With the media spotlight on President Obama’s visit to India, outsourcing is a hot topic right now. While typically associated with call centers and technical support, the current face of outsourcing includes everything from Health Care to Human Resources. 

Many companies are looking to outsourcing to reduce costs and become more efficient, but what does that mean for the typical organization, its HR staff, and employees? There are many factors involved in HR outsourcing that determine if it is appropriate for an organization, as well as whether or not it will be successful. But let’s first take a quick look at what it means to outsource the HR function. 

In the last post we talked about the responsibilities of the 21^st Century HR office. Well, the dawning of the new century has also enabled many of these jobs to be done remotely. There is a new industry of companies called Professional Employer Organizations (PEOs). These companies partner with an organization and handle all of its HR related tasks, from employee screening, to benefits administration and risk management.  

Usually targeted at small and mid sized businesses, PEOs legally become co-employers of a company’s staff. The company transfers its employees to the PEO, who then leases them pack to the company. The PEO remains responsible for administering payroll and other benefits. This arrangement allows them to claim a large employee base, which they use to negotiate lower benefit premiums, liability insurance, and workman’s compensation coverage. This can be attractive to a small company that would not normally qualify for such discounts. 

According to National Association of Professional Employer Organizations, there are currently 700 PEOs operating in the United States, covering 2-3 million workers. The industry reports 68 billion in gross revenues, so we can see that this is not a fly-by-night idea.  Other countries jumping on the PEO bandwagon include Sweden, Germany, the UK, Russia and India. 

While seemingly a good idea, there is debate on both sides of the coin when it comes to outsourcing HR. A critical part of any organization, the HR function is the foundation which helps shape the company, its culture, and staff. Let’s look at some of the most common arguments on both sides of the fence. 

Benefits: 

• Collective Bargaining Power – PEOs are able to negotiate better health insurance premiums and liability insurance, as they combine the employee count from all of their clients.
• Reduction of Headcount – Often a company is tasked with reducing staff. Hiring a PEO provides the ability to retain the same functions, but usually for less than running a full HR office onsite.
• Eliminates the cumbersome task of managing payroll and benefits for employees.
• Reduces the costs associated with HR and payroll software.
• PEOs manage all employee records.
• PEOs also offer reduced cost training and career development programs.
• Time Savings- The company no longer needs to spend a large amount of time on HR functions and can focus on its core business, thus improving.
• PEOs often offer management services that help the business expand and grow.
• Detailed analysis on trends in employment, based on their large employee base and sole focus on HR.

Drawbacks :

• Lack of an onsite HR may not be appreciated by staff. Face to face interaction is very important to some, especially those with a complaint or personal problem.
• Sharing employer status with a PEO could cause problems in the event of misconduct. Some PEOs have been found guilty of attaining lower coverage rates through fraud.
• The costs may be prohibitive, ranging from 2% -20% of payroll.
• Timeliness in problem resolution.
• The company’s lack of total control of its HR function. 
• Mass HR may lose that personal touch and seem more clinical, causing reduced employee engagement and loyalty.  
• Less ability to identify and hire/promote excellent candidates independently, as everything is now required to go through the PEO.
• Things could get nasty in the event that you wanted to sever the PEO relationship. They have all of your benefits data and personnel records.
• The PEOs philosophy may not be in line with your company culture.

There are many pros and cons to HR outsourcing. An organization could reap rewards in benefits cost and efficiency, but lose control of its hiring and reduce the engagement of its employees. It comes down to an individual choice of each company. 

For smaller enterprises, there may be a huge burden lifted in terms of time, as well as the ability to provide a full range of benefits for employees at an affordable cost. Larger organizations may feel that it is more important to control the HR function, as their corporate culture is dependent on intense HR engagement. 

This is definitely a loaded topic and one that could be discussed for hours. But I want to hear your thoughts on the subject.

Do you have any experience with HR outsourcing?

How has it affected the company you worked with?

If you’ve never heard of this concept, still weigh in and give your thoughts on the matter. 

Let’s keep the dialogue going. I’m all ears.