Small businesses have several options when considering how to handle their human resource needs as they grow. Ultimately, the decision of whether to outsource HR, use a service such as a PEO or handle it in-house comes down to business strategy, culture and immediate growth plans.
For our client who choose to outsource, they use us until they are large enough to need their own full time HR person. Typically that happens between 75-100 employees. Inevitably there is a mark earlier than that though where the discussions start happening about the pro’s and con’s of continuing to outsource or bringing someone in-house earlier than they thought. That mark is different for all businesses, but the discussion is nearly the same.
In having these discussions with our clients for the last several years, here is our top list of pros and cons to outsourcing your HR services.
Cost: Hands down outsourcing HR is typically cheaper than bringing someone on in-house. The in-house person will not only cost a salary, but benefits and other incentives as well. The first discussion all clients want to have is whether it is still financially advantageous to keep outsourcing. And up until that 75-100 employee mark, it almost always is.
Distance: Our team does it’s best to seamlessly integrate as though we were an onsite staff member. The reality however, is that we don’t sit onsite and may not even have a presence in the office every week. This can sometimes make employees or leaders feel disconnected to their HR provider.
My team and I talk a lot about being responsive to overcome this challenge, but we know it exists.
Expertise: Possibly the largest pro of outsourcing HR services is that you can ensure that someone with the highest level of expertise in an area is handling it. Whether you split your services and have recruiting handled by a recruiting firm and compliance handled by another firm or whether you find a firm (ahem) that can do it all, you know you are getting specialists in those areas to handle your needs. If you want specialist in-house you have to build an entire team which only makes the cost increase more.
Priorities: An in-house team is dedicated to your business and your business only. An outsourcing firm is handling multiple clients and multiple client needs. This can result in delayed responses or miscommunication.
I have recently changed our business model to address the issue of priorities, especially for our clients who are growing and past that 50 employee mark. More dedicated resources are needed for that group. While our generalist may still serve multiple clients, the overall number and workload is much less and allows them to focus more into just a few needs.
HR Tech: Small businesses often do not have the budgets for HR tech. If they do have the budget, they do not have a lot of negotiation power because their headcount isn’t enough to entice the tech company to lower the price. What’s more, many tech companies won’t even offer services to business that are under a certain employee threshold.
Outsourcers either come with their own HR Tech, or, because they can refer multiple clients, they can get tech companies to offer discounts or allow businesses to join earlier than they normally might be able to. We pride ourselves on having great connections with, not just tech companies, but brokers and other HR service providers that allow us to pass on discounts to our clients or allows them to have access to tech even if they do not meet the headcount minimum.
We are very proud to be rolling out a learning management system for our clients next year. Tech that most small businesses can not afford on their own.
Culture: It’s hard for an outsourcer to help build culture unless there is dedicated onsite time built into the contract. Even then, an outsourcer will never have the same feel and ability to build culture like an in-house team would. For an HR person to really be able to help build the environment around them, dedicated regular on-site time is needed.
In order to combat this, where culture is a focus, we work with leaders to ensure that they are driving and demonstrating the behaviors they expect even when we can’t be around. It’s a bit harder, but it can work.
Best Practices: We focus on small businesses, the smallest of small really. Startup to 75 employees is our prime target and the vast majority of our clients are below 50 employees. In nearly every client meeting, every week I get asked the same question: what are your other clients doing? In or outside industry, it is comforting for small business leaders to hear that other small businesses face the same struggles and to know what they have done to overcome. An in-house team without a large network would not have this information readily available. We often pull on the experience with one client to fix the problems of another. It allows us to continually build a knowledge database we can pull from as problems arise. We have likely seen them before and know what to do and more importantly, what not to do.
Outsourcing HR is a different decision for every company. Early on outsourcing this function helps startup and small business leaders focus on the business at hand while knowing they have someone ensure they are compliance. As the business grows, outsourcing means that experts are on hand to help get the business where it needs to be. Once it is time for in-house staff, having an outsourcing provider who has been with you from the beginning and can help transition the new person into the role is always better than throwing someone into the deep end and hoping they can swim.
Outsourcing isn’t a perfect solution, nothing ever is. It is certainly one that can keep costs down while still giving businesses the expertise it needs for employees to feel their needs are handled. I often hear small business leaders say they don’t know what they don’t know about HR and that is where outsourcing comes in. No need to figure out what you don’t know if you have someone who can take care of it for you.