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The Complete HR Outsourcing Services Guide to Boost Your Business Efficiency
Discover how HR outsourcing can transform your business, from cost savings to enhanced efficiency. Explore our complete guide & make an informed decision.
In this article
- What is Human Resource Outsourcing?
- Types of Outsourcing HR Services
- Key HR Functions to Outsource
- The Benefits of Outsourcing HR to a PEO for Businesses
- Common Concerns and Risks of HR Outsourcing to a PEO
- How to Choose the Right HR Outsourcing Partner
- Accurately Measuring the Success of HR Outsourcing
- Don't Miss Out! Unlock the Full Potential of HR Outsourcing for Your Business
What is HR Outsourcing?
Human resources (HR) is the department that focuses on managing the people-related aspects of your business. HR managers are responsible for managing employees, including hiring, terminating, compensation, managing benefits, improving morale, processing payroll, and more.
Outsourcing HR occurs when a third-party organization takes on some or all administrative HR responsibilities on behalf of your business. This frees up your time and resources to focus on more profitable objectives like increasing employee satisfaction, enhancing your workplace culture, and improving retention.
By entrusting administrative HR tasks to a specialized outsourced provider, your business can enjoy greater flexibility and efficiencies in its operations, which leads to improved overall performance and business success.
Here at Stratus HR, we can help you unlock the full potential of HR outsourcing. Tired of juggling countless HR tasks and concerned about compliance and employee satisfaction? We've got you covered. With our comprehensive suite of services, from payroll to risk management, we tailor solutions to fit your business's unique needs. Book a free consultation with Stratus HR today and discover how we can elevate your business to new heights through HR outsourcing.
Types of Human Resources Outsourcing Services
Outsourcing your HR functions provides significant benefits to businesses of all sizes. The three main types of HR outsourcing service providers are Professional Employer Organizations, Administrative Services Organizations, and Business Process Outsourcing.
Professional Employer Organization (PEO)
PEO stands for Professional Employer Organization, which is among the most popular types of HR outsourcing. In this arrangement, a third-party provider performs administrative tasks and assumes some employer responsibilities, such as new employee paperwork, E-Verify, payroll processing, employment tax filing, and compliance assistance with employment laws. Some PEOs also provide HR technology to streamline your HR processes.
Although PEOs specialize in serving small to medium-size businesses, some, like Stratus HR, partner with businesses of all sizes, from start-ups to enterprise level.
When you outsource HR to a PEO, your business and the PEO enter a co-employment relationship where the PEO becomes the employer of record. Among other things, this means the PEO is fiduciarily responsible for paying your employees’ wages, withholding taxes from employee paychecks, remitting tax payments to the proper agencies, and record keeping.
During the duration of the partnership, your business remains responsible for day-to-day operational tasks like hiring, firing, and updating employee information.
Administrative Services Organization (ASO)
ASO stands for Administrative Services Organization, which is another type of HR outsourcing. When you partner with an ASO, the third-party provider handles the HR administrative tasks on behalf of your company, but everything is done under your employer identification number rather than the ASO’s.
Outsourcing HR to an ASO offers a full suite of HR services while businesses in partnership with an ASO retain their own employer of record status. In other words, the ASO manages all the administrative functions and tasks of human resources but remains as a separate third-party vendor for HR.
If you are seeking a less comprehensive approach to outsourcing HR and primarily need administrative support, then an ASO may be your best choice.
Business Process Outsourcing (BPO)
When you only want to outsource individual back-office or front-office functions, then you may be searching for a BPO, or Business Process Outsourcing company. HR services commonly used in a BPO include recruiting, payroll, benefits administration, and training.
A BPO can provide personalized support and service management to your business, along with a software solution. This type of service is commonly used by businesses looking to outsource single, complex HR functions that otherwise monopolize their time.
The Differences of Each HR Outsourcing Type
The main difference among PEOs, ASOs, and BPOs is the nature of the outsourcing provider's involvement in HR management. While BPOs focus on individual, specialized HR tasks, ASOs and PEOs offer more comprehensive solutions for outsourcing HR, with PEOs being the most involved in employer responsibilities.
If you are trying to decide which outsourcing solution would be best, consider which key HR functions would benefit your company the most by using a third-party HR outsourcing provider.
Key HR Functions to Outsource
By outsourcing HR functions, business owners and HR managers can focus on their core functions and improve the business's bottom line. Several of these functions are referred to as “transactional HR functions” because, while necessary, they are transactional in nature and easy to outsource.
Ask any employer and they will tell you: payroll is crucial to their business. When you outsource payroll administration services, your business will streamline its payroll processes for tasks like calculating wages, withholding and submitting payroll taxes, processing garnishments, and issuing paychecks or direct deposits.
In all, outsourcing payroll can save your business money while providing you with greater accuracy, compliance, and time savings. Your employees may also have easier access to their payroll data, depending on your outsourced HR provider.
- Payroll Administration with a PEO: Payroll is one of many services provided by the PEO, processed under the PEO’s employer identification number.
- Payroll Administration with an ASO: Payroll is one of many services provided by the ASO, processed under the client company’s employer identification number.
- Payroll Administration with a BPO: Payroll is an individual service provided by the BPO, processed under the client company’s employer identification number.
Not every small or midsize business offers benefits to employees, perhaps because of the burden to procure a plan, the administration of the plan, the cost of offering benefits, or some combination of the three.
If the administration piece (setting up deductions, remitting payments to insurance providers, reconciling the plan, etc.) of offering benefits is what’s holding you back from offering employee benefits, choosing the right HR outsourcing partner will relieve you of the benefits administration burden.
- Benefits Administration with a PEO: PEOs handle the full benefits administration piece and can work with an internal or external broker. PEOs also have negotiating power to offer a variety of employee benefits to your staff at economies-of-scale pricing, as employees are co-employed by the PEO.
- Benefits Administration with an ASO: ASOs handle the full benefits administration piece of offering employee benefits and typically work with an outside broker. If the ASO also offers PEO services, they may be able to offer large group benefits to your employees.
- Benefits Administration with a BPO: BPOs handle the full benefits administration piece of offering employee benefits and work with an outside broker.
As your business grows, it's crucial to stay on top of compliance and risk management. An HR outsourcing company can provide sample HR policies and procedures to set the foundation for compliance, as well as provide expertise to help guide you with federal, state, and local employment laws and regulations.
Overall, partnering with an HR outsourcing company for compliance management services offers the following benefits:
- Mitigates financial and legal risks
- Improves employee morale and productivity
- Enhances the overall reputation of your company
- Compliance Management with a PEO: as a PEO client, you share liability for compliance. The PEO also helps you manage workers’ compensation claims and other areas of risk.
- Compliance Management with an ASO: as an ASO client, you have 100% liability for compliance. The ASO may also help you manage workers’ compensation claims and other areas of risk.
- Compliance Management with a BPO: as a BPO client, you have 100% liability for compliance. The BPO may also help you manage workers’ compensation claims and other areas of risk at an additional cost for each service.
Recruiting and Talent Acquisition
Instead of handling the full (or even partial) recruiting and talent acquisition tasks yourself, you can outsource this time-consuming piece to help streamline recruiting tasks.
If you do not already have your own applicant tracking system (ATS), simply having access to this tool may suffice for your recruiting and talent acquisition needs. An ATS easily posts position openings to multiple job boards, removes the long process of sifting through resumes, and automates manual tasks. Upgrading to an ATS will also give job candidates a much better user experience.
Some companies need more than technology to help with recruiting, particularly when they are hiring offshores or struggling to keep up with company growth. Your company’s needs will best determine which outsourcing option to utilize.
- Recruiting and Talent Acquisition with a PEO: as a PEO client, you gain access to the PEO’s applicant tracking system to help simplify recruiting. By offering better benefits, providing HR technology that makes onboarding and employee management a breeze, and receiving certified HR expertise to help you become an employer of choice, your company also attracts more talent.
- Recruiting and Talent Acquisition with an ASO: as an ASO client, you gain access to the ASO’s applicant tracking system to help simplify recruiting.
- Recruiting and Talent Acquisition with a BPO: as a BPO client, you can subcontract the full recruiting and talent acquisition process of placing ads, advertising job listings, filtering applications, conducting interviews, and negotiating offers.
Training and Development
Dedicated and motivated employees are always seeking to improve their skills and advance their careers. Providing training and development opportunities helps keep employees engaged and creates a higher-quality workforce.
While investing in training and development may be overlooked by some employers, the return on investment is typically greater than the cost of training. Top Workplaces lists several benefits of training and development programs, including improved employee retention, higher productivity, increased employee engagement, reduced waste, boosted morale, and more.
- Training and Development with a PEO: Many PEOs offer manager and employee training courses as part of their services.
- Training and Development with an ASO: ASOs do not typically offer manager and employee training courses as part of their services.
- Training and Development with a BPO: BPOs offer comprehensive and selective training and development modules.
Utilizing a performance management system will help you align company goals with employee performance. While you could purchase your own performance management software, outsourcing to a third-party provider will combine human support with technology to maximize the effectiveness of the tool.
Your outsourced HR provider can help guide you through processes like goal setting, monitoring progress, skill development, priorities, expectations, and connecting compensation with achievements. Using strategic metrics from the performance management software will help you make data-driven decisions about your business.
- Performance Management with a PEO: Most PEOs offer performance management as an integrated piece of their Human Resources Management System, as well as a certified expert to help you along the way.
- Performance Management with an ASO: Most ASOs offer performance management as an integrated piece of their Human Resources Management System but may lack human expertise.
- Performance Management with a BPO: BPOs offer comprehensive and selective performance management services.
The Benefits of Outsourcing HR to a PEO Company
There are many reasons why a business may decide to outsource HR to a PEO, from handling transactional work behind the scenes to providing guidance to your office manager or HR Generalist through sticky HR situations.
In a nutshell, outsourcing HR functions to a PEO:
- Creates cost savings to improve your bottom line
- Allows you to offer better employee benefit packages
- Improves your focus on higher priorities
- Streamlines hiring and onboarding processes
- Improves labor law compliance
- Helps you manage risk and workers’ compensation claims
- Provides you access to certified HR experts
As your small or medium-size business grows, so do your HR responsibilities. Instead of managing the additional responsibilities on your own, outsource to a PEO that can provide a steady source of expertise for each phase of your company’s growth.
Outsourcing HR is much more cost-effective than paying for a full-time in-house HR professional, and you gain an entire team of HR experts for each aspect of human resources rather than a single employee.
When you outsource the transactional HR tasks to a PEO, your business significantly reduces its HR spending budget. In fact, one study found an annual return on investment of 27.2% in cost savings alone when utilizing a PEO.
Depending on the PEO you choose, the actual cost of outsourcing HR will be based on your employee headcount and the services you require. Book a free consultation to determine your cost for outsourcing to Stratus HR.
Better Employee Benefits
Outsourcing HR to a PEO provides your business with a wider range of employee benefits at economies-of-scale pricing. This helps small and medium-size businesses compete for talent against larger companies that traditionally have more buying power.
Most PEOs offer a variety of plan options for employees to pick and choose from, with many of the plans beyond health insurance available at no cost to the employer. These include life, dental, and vision insurance, flexible spending (FSA), retirement plans, supplemental insurance, and more.
As a business owner or HR manager, your focus should be on growing your business and making your company an employer of choice. Unfortunately, these idealized priorities take a backseat to the more immediate needs of processing paperwork, submitting taxes, ensuring benefit deductions are properly set up, responding to employee questions, and other administrative HR tasks.
Outsourcing HR to a PEO saves your team valuable time that can then be reallocated to these higher priorities.
Whether you're a business owner looking to concentrate on generating revenue, or an HR or office manager exploring strategic ways to improve workplace culture, partnering with a PEO allows you to delegate HR tasks to seasoned experts. This gives you time to focus on your critical business objectives, and peace of mind knowing your PEO has your back.
Streamline Hiring and Onboarding Processes
Outsourcing HR to a PEO can help your business recruit top talent by providing advanced HR technology, which significantly reduces your administrative burden and gives a positive first impression. Having access to a digital system also enhances a positive user experience for applicants and employees.
To streamline your recruiting, screening, and selection processes, many HR outsourcing firms provide you with an applicant tracking system, or ATS. An ATS allows you to post jobs across multiple job sites, filter applicants based on qualifications, send auto-responses to keep candidates up-to-date, and view applicant statuses throughout the hiring funnel.
Now That your candidates have had a positive applicant experience, it’s important to give them a positive onboarding experience to prevent them from leaving within the first 45 days. A PEO can help with that by providing a paperless onboarding system. This allows employees to complete all necessary paperwork at their convenience prior to starting their first day of work.
By improving the candidate and new hire experience, your company will experience higher retention rates and improve its employer brand. Your internal team that handles HR functions will also have more time to focus on other critical aspects of recruiting and retention, such as creating effective training programs and fostering a positive company culture.
Labor Law Compliance
Researching employment laws and compliance requirements are time-consuming but critical tasks when moving into new markets, managing growth, or handling employee disputes.
But staying in-the-know and maintaining a regular training schedule to keep employees educated about applicable labor laws is something that takes a back seat…until there is a problem.
When you outsource HR to the right PEO, you receive access to employee and manager trainings to help you avoid problems. You also gain a certified HR expert who is familiar with federal, state, and local employment laws in case you need a quick (or lengthy) answer about something that will help you avoid a lawsuit – or simply be compliant.
Risk & Claims Management
As a business owner or HR manager, you know that workplace accidents are never a good thing. Each workplace accident is a worker’s compensation claim, and severe claims are expensive.
Workplace accidents and injuries can lead to company downtime, loss of productivity, poor morale, reduction of sales, broken and damaged equipment, negative company image, or perhaps even closure. Even minor injuries can take a lot of time managing the claim, from reporting the injury and responding to the insurance company, to conducting an investigation and finding light duty work for the injured employee.
Outsourcing HR to a PEO can help your business develop a risk management plan to reduce workplace hazards and help you manage any workers' comp claims, should a workplace incident occur.
Certified HR Expertise
As a small or medium-size business owner, your choice to outsource HR to a PEO likely depends on company size, internal expertise, and budget constraints.
For example, a small business may have an office manager who was delegated with HR responsibilities. Whether they are new to this role or have already had some experience, it would be ideal for them to learn from and work alongside HR experts.
By partnering with a PEO, your business gains access to a team of HR experts who provide valuable advice, support, and guidance for both daily and sticky HR situations.
Larger companies may have their own internal HR staff, but oftentimes those employees are overwhelmed by their regular list of responsibilities and must prioritize what does or does not get done in a day. And while they would love to add to their HR staff to reduce their load, they are constrained by budget.
By outsourcing to a PEO, businesses not only offload the transactional tasks, but they also gain a certified HR expert to help them bounce off ideas and implement best practices and policies that are designed to boost morale and company culture.
Common Concerns and Risks of HR Outsourcing to a PEO
Despite all the advantages of partnering with a PEO, there is a lot of bad information and misconceptions about outsourcing HR to a PEO.
If you feel uncertain about the concept of outsourcing, here are common concerns and suggestions of how to do your due diligence when looking for a reputable and trusted PEO partner.
Loss of Control
“Outsourcing HR means I will inevitably give up some control.”
When you outsource HR to a PEO, your business and the PEO share employment responsibilities for employees. Some people refer to this as co-employment, and this term alone makes business owners feel uneasy.
However, in a co-employment relationship with a PEO, you maintain 100% of the direction and control of your employees, but you no longer have 100% of the liability. That is because the PEO pays your workers, as well as withholds and remits employment taxes, under the PEO’s employer identification number. This makes the PEO fiduciarily responsible for the administrative side of having employees.
So go ahead and hire who you want, then let the PEO be responsible for handling the new hire reporting, as well as accurately reporting and paying both employer and employee taxes. If you are like every other PEO client, you will not miss the administrative burdens and liabilities.
Quality of Service
“Outsourcing HR means a lower quality of service.”
As with any business service, you will need to do your due diligence by finding a PEO that provides superior HR service.
As part of your due diligence, ask the following questions to the PEO:
- Will my HR questions be answered by a chatbot, a phone tree, or an HR expert?
- What metrics do you use to measure response times?
- What is your internal employee tenure like?
- Will I have a dedicated HR rep, or will I get whoever is available to help me?
- What does your team do to understand my business’s goals and needs?
- Am I purchasing software to figure out on my own, or will I have someone to help guide me through making our processes more efficient?
- What is your internal client retention rate?
Each of these questions will give you insight into the level of service your outsourced HR provider offers. You may also want to request a list of clients to contact prior to making your decision.
Impersonal Customer Experience
“Outsourcing HR feels so impersonal.”
If you are new to outsourcing HR, the concept may sound impersonal and cold. Once again, you should do your due diligence by learning what the customer experience is like when working with a particular PEO, as each PEO is different.
Questions you could ask the PEO about the customer experience are:
- When I contact you for questions, will I be handed off to any available rep, or will I primarily work with a dedicated person for my company?
- How will my employees become familiar with your staff?
- What is your internal client retention rate?
- How often will you be onsite at my company?
- What do your clients like best about working with you?
- How will your business support me as my company grows?
There may be a sense of apprehension for many staff members if outsourcing HR to a PEO is new to them, and that is normal. Allow their questions and concerns to be addressed before you make a final decision about a certain PEO to help them feel more comfortable.
Errors Take Longer to Correct
“Outsourcing HR means errors will not be corrected quickly.”
If you’re concerned about errors, it sounds like your need for outsourcing HR (which will help you create more automated workflows) might be higher than others. But even companies who have already invested in automated systems are prone to having errors, simply because you are working with humans.
When you outsource HR and experience errors, you will find that PEOs are extremely responsive and quick to fix mistakes. Keep communication open and allow the PEO to resolve problems with anyone involved. To help with your confidence, ask specific questions about mistakes and how quickly the PEO resolves them during the due diligence phase.
An outsourced HR partner may not be familiar with your business’s culture, which could lead to recruitment challenges, like recruiting candidates who aren’t a good fit for your business. If the outsourced HR expert doesn’t align with your business’s culture and values, hiring a candidate that doesn’t fit the company culture could lead to increased employee turnover.
At the end of the day, you need to carefully consider the disadvantages of outsourcing HR before making the decision to outsource HR functions. While there are many benefits to outsourcing HR to a PEO, businesses like yours must be aware of the potential challenges and risks involved, and finding the right partner will be crucial.
How to Choose the Right HR Outsourcing Company
Partnering with an HR outsourcing organization is a great way for businesses like yours to streamline HR functions and reduce administrative burdens. However, it's important that you ask some key questions to ensure that it's the right fit before making the decision to outsource HR.
- How will collaboration and communication be managed when outsourcing HR functions?
- How will the outsourcing provider ensure data security and compliance?
- What is the PEO’s own turnover like?
- What kinds of technology does the PEO offer to your managers and employees?
- What can the PEO do immediately to help address your HR concerns?
At the end of the day, asking key questions to better understand the nature of the outsourcing firm, its values, goals, and mission will help you determine the right fit for your company.
Accurately Measuring the Success of HR Outsourcing
Measuring the success of your HR outsourcing arrangement requires several key steps.
Know your baseline metrics before outsourcing
Metrics are a fantastic way to measure the effectiveness of a new initiative or idea. In fact, most number-driven CFOs will want to know the expected return-on-investment prior to implementing a new program and expect to get measurable data throughout the process to analyze its success.
The same is true for measuring the effectiveness of your HR outsourcing provider. But like any other comparison, you must first develop and know your baseline metrics prior to outsourcing HR to accurately measure the effectiveness of your HR outsourcing partner.
If the mere thought of calculating your current HR metrics sounds overwhelming, you are a prime candidate for outsourcing. Most business owners barely have time to research outsourcing HR providers, let alone spend time developing baseline HR metrics for future comparisons.
Thankfully, there are several easy metrics you can measure prior to outsourcing that will help you determine whether you made the right HR outsourcing choice. While they will not give you a complete picture, they will be a good indicator.
Determine KPIs for HR
Establishing key performance indicators (KPIs) is a great way to measure the success of HR outsourcing initiatives. The easiest KPIs to measure prior to and while outsourcing HR are your employee turnover rate and your employee satisfaction index, although cost savings and time savings are also valuable metrics to compare.
Employee Turnover Rate
Knowing your current employee turnover rate is key to measuring the effectiveness of your HR initiatives.
To determine your company’s employee turnover rate, count the number of employees who left your company during a set time period and divide it by the average number of employees during that same period. Multiply the answer by 100 to get your turnover rate.
Although outsourcing HR will not completely solve a high employee turnover problem, most companies experience a decrease in turnover by 10-14 percentage points by choosing to outsource to a PEO. Those who implement retention strategies provided by a certified HR expert may experience an even higher reduction in turnover.
When comparing employee turnover rates to determine the effectiveness of your HR outsourcing partner, be sure to wait at least one year to get an appropriate measurement for comparison.
Employee Satisfaction Index
By surveying your employees, you can measure their attitude, experience, and overall satisfaction with how things are running at your company. Specific questions that can be used as a comparison with your HR outsourcing provider may include:
- Onboarding experience
- Employee benefits package
- Access to employee data
- HR response time
- Payroll accuracy
- Employee trainings
- Access to employee handbook
- Benefits deductions accuracy
To get a proper comparison, wait at least six months to one year after being with your outsourcing HR provider to re-survey your employees and compare with your baseline data.
When determining the cost savings of outsourcing HR, first calculate how much you would need to pay an in-house employee(s) to do all the work performed by your HR outsourcing partner. (Please note: if you are doing this analysis prior to outsourcing, you may not be fully aware of all the services your prospective outsourced HR provider offers, which would be an inaccurate comparison.)
Your cost savings will also be determined by who was handling the HR functions prior to outsourcing, as an office manager’s time is significantly different from an executive’s time.
When you analyze your cost savings for outsourcing HR after having been with the outsourced provider for at least a year, you will have a more accurate feel for all the services offered and the number of outsourced experts assisting your staff day-to-day. This will give you a better idea of how many full-time, benefited employees you would need to pay to replace the outsourced HR provider to make a fair comparison.
The amount of time companies save by choosing to outsource HR varies by company size – and the value of that time also varies based on who was handling the HR functions prior to outsourcing, as mentioned previously.
To get your baseline data, you will need to determine the amount of time your company spends on the following:
- Procuring Payroll and Timekeeping Systems
- Payroll Administration
- Recruiting Tasks
- Employee Relations & Compliance
- HR Administration Tasks
- Procuring Benefit Plans & Open Enrollment Tasks
- Benefits Administration Tasks
If there are functions mentioned that your company was not offering prior to outsourcing, then you will need to do a separate assessment to determine the value of these additional services now provided by the HR outsourcing provider.
Don't Miss Out! Unlock the Full Potential of HR Outsourcing for Your Business
By outsourcing HR tasks to a reliable partner like Stratus HR, you can focus on your core business activities while HR experts manage employee-related functions.
Stratus HR offers a comprehensive suite of human resource outsourcing services including payroll, human resources consulting, employee benefits and benefits administration, risk management, and HR technology. Our team of certified HR experts will work closely with your organization to create a customized solution that meets your business’s specific needs.
Overall, outsourcing to Stratus HR is an effective strategy for companies looking to streamline their administrative functions and grow their business. We will help you increase profitability, maximize productivity, reduce time spent on transactional HR tasks, minimize liability, and ultimately lower your labor costs.
If you're ready to take the next step in improving your HR functions, book a consultation with Stratus HR today to learn more about our services and how we can help your organization achieve its goals.