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Outsourcing HR: Big Savings for Small Business

In the past few years, the outsourced HR industry has grown to an estimated $165 billion annually.
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Since its founding in 2010, vegetarian food producer Beyond Meat has grown into a company with 50 employees in three states. Their product is available in every Whole Foods in America and Western Canada, with a conventional grocer roll out already underway.

Brent Taylor, Beyond Meat's VP of Corporate Development believes the firm's ability to focus on its core competencies has enabled it to grow rapidly without getting bogged down in such necessary time sucks as payroll, benefits and vacation time. Translation: it outsourced its human resources department, and the move paid off big.

Beginning in the 1970s and accelerating in the late 1990s, "insourcing HR" (and other services like IT) grew increasingly popular for big companies. They realized the cost savings benefits of a reduced staff, more efficient payroll processing and legal compliance, and streamlined recruitment. 

 

In the early going many external HR companies failed miserably, but in the last few years, the outsourced HR industry has grown to an estimated $165 billion annually, as nearly 85 percent of firms now outsource at least some of their HR functions.

Smaller businesses have started to get in on the trend, with startups like Beyond Meat, who contract Private Employer Organizations (PEOs) to create a fully functioning HR department externally. The motivation is two-fold. PEOs share the liability of legal compliance, and offer a range of employee benefits small employers could never otherwise afford.

When it comes to health care, for example, most small employers can only afford to offer their employees one Preferred Provider Organization (PPO) plan. TriNet, one of America's largest PEOs, has 7,000 clients with over 200,000 combined employees. They’re able to leverage that buying power and offer dozens of plans to each of its clients. TriNet's Jacqueline Breslin says that these kinds of options are crucial to attracting talent. "If you're going to compete with larger companies, nurture top talent and drive your innovation, you need to offer competitive benefits."

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Based in Silicon Valley, with 27 affiliated offices scattered throughout the US, TriNet is one of America's largest PEOs. That's where Beyond Meat turned when it launched its factory, and ramped up its sales force. "We have individuals working in our factory in Missouri, and sales executives working on the east and west coasts," says Taylor. "The competing legalities and requirements are complex and we’re able to lean on our PEO for compliance."

According to Breslin, risk mitigation is one of the most compelling factors in a PEO relationship. "Instead of pecking themselves to death trying to figure out how to comply with all the state and federal regulations," says Breslin, "we help our clients get ahead of the legal issues -- such as vacation time, workers compensation and insurance, and they can focus on what they do best." TriNet generally absorbs at least half of the legal liability for their clients, and they also enable smaller firms to compete with larger, wealthier employers by putting together competitive bonus packages.

Paul Belliveau, a veteran HR manager with more than 30 years of experience, agrees there is tremendous benefit to outsourcing the administrative side of HR, but cautions that the human side should not be overlooked. "Organizations need to make sure they are not giving away the candy store. As a business, you need to identify the things that HR does to increase the value of the humans within the company and keep that in house. If you have employees with promise you have to develop them." That not only helps maintain a workplace where employees feel valued, it's strategic, and actually builds the company’s financial value.

It's this type of "blended approach," says Pamela Peters, director of KPMG's Shared Services & Outsourcing Group, "that works best for employers regardless of their size." Part of a global auditing firm working in 156 countries, Peters advises businesses that range in size from 2,000 to 300,000 employees. 

"It's hard to find an organization that can do all HR services well," she says, "so much new technology has emerged, and we help our buyers pick and choose their services from multiple contractors."

Not all out sourcing happens off campus. There are times when large companies contract with external HR firms but host their representatives within company headquarters, or even re-badge their own employees, who will now get paid by the external HR firm. Belliveau says the motivation for this is rather intuitive. "When companies do this, they're saying 'We want to focus on our core competencies, but we still need HR talent within our organization, in close proximity to where our people are.'"

KPMG also designs internal HR models for their clients that dovetail with the external services that they've chosen. Shell Oil took that approach, and according to Hugh Mitchell, their Chief Human Resources Officer, their reliance on a range of internal and external services helped cut their HR budget by 40 percent in four years.

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These days it's easy to point at that number, which is admittedly striking, and wonder how employees could possibly benefit from such a budget slash? Factor in the way PEOs and likeminded HR organizations work with their remote "shared service centers" (a.k.a. call centers). They are staffed with hourly employees armed with scripts on maternity leave and health plan basics, but they have zero connection to the employee on the other end of the line. For many, it feels as if this trend is just the latest in a corporate push toward cost reduction and a dehumanized work place.

Yet Professor Peter Cappelli of University of Pennsylvania’s Wharton Business School, disagrees. "I'm usually not a fan of these things, but this is one of those rare instances that is both cheaper and better," he says. "It's a big burden on a local HR manager to know everything."

Though centralized services frequently mean scripted responses, Cappelli maintains those responses are more accurate and lead to better overall service -- especially in America, where professional services like payroll, benefits and compliance -- once the domain of in-house staff -- are becoming massive industries in and of themselves.

The key, Belliveau argues is to make sure you continue to nurture the human side of the equation, a strategy that is integral to a company's success. "When you are determining whether or not to outsource," he says, "I wouldn't focus on cost. It's the increase in value that matters."

This article was originally published on The Fiscal Times.




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