an outsourcing partner for HR, they might end up being a poor fit for your company culture, resulting in higher turnover and reduced productivity. It’s important to thoroughly vet any outsourced HR partner you’re considering to see if they’re in alignment with your company values and culture.
- Dependency. You can also become dependent on the provider, which can cause problems if you want to switch or if they go out of business. Do your research to find a partner that can scale as you grow.
Many of these issues tend to come up when you outsource instead of having an in-house team. When you outsource in a way which complements your in-house team, you avoid the problems and can reap the advantages of having an extension of your HR department.
How Can a PEO Make HR Outsourcing Work to Your Advantage?
The biggest way a PEO makes HR outsourcing better is by significantly improving ROI. PEOs let you:
- Enroll your employees in their master benefits plan, which allows you to provide better benefits for a much lower cost.
- Allow them to remit payroll taxes for you instead of just telling you how much you owe, which reduces errors.
- Provide you with high levels of expertise across a variety of areas. Because your PEO provides comprehensive HR solutions to a variety of clients, they can learn from that and develop processes you will benefit from.
PEOs are not designed to replace your in-house team, but rather to act as a trusted HR partner. By working with your team, they can help you develop HR processes that support your values and increase productivity.
What Are the Benefits That Outweigh the Risks?
Although there are potential downsides to outsourcing HR, they can be mitigated. The risks are generally outweighed by the significant benefits.
By partnering with a PEO you get a substantial ROI, significantly reduced compliance risks, and you save a lot of time. Although the risk of becoming dependent on an outsourcing partner is very real, PEOs help you build your own team and processes so that when and if you choose to move on to handling everything in-house, you will be ready to do so.
Outsourcing HR is always a good thing as long as you do it right. To find out more, download our latest eBook How HR and PEOs Work Together for Business Success in California.