Human resource outsourcing (HRO) providers give small businesses much-needed relief for HR tasks. But pricing models for HR outsourcing can vary and can affect your ROI.
Small business owners are faced with four distinct pricing models. The pricing model available to you depends on the type of HR outsourcing solution you choose.
3 Types of HR Outsourcing Solutions
HR outsourcing comes in many forms. In general, this is good because it gives businesses options to choose only the services they need.
Payroll Processor
Payroll processing companies do exactly what it sounds like. They handle your payroll needs and nothing else. If all you need is someone to do your payroll, a payroll processor may fit your goals. But be aware that payroll processing companies do not accept any liability for mistakes made, so you'll still need to carefully review any payroll before it's submitted.
Administrative Services Organization
Administrative Services Organization (ASO) handles your payroll but also manages additional HR functions of your business. An ASO can help you secure health benefits and workers' compensation coverage, though they probably won't be able to save you any money. An ASO also does not accept any liability for payroll mistakes, so you will still need to verify everything they do.
Professional Employer Organization
A Professional Employer Organization (PEO) is the most comprehensive type of HR outsourcing available. A PEO handles everything from payroll and benefits administration to helping you get health benefits and workers' compensation coverage at better rates than you could get on your own. A PEO also reduces your payroll liability by sharing responsibility for any mistakes that may be made.
4 Popular Pricing Models
Within each of these HR outsourcing options live different pricing models. Depending on the solution you choose, it could affect your ROI based on the pricing model offered.
Percentage of Payroll
A percentage of payroll pricing model charges your company a flat percentage of your payroll. While this might seem like a good option for small businesses, it actually works to discourage giving employees raises or hiring new staff. Each time you take either of those actions, you will end up increasing the amount you have to pay to your HR outsourcing provider, cutting into your ability to reinvest money into your business. This model increases your costs drastically if you need to hire highly paid executives.
Service-Based Pricing
Service-based pricing models charge you for the services you use. Again, this seems like a good option for small businesses to keep costs down, but it could lead to an underutilization of services. As you attempt to keep your costs in check, you may miss out on necessary services that could help your business grow and remain compliant, losing important functions of HR outsourcing.
Bundled Pricing
A bundled pricing model for HR outsourcing services means you pay one price for a package offered by your chosen provider. If you need all of the services offered, this can be a good way to bundle services and get one price that doesn't change as you grow. However, a one-size-fits-all plan doesn't usually work for every business and risks overutilization. If your company doesn't need all of the services offered, you're paying more than what you need to pay.
Flat Per-Employee Per-Check
Another pricing model called per-employee per-check offers a flat rate for each employee on staff. This model provides you with a regular and fixed cost and does not increase per employee. Your company will not see an increase if you give employees a raise. This pricing model leads to less underutilization since your cost remains the same, regardless of services. It leads to less overutilization because you can customize your offerings to your company's needs.
Which Pricing Model is Best?
There is one clear winner of the pricing models discussed above for outsourcing your HR — per-employee per-check. It gives you the most flexibility to select only the services you need, so you're not paying for things your business and employees will not utilize. It also gives you the ability to better budget, since you know exactly what it will cost you for each employee. The best part is that you don't have to pay your HR outsourcing provider more to give employees a raise, instead allowing you to keep that money and reinvest it in your company to help you grow even more.
As with any business decision, you should be concerned about your ROI. When outsourcing your company's HR needs, the highest ROI you will get comes from partnering with a PEO that utilizes a per-employee per-check pricing model. Not only do you get comprehensive HR support and services, you don't get nickel and dimed. You only pay for what you use and what your company needs right now.
