A well-oiled HR department provides competitive agility, risk reduction, staffing, and employee satisfaction. Unfortunately, many small businesses don't have the resources or time to create a large HR team, putting them at a competitive disadvantage. To compensate, SMBs often outsource HR functions to professional HR providers.
But doesn't it make more sense to hire more employees or create new internal processes?
Why is outsourcing important to human resources management?
Outsourcing is important to human resources management because it controls costs, reduces time waste, improves productivity, and creates tangible and measurable value for your business. Plus, it does all of the above without requiring the upfront liquidity to create robust internal HR units.
Better yet, outsourcing your HR responsibilities to a Professional Employer Organization (PEO) provides the added benefit of generating a significant ROI for your business that you can use to fuel further growth. In a nutshell, there are plenty of benefits to HR outsourcing, but not all HR outsourcing solutions are built to take advantage of those benefits.
Advantages of HR Outsourcing
The benefits of HR outsourcing are massive. There are so many benefits that we need to break them up into buckets. Even then, there are intangibles that are we aren't considering in this post. These are things like employee happiness, stress reduction, and improved culture. For now, we'll focus on the tangibles. Here are some (but not all) of the advantages of HR outsourcing:
Free Up Time to Tackle Core Growth
HR administration is a notoriously time-sapping venture. The average HR team spends up to 40 hours a week simply dealing with compliance-related activities. Human Resources spends so much time on HR administration that it forces the average small business owner to get involved. Small business owners spend over 25% of their time dealing with HR issues and 5 hours on payroll taxes.
By outsourcing HR, you aren't just reducing costs; you're gaining time.
HR teams shouldn't spend their precious time on paperwork and redundant, mundane processes. They should be free to focus on growing culture, managing employees, and creating a happy and holistic work ecosystem.
Outsourcing HR doesn't reduce the need for your internal HR team; it gives them the freedom to put their experience to work solving tangible problems that inhibit growth.
Some smaller businesses don't even have internal HR teams. In this case, outsourced HR frees up business owners to focus on growth and their driving goals.
Reduce Operating Costs
Depending on the industry (e.g., manufacturing, production, etc.), small businesses may operate on razor-thin, sub-5% margins. Even for those in the highest margins (e.g., dental care, real estate, etc.), margins rarely peak above 15%. In other words, you're on a shoestring.
Every percentage increase in internal operating costs directly impacts your ability to grow, and it may even influence your ability to keep the doors open. A major center of these costs is HR. Between compliance, labor, training, workers' compensation, and benefits, HR takes up a decent chunk of your annual budget and directly impacts your resource planning.
Professional Employer Organizations help reduce your overhead costs. The average business will save 21% of HR administration when partnering with a PEO. Also, the cost-savings associated with benefits are massive. PEOs are the only type of outsourced HR partner that can directly reduce your benefits costs — giving you access to Fortune 500 benefits at Fortune 500 prices, regardless of your business size.
Best-in-class PEOs are hyper-flexible and agile enough to scale their needs to your need. So, if you just need payroll and workers comp, your PEO can handle that. If you want the whole package (e.g., benefits, workers' compensation, compliance, payroll, etc.), your PEO can also handle that. The more services you outsource, the larger your savings.
The average business that uses a PEOs will see a +27% return on their investment.
Improved Employee Relations
When it comes to revenue leakage, employee engagement takes the cake. Eighty-five percent of employees are actively disengaged at work. In other words, the majority of your workers aren't working as hard, accurately, or passionately as they could be, and that directly impacts your bottom line.
Things get worse for small businesses.
Sixty-four percent of small businesses struggle to attract quality talent. This leads to 74% of them hiring the wrong person for the job, which costs them significant capital. The average cost of a poor hire is over $14,000.
Worse yet, over half of SMBs struggle with employee productivity.
By outsourcing HR functions, you can solve your employee relations headaches. Not only will your outsourced HR partner free up precious HR time to focus on employee relations, but working with a PEO also lowers the cost of benefits — allowing you to secure competitive benefits packages.
Simply having world-class benefits puts you ahead of the pack. Here are some statistics that should shed light on the value of benefits during the talent-attraction phase of hiring:
- Businesses with great benefits enjoy 53% lower attrition.
- Seventy-two percent of employees say that better benefits increases their job satisfaction.
- Eighty percent of workers would stay at a job with better benefits vs. taking a job with better pay and worse benefits.
- Over 50% of employees have left their job to secure better benefits, yet compensation is listed in only 9 percent of exit interviews.
- Fifty-five percent of employees are "likely" to accept a job with lower compensation but better benefits.
In a nutshell, better benefits means better hires.
Gain Skilled Professionals With Expertise in HR
Running a small business has its advantages. You're agile, nimble, and mission-driven.
But being small also has plenty of disadvantages. However, few are as significant as compliance. The "regulatory thicket" of local, state, and federal codes and laws is incredibly difficult to manage. In Utah alone, there are hundreds of regulatory restrictions in the administrative code.
When you combine an ever-growing federal landscape with local ordinances (Orem alone has 25 chapters of ordinance code), you're dealing with an ever-growing hurricane of administrative responsibilities. But, unlike large companies, your small business doesn't have a crack team of HR pros on standby.
HR outsourcing provides a tangible solution to these types of "not enough in-house skill" problems. Your outsourced HR partner will help you stay abreast of current local, state, and federal legislation without requiring you to onboard an army of HR professionals.
Disadvantages of HR Outsourcing Without a Local PEO
Yes! Outsourcing HR is filled with benefits. But not always.
Not all outsourced HR partners are the same. Payroll processors — which are outsourced HR solutions that solely handle payroll — often provide a negative ROI. PEOs, on the other hand, are proven to generate a positive ROI.
Better yet, in Utah, using a local PEO costs about the same as a payroll processor. On the other hand, using a national PEO is often significantly more expensive, time-consuming, and burdensome on your business.
Remember, PEOs are the only outsourced HR partner that can directly reduce the costs of benefits, and they're the only partner that can process and remit payroll taxes. In other words, using either a payroll processor or national PEO is usually a waste of money. Local PEOs provide a significant ROI, and they offer the services you need to reduce your administrative headaches.
Outsourcing HR Produces Organizational Value
Human resources management is invaluable for small businesses. With a value-driven HRM framework, you can compete in the talent marketplace with larger companies, reduce your compliance risks, and mitigate any internal employee issues that arise. Without one, you're operating in the dark.
Luckily, you don't have to build a successful HRM in a day. Outsourcing HR functions to PEOs means mitigating paperwork and administrative needs to free up time to focus on what really matters — people, profits, and growth.
To learn more about how PEOs can help, download our free eBook, "What is a PEO?"