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Is HR Outsourcing Cost Effective?

Is HR Outsourcing Cost Effective?


A lot of owners and HR departments ask themselves whether they should outsource HR. Before doing so, you need to work out if it is a good investment. While outsourcing always saves time, does this always justify the investment?  

Obviously, you should only outsource HR when it is cost-effective to do so. Establishing this can be a challenge, especially as many of the savings are intangible and hard to measure. 

What Does it Mean to be “Cost-Effective?” 

So, before we can work out whether HR outsourcing is cost-effective, we need to understand what the term means properly. 

At a basic level, cost-effective means that it is productive concerning its cost. So, being cost-effective does not equal being “cheap.” Something can be expensive and still cost-effective. At a basic level, we’re talking about value. We’re talking about getting a lot for the money you are spending, rather than simply counting what goes out. 

This means that to be cost-effective, your HR outsourcing efforts have to give you more than the outlay. This can be hard to measure as many of the savings of outsourcing are measured in time, not money. In most cases, you are still paying people the same salary, so you have to consider the value of what they are able to do instead of the outsourced functions. This can be very intangible and hard to both measure and justify. 

When is HR Outsourcing Cost-Effective? 

The central question is when your outsourcing is cost-effective. The fact is that some models of HR outsourcing are a lot more cost-effective than others. 

Most companies, when they think about HR outsourcing, think about payroll. They see the length of time processing payroll takes and how annoying and tedious it is and decide that’s the key thing to outsource. Unfortunately, outsourcing payroll tends towards a negative ROI, especially as your company grows. Payroll processing alone may be acceptable for your company, but it is not the most cost-effective HR outsourcing solution. Also, the only savings from outsourcing payroll are the intangible time savings already mentioned. These can be significant, but again, are hard to measure and justify, especially when the work is being done by salaried employees. 

So, when is HR outsourcing cost-effective? When it is more comprehensive. Comprehensive solutions tend to have a better ROI because you are saving even more time, allowing your in-house HR team to do the more exciting parts of their job. They also often mean you don’t have to hire an additional HR person as quickly as your company grows. 

Even more cost-effective is partnering with a Professional Employer Organization (PEO). When you do so, you gain things other than just time savings. The biggest is that you have access to their healthcare benefits for your employees. This pretty much always allows you to get a better deal, offering improved benefits at a lower cost to you and your employees. It will enable you to provide better retirement plans and to provide the kind of benefits that attract high-caliber talent to your business. However, there are other advantages. 

PEOs can help you with safety training and return to work programs to lower your workers’ compensation costs. You can talk to them about the kind of voluntary benefits and perks their other clients have found attract the best talent. They can also remit payroll taxes for you ( a payroll processor can only tell you what you need to pay), which removes a potential source of human error. Finally, because they are a comprehensive solution, you are not wasting time sending money to multiple vendors each month, which can easily happen when HR is outsourced in a more ad hoc manner. 

When is HR Outsourcing Not Cost-Effective? 

As already mentioned, just outsourcing payroll is not cost-effective. The only savings you make by doing so are time savings, and while the value of your HR specialists’ time is high, it is not always as high in real terms as what you are paying to the payroll processor. Measuring the true value of activities they are freed up to do such as creating a great company culture and mediating employee disputes is particularly hard.   

Payroll-only outsourcing also becomes less cost-effective as your company grows. Once you hit about 500 employees, it no longer makes sense to outsource payroll. Processors tend to charge by the size of your payroll, meaning that their prices start to skyrocket at this point. It becomes cheaper to hire an HR generalist to handle the administrative burdens than to continue to outsource. 

However, if you partner with a PEO, you still experience significant cost savings. Many medium-sized businesses find sticking with a PEO remains beneficial even when their company grows to a fair size. Primarily, this is because of the healthcare benefit savings, which are easy to measure and can be substantial. 

This makes a PEO the obvious choice for cost-effective HR outsourcing. By using a PEO rather than a payroll processor you save money on benefits, gain the advantage of their significant expertise, and are able to outsource nearly all of your administrative burdens. PEOs can also help you with compliance and risk management, lowering your risk of fines and lawsuits substantially. 

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