Outsourcing HR: What Are the Benefits?

Many small, mid-sized, and large businesses with limited personnel often find themselves overwhelmed by HR demands. If your company is stretched thin managing critical HR areas, consider getting help through outsourcing HR. Many outsourced HR services are designed to streamline business functions, reduce expenses, and help companies meet their operational goals.

What Is HR Outsourcing?

Human resource outsourcing is using an experienced third-party provider to assist a business with specific HR functions such as:

• Attracting and developing talent
• Keeping businesses aware of developments that may impact legislative and regulatory compliance requirements
• Managing benefits and payroll administration

In many cases, working with a third-party provider includes access to a scalable HR technology platform and guidance and support from a knowledgeable HR professional.

By shifting your team's focus from administrative tasks to strategic efforts, your team can make more comprehensive and lasting contributions with the help of HR outsourcing services.

How Does HR Outsourcing Work?

There are a few options for HR outsourcing (HRO). One option for outsourcing HR is a professional employer organization (PEO). PEOs offer comprehensive HR services that help businesses manage day-to-day operations and provide expertise in many HR areas.

PEOs have gained popularity in recent years. According to the National Association of Professional Employer Organizations (NAPEO), PEOs provide services to nearly 200,000 businesses employing approximately 4.5 million people. There are 523 PEOs in the United States, with industry revenue estimated at $305 billion.

Businesses can also choose an administrative services only organization (ASO) for outsourcing human resources. While its services are like those of a PEO, ASOs are designed so that businesses maintain employer of record status. That means an ASO can help manage your business's payroll and tax filings, but taxes are filed under your company's federal employer identification number. An ASO can also help manage your company's human resources functions, but it doesn't sponsor employee benefit programs or workers' compensation coverage.

When Should You Consider Outsourcing HR?

With ever-mounting challenges and today's economy,¹ 64% of companies spend over 570 hours a year on HR administration, costing them as much as $350,000 annually. Almost 2 out of 3 respondents spend at least 11 hours a week on HR administration — more than 25% of the average workweek.

Using outsourced HR services at any point can be beneficial, but how do you know when it's time to get HR support for your business?

• Your HR team's primary focus is administrative: When HR staff spends most of their time on data input or forms processing, it might be time to look at outsourcing or upgrading to more robust HR systems. Your team being limited to predominantly administrative work takes members' focus off strategic contributions.
• Employees don't have self-service access: HR managers no longer need to handle every aspect of benefits enrollment, updating employee information, retirement plan information, or employee training. Leading HR technologies provide employees with self-service portals that help them complete many basic tasks. A self-service portal frees HR staff time, and many employees find the process more convenient.
• Your HR system doesn't support mobility: Mobility for critical HR services is essential. Cloud-based solutions that support off-site access to the company are becoming the norm. You may need to update your HR technology if your employees can't complete essential functions from their smartphones or tablets.
• HR is becoming a cost center: Ideally, HR should function as a strategic asset, not a liability. It may be time to ask yourself how external expertise or better technology can help.
• You struggle to keep up with regulatory requirements: You must understand current federal, state, and local laws and regulations that may affect your business. Companies lacking in-house expertise may want to get compliance support.

7 Benefits of HR Outsourcing

Small businesses should consider the advantages of choosing to outsource HR. According to a Paychex study,¹ almost 7 in 10 leaders with 100 to 249 employees spend more than 1 week each month on HR tasks. On average, this costs $233,896 annually and grows to $10.7 million annually for larger employers.

The number one benefit for leaders surveyed who outsourced HR administration was having fewer mistakes, which was cited by 51% of respondents. Other outsourcing benefits included increased productivity (41%), better analytics and reporting (35%), improved regulatory compliance (35%), and reduced costs (34%).

The benefits of outsourcing human resources include:

1. Time To Focus on Business Productivity

More than 2 in 5 leaders shared that they outsource to increase productivity. Instead of spending time handling administrative tasks, business owners can focus on more strategic business functions that offer greater potential rates of return.

2. Access to an Enterprise-Class Solution

Small businesses that work with a PEO may enjoy similar benefits offered by larger employers. This can help them save on costs and compete more effectively for great talent. More than 1/3 of leaders said they receive better analytics and reporting from outsourcing HR.¹

3. Compliance Help

Many small businesses struggle to keep up with changing labor and employment laws and regulations. Failure to comply with laws and regulations can lead to serious financial consequences. Outsourcing HR to a trusted provider may help business owners understand and comply with these laws and regulations. In fact, 35% of the leaders said they improved their ability to stay in regulatory compliance by outsourcing HR administration tasks and duties.

4. More Effective Recruitment Efforts

Improving recruitment to support company objectives was cited by HR leaders as a top priority, according to the 2023 Paychex Pulse of HR Survey. Outsourcing recruitment efforts to third-party providers offers a practical and cost-efficient method of improving a business's recruitment strategies.

5. Save on Costs

HR administration can cost a business $234,000 annually for a company with 5 to 500 employees and can jump to over $10 million for larger employers.¹ HR outsourcing, particularly PEOs, could help small businesses with tight budgets.

6. Free Up Time and Resources

Human resource outsourcing may help businesses lower health costs, reduce HR expenses, process fewer workers' compensation claims, reduce turnover, and help generate higher revenue growth.

According to business leaders,¹ the HR tasks that take up the most time are managing 401(k) or other retirement plans (11%), benefits administration (10%), payroll processing (10%), managing multiple HR systems/applications (10%), and people management (10%).

¹ 2024 Priorities for Business Leaders

7. Gain Access to Expert Guidance

Today's leading HR outsourcing providers offer dedicated guidance from an HR professional. They can educate and guide you through complex laws, regulations, and employee-related matters. With the experience and expertise that an HR professional can deliver, a business may:

• Elevate customer service relationships both internally and externally
• Potentially minimize costs associated with turnover and poor employee morale
• Focus more on strategic planning for future growth

Businesses can reap these benefits without the expense of additional staff while retaining the experience and expertise needed for business success.

Potential Disadvantages of HR Outsourcing

Depending on the type of business, there are certain disadvantages of HR outsourcing:

• An extended period needed to fix errors in outsourced duties (because the third-party provider is not onsite)
• Possible shortcomings for help with recruitment when a third-party provider lacks a keen understanding of company culture

Businesses can offset these potential disadvantages when they take the time to explore the capabilities and expertise offered by a PEO.

Which HR Functions Can Be Outsourced?

An HR outsourcing provider can work with you and your team to provide support throughout the employment life cycle. Depending on the services you're looking for, an HR outsourcing provider may offer support in the following areas.

HR Administration

The time and resources needed to handle HR administration can be challenging for any business. With this in mind, outsourcing HR may help you regain precious time that can be better used to focus on your business and your customers. At the same time, experienced HR support can bring many benefits to businesses, including:

• Expert guidance: An experienced HR professional can offer support and recommendations to help establish your HR operations and provide personalized HR guidance to help you mitigate risk, manage employee relations, and potentially avoid costly compliance mistakes.
• Support to help comply with laws and regulations: Outsourcing HR may mean having access to guidance related to federal, state, and local employment laws that impact your business.
• Personalized policies and procedures to help employees know what's expected of them: Outsourcing HR services may help you better communicate with employees. For example, you can get help developing an employee handbook that lets your team know about specific company policies, procedures, benefits, and training.

Payroll Processing

Outsourcing is an effective way to help streamline essential payroll processing tasks. Business owners who do so can:

• Process payroll efficiently and seamlessly every pay period
• Help maintain compliance with payroll tax laws and regulations
• Reduce time spent on payroll administration, including tax filing, tax credits, and workers' compensation claims
• Generate custom reporting (employee data, expense management, timekeeping, labor management, and forecasting) to help them make more informed decisions

Employee Benefits

In today's quest for top talent, businesses may want to leverage the power of offering competitive employee benefits, including health insurance, 401(k) retirement plans, and health savings accounts.

Outsourcing employee benefits could help you:

• Recruit and retain quality talent: Third-party providers often have stronger buying power that allows you to offer various affordable benefit options
• Compete for talent against much larger firms: Get help offering benefits that can rival Fortune 500 companies and meet your financial and business objectives
• Seamlessly conduct open enrollment: An HR provider typically manages open enrollment administration, saving you time and resources. Integrated employee benefits administration also means you can save time on data entry and help ensure accuracy

Recruiting and Hiring

If your business struggles to find and keep great employees, you may want to consider HR outsourcing. Some of the recruiting and hiring services that a third-party provider may offer include:

• Reviewing your talent acquisition strategy
• Streamlined and integrated applicant tracking system (ATS)
• Assistance in the development of targeted job descriptions
• Development of engaging new-hire onboarding experiences

These services are designed to help you make faster hiring decisions and retain your employees longer.

HR Compliance

Handling HR compliance on your own or without help can be difficult. That's why some HR outsourcing options include assistance to help you understand and stay on top of applicable regulatory and legislative developments that may impact your business. More specifically, an HR professional can consult on applicable compliance requirements to help you make sure your employment and safety practices adhere to federal, state, and local laws.

Employee Performance Management

Keep your employees on track and help them know what's expected of them with customized performance management tools and training for position-specific performance objectives. These can help you:

• Align employee performance and development with your business strategy
• Build employee career plans that are personalized and aligned with your business priorities
• Implement performance improvement plans, disciplinary action, and restructuring plans
• Create targeted retention strategies with input from employee opinion and satisfaction surveys

Workplace Safety and Risk Management

Onsite safety programs can help you keep your staff safe and your business compliant with OSHA compliance guidelines and other important safety regulations. By designing and implementing a safety program, you can help manage and reduce risk that may impact workers' compensation premiums and additional costs. Safety and risk management outsourcing may include:

• Auditing your business for safety risks
• Ensuring you have the right insurance policies in place
• Developing OSHA training and manuals
• Complying with workplace safety posting requirements

You must take compliance with applicable laws and regulations seriously. Missteps can cost your business significantly in terms of fines. Finding the right HR partner can help identify all areas of concern within your business and take the steps needed to stay on track.

How Much Does HR Outsourcing Cost?

There's a common misconception that HR services are expensive. First, consider what the costs may look like: depending on the service you're looking for, you can expect to pay either a percentage cost or a fixed fee. You may also consider narrowing your choices to providers that can tailor their services and products to your organization's needs.

When considering cost, remember that HR matters are unavoidable parts of doing business. You must comply with and pay employees according to applicable laws and regulations. Whether you take on the work yourself, hire an employee, or use a third party to help, costs are inevitable.

A DIY approach can be time-consuming, quickly leading to other work falling by the wayside and leaving your business vulnerable. Bringing on someone in-house to handle administrative HR matters means absorbing the ongoing costs associated with additional headcount (salary, benefits, training, ramp-up time, etc.). A new hire may also become overwhelmed with the volume of responsibilities that come with the job.

On the other hand, investing in HR services and technology means streamlining business functions for your staff, helping them focus on more impactful areas of the business.

Find HR Support That Keeps Pace With Your Business

Running a business today means managing increasing labor and employment laws and regulations, demands from staff, and team members who are stretched thin. That's why HR outsourcing may be an excellent investment. Help your business meet its long-term goals with HR services and support.