Small business trying to decide on outsourcing payroll services or the entire HR function.

Hi Barry -

You've asked a loaded question. Without having additional details (how small is your organization; what industry are you in; have you had any previous work comp and/or hr issues in the past) my advice is going to be a bit watered-down.

Both options can offer a variety of benefits for your organization - alot of which may look and act the same (payroll tax filing; health benefits; workers' compensation coverage; etc). Understand that when you choose to outsource all of your hr, generally you're using a PEO or employee leasing program. The added benefit to this option is the 'transfer of risk' by moving your employees out from under your FEIN to that of the leasing company. This can be enticing if you have had increases in your work comp rates due to injuries; increases in your FUTA/SUTA rates due to layoffs; or if you are lacking in the hr function because your organization does not have a dedicated hr professional to make sure the organization is in compliance on all levels. Obviously if you don't have any of these issues, payroll outsourcing may be a viable solution for you.

I hope this helps you. Best of luck with your decision!

Wendy Welch

Barry -

Your question is one that many companies ask - and it essentially becomes a question of "make or buy?". Like Wendy I agree that there is no single "right" answer, but there are other vantage points to consider:

1) What is the expertise of my current HR group?
2) How fast are we growing?
3) How much influence do I want to have over benefit plan design?
4) Do I want a 1 size fits all program for all things HR?
5) How will my current staff react to working with consultant for confidential HR issues?

PEOs tend to be very appealling when you are small - under 50 employees, but I know of more than one HR professional who has had to come in and unravel a big mess when the company outgrows the PEO or when the PEO tries to fit a single benefit scheme into many different companies and cultures. Tread carefully and get solid references from both companies currently with the PEO and others who've moved away as they've
grown.

Good luck!

Amy Jones

Outsourcing HR can be a very cost effective means for dealing with necessary compliance responsibilities, as well as ensuring that basic HR processes are handled efficiently. There are a wide variety of resources for this but judging from the way you've posed the question, it would appear that you are considering outsourcing HR to a payroll-based service. This may or may not be the right option for your organization, depending on a number of factors, such as cost, type of work environment, size of company, what kind of HR resource needed, etc. I help companies determine how to best address their HR needs so let me know if you'd like to discuss this in more detail--you can contact me at oauhrconsulting@yahoo.com.

While there may well be no single right answer there is an answer. Much has to do with the size and budget of your organization. However, a fair amount of positive return can be realized by outsourcing many transactional items beyond payroll, regardless of organizational size.

Over my career I have had significant success outsourcing many transactional activities (benefit administration, pension administration, employee files, unemployment, some recruiting activities, etc). These do not need to be done in-house and a very positive ROI can be realized by outsourcing these. Further, in many instances these can be done better by an outsource provider than you in-house staff can.

Maintaining an internal HR function again depends upon organizational size more than any other factor. If a true HR presence is desired, even in an outsourced environment, then the focus can be on a more highly skilled individual who can provide significant value added through that expertise. You don't need to maintain the overhead for a collection of administrative people and can truly focus on the business and investing in the long term success of the business.

I'd be happy to discuss this with you further if you'd like. You can reach me at dmh@thcg-home.com

www.thcg-home.com

Hi Barry,

Employee leasing companies and PEO's come in all shapes and sizes. Many of the top PEO's are comprehensive HR outsourcing organizations. Your description tells me that payroll administration, affordable choices of health benefits, cost effective 401k, perhaps even a HRIS platform with employee self service options would be valuable. If you shop around you will find companies that can provide these services for $800 to $1200 per employee per year. If your company is providing health insurance and contributing a fair portion, you may find that the savings will offset most, if not all of the PEO's administrative charges.

Our firm is uniquely qualified to help you find a suitable partner.

Bruce Silver
http://employers-rx.com

Hello Barry,

I think its important not to underestimate the change in mindset required in outsourcing and be sure that any decision is founded on a thorough analysis. Outsourcing agreements typically assume a partnering style of relationship between the parties within expectations set by a service level agreement (SLA). Such a relationship generally means that an organisation’s focus shifts from managing inputs to managing outputs - this is an important shift and means shifting from being a resource manager to becoming a contract manager. This in turn would require you to either have or develop skills in the areas of, negotiation, contract law and administration, performance measurement, finance, and audit. These are critical to successful management.

With the Service Level Agreement, the supplier’s performance needs to be based on key performance indicator (KPI’s) specified in the agreement. The KPI’s must be meaningful to the stakeholders, they must be measurable, readily available and within the control of the supplier.

It's my experience that outsourcing is usually and probably most often should be driven by contestability, i.e. the objective being to obtain an optimal quality/cost balance. The first step in considering outsourcing, and before business analysis, is a strategic analysis that provides a clear definition of the service under consideration; confirms that this service is not an organisational core capability; determines good practice in the sector; makes an initial assessment that there is at least one organisation who may meet the organisation’s outsourcing criteria; specifies why the service should be outsourced, including how this would support business strategies; and identifies how outsourcing the service would contribute to the organisation’s financial performance. Some thoughts... hope this is helpful.

Cheers, Crispin
www.gardenwebster.com

Hi Barry,

For a company of your size an outsource could be a very valuable consideration. Although you have somebody in place assisting with the function of HR, as you even say yourself, for one person this could be quite a handful, as it is very difficult for one person to be a specialist in all areas of HR.
I agree with others who have responded, that you do not want to find a company that will give you a one size fits all approach, as the reality is that your requirements are unique. You would want to find a partner who understands this, and finds a hole to fit you, rather than pushing you through a whole that does not fit.
It may be that you would like to keep one or two of the functions inhouse, because you have a handle on these or you may only want to outsource one part of a function, speak to a company that will give you this flexibility.
I hope that this information assists you with your query.

Kind Regards

Kylie Dutton

Barry,

Why has no one mentioned the possible impact outsourcing HR will have on the most important asset this company has, its people.

I believe that the decision to outsource HR should be based on more than just a spreadsheet analysis of costs with the cheaper alternative winning.

For all successful businesses, customer satisfaction is a paramount concern. In the case of offloading your HR function to an outside vendor, it's not only your firm but more importantly, your employees that suddenly become their customers.

As Crispin so thoughtfully states above, the decision to outsource requires a very real change in mindset not only in vendor management but also how the firm interacts with its employees.

Again, As Crispin states, the first order of business is not an analysis of what is the cheaper alternative but a strategic analysis of your requirements and the likely impact it will have on your employees.

Once a company decides it is ready for outsourcing, it should evaluate vendors wisely and have clear, well written contracts in place that describes the services to be preformed and the obligations of each party. You also need to evaluate the risks. Remember, you can outsource the paperwork but not the liability. If a payroll processor goes bankrupt and your tax deposit wasn't made, guess who's liable to the IRS.

So chose wisely and look for a well-managed, well-capitalized company. Ask for financial statements and references from current and past clients for vendors under consideration. Also, talk to their clients employees. Call the industry's trade association or accrediting organization and make sure the company is reputable, stable and strong.

Remember too that sensitive information, such as health-care paperwork or social security numbers may be involved. Ask how it monitors compliance. Is claims processing efficient and in accordance with federal and state regulations?

Ask what tools are available to employees to use to get the services they need. Who do employees interact with and how? How does management interact with its employees on HR matters? How will it affect employee satisfaction? How do you outsource a problem?

The most effective outsourcing relationships create value. Of course, "value" has a different definition for everyone involved. Before exploring outsourcing, business owners should know what they are trying to achieve - saving time, saving money, decreasing management distractions, accessing experts - so they can evaluate the effectiveness of the program and its impact on employee moral.

If your employees become dissatisfied, your cost savings will disappear in a heartbeat as your employees call someone like me to get them out of there.

Sincerely,

Tom Hogan
Level 1 Resources
www.level1Resources.com
(914) 478-4459 ext 111

I do believe it depends on the size of the company, what your strategic goals are and what phase of company development you are in.

If you are small (under 30 people) you can outsource or even hire a part-time consultant who is at the company once a week to help you strategically with your decision making, hiring and even do payroll. This give you and your staff someone to go to with questions and concerns and builds a foundation. You don't need a full time person.

If you are growing then I think you need someone on-site more than once a week to help with hiring, creating a culture that will help you grow and be a bigger part of the companies strategic direction. Great HR people are great an supporting and delivering your vision and are an underused asset in so many firms. I would then outsource payroll until you were over 120 people.

When you are larger than that I think you want to put payroll in finance and keep the transactional part of people work there, and focus your HR on employee attraction and retention, policy, benefits and strategic development.

Hi Barry,
You've had some long and informative responses, so I'll keep this brief. Outsourcing doesn't mean loss of control as some people seem to suggest. The important thing is to find a good company to work with. My suggestion is to find an HR outsourcer that regularly works with your size of company.

I'm talking from the point of view as an outsourcer (albeit just for the recruitment functions). My clients think of me as part of their company (inviting me to their company Xmas parties, etc) and I think an HR outsourcer should be the same if not more so. Payroll is a more functional job and there are plenty of good companies out there doing this.

Regards
Geoff
gmyatt@rpozone.com

I think it depends on the size of the company. While outsourcing payroll/benefits administration, 401K, etc can be great, let's not forget the human factor. I worked for a company once where we outsourced payroll/benefits administration and it was a NIGHTMARE!!! The ee's almost 90% of the time received horrible customer service. The svc reps ALWAYS referred ee's back to their HR partner for issues they could/should resolve. Every pay period there was an issue. The outsourced company had horrible turnover and a lack of training on their end so the CSR's were ineffective. WE ultimately had to hire two people to manage the relationship between the outsourced company and internal HR/HRIS.

I currently work with small companies who outsource their admin functions but I provide on-site guidance as needed when it comes to policy/procedures, investigations, performance mgmnt, complaince, etc. This option can be a win/win for smaller companies.

Even the most meticulous and experienced human resources professionals find that handling payroll can be a headache. In addition, the person who handles your payroll system needs to keep up to date on changes in personnel, deadlines, and tax requirements on an ongoing basis.

Payroll outsourcing can be an affordable way to remove this burden. If your employees work varying amounts of hours each week or if you have significant turnover, a payroll service can be a time-saving and cost-effective alternative to internal processing.

http://www.buyerzone.com/hr-personnel/payroll-services/rfq-payroll-services/