When it was founded in 2010, Swipely, a late-stage start-up in Providence, Rhode Island, whose payment processing system helps smaller retailers and local businesses better understand their customers by analyzing their credit- and debit-card usage, had no dedicated human resources staff. HR work was divided among several employees with previous peripheral HR experience. As the company quickly grew, doubling the number of employees in just a year, it knew it needed someone with expertise to help it manage the HR issues that accompany rapid growth.

“We initially planned to outsource only some of the HR functions,” explains Carol Gordon, controller at Swipely. The company started with those activities that were directly related to compliance, such as audits of I9 documentation and its employee handbook. 

“But when we saw the benefits of outsourcing, we decided to eventually transition almost everything to the consultant, trusting their expertise to manage HR while we used our expertise to grow the company,” says Gordon.

Today, Swipely has moved more off of its plate, with the expectation that almost all HR functions will eventually be outsourced. And the impact on its business has been substantial.

“Those who were previously responsible for HR functions can now focus on projects that can contribute to the continued growth of our business, because we have a trusted resource for all things HR, someone who understands our business and is working with our goals and culture in mind,” says Gordon.

No matter the size of an organization, HR is an increasingly complex area, in large part because of continually changing rules. HR offices are no longer just responsible for hiring and firing; today, they manage benefits, payroll, compliance, training, safety and more – all functions subject to increasing regulation. But while the responsibilities of HR departments continue to grow, the staff allocated to them often do not.  

For the small companies like Swipely that don’t have formal HR departments, business owners now spend more time on HR activities and less on revenue-generating activities that are critical to their future success. And even large employers with HR staff feel the burden as the teams are expected to do more with the same or fewer resources.

Since the regulatory environment shows no signs of slowing down, and HR issues that aren’t managed properly can put the business at a heightened risk of lawsuits, fines and penalties, employers today face a critical decision: continue to handle all or most HR tasks in-house or outsource them to agencies that can help alleviate the burden. Increasingly, the choice is the latter.

So what drives HR out? There are a number of common drivers among companies that choose to outsource some or all of their HR roles, including:

  • Cost savings. Labor costs for full-time employees are one of the largest operating expenses a company faces. From taxes and administration to benefits and insurance, the costs of retaining HR employees in-house increases each year. Added to these expenses is other overhead, such as office space, equipment and technology needed for HR workers. Outsourcing HR can help reduce these costs and, because companies can pick and choose what tasks they want help with, they can adjust their plans as their needs – and budgets – change.
  • Reduced risk. In-house HR staff are often generalists who can support a wide variety of functions. But when it comes to interpreting the specifics of laws, rules and regulations, an experienced specialist can help understand their application to a particular business – and ensure the company stays on top of changing requirements. At a time when employers face a rise in enforcement and litigation, this expertise can help businesses minimize the risks of noncompliance.
  • Access to expertise. Outsourcing companies bring experience from a wide variety of clients that have faced similar HR challenges, so have proven paths to overcoming these issues efficiently and cost effectively. This input can be useful when dealing with more routine issues such as employee discipline or complaints, recordkeeping and safety policies. And it can be especially valuable when a company is in the midst of a transition, such as a spin-off, geographic expansion, layoff or other organizational development, and needs specific advice.   
  • Improved HR efficiencies. Maintaining an efficient workplace is critical to an organization’s future, and outsourcing HR can help streamline a company’s practices and policies. And seeking outside assistance with some or all HR tasks, especially more administrative ones like payroll, workers’ compensation and benefits administration, can ease the burden on in-house HR staff and management. Once freed up, they can focus their time and effort on the core business and strategic improvements for the organization that can give them a competitive advantage.

Is outsourcing right for every company?

While some organizations have embraced HR outsourcing, others are still wary about transferring sensitive employee data to external partners. Proceeding thoughtfully is critical to ensure the decision is one that will fit with an organization’s needs, objectives and management style. Key considerations for organizations to think about include:

  • Company size. There’s no set number of employees an organization needs to have before outsourcing HR makes sense. But a general rule of thumb is that companies may want to look outside once administrative processes are slowing down the productivity of the business. And while every company is different, this typically occurs when a business reaches 10 to 25 employees, in fact, the sweet spot for HR outsourcing are companies with between 10 and 100 employees. 
  • Workforce composition. Some companies are equipped with the skill sets internally that can provide the spectrum of support they need to handle all HR activities, while others don’t have employees with the right experience and training required for specific HR tasks. So the content of a company’s employees can be the deciding factor in determining whether HR functions should stay or go. 
  • Control. Outsourcing changes the dynamic of control over the HR role from one of manager to partner. And that means the company must be willing to be an engaged, committed participant in the relationship, be open to ideas, and take recommendations seriously. If a business owner or company leadership wants to maintain control over all aspects of the business and decision-making, then HR outsourcing may not make sense.

A successful strategy

Even if a company decides that outsourcing is the right step, there’s no one-size-fits-all approach. The key is to develop a strategy that works for an organization. For certain companies, that might mean just having an expert available to help the company with particular HR issues. Others may opt to outsource all HR functions. And some companies may transfer only administrative tasks and keep more strategic roles such as recruitment in house to start, and evolve the relationship with the HR partner over time, based on comfort level and changing business requirements.

The best way to determine the scope of outsourcing help an organization needs is to start with HR assessment. This audit, which can be conducted by the HR partner or performed in-house, identifies problem areas, the expectations and business impact of outsourcing, and budgets that will help an organization determine the best scenario for their specific situation. 

Karyn Rhodes, SPHR, is vice president of human resource consulting at Cornerstone Group.

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