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The Buzz on HR Outsourcing

HR outsourcing has become such a buzzword it is even discussed in a recent IBM television commercial.

In a business environment where companies seek to maximize efficiencies at every corner, the idea of outsourcing anything has become increasingly popular.

But many business owners and managers who are not fully up to date on the latest corporate speak wonder what HR outsourcing really means, and how it would benefit their company. Is it really a good idea to turn over these critical, people-related functions to an outside provider?

HR outsourcing defined

HR outsourcing means divesting all or part of your company's human resource functions to another organization specializing in this area. Functions include:

Payroll administration, from preparation and distribution of payroll checks to detailed payroll reporting and the management of federal and state payroll tax
Employee benefits, including the selection and administration of health benefits, 401(k) and retirement plans, life insurance, flexible spending accounts and more
Risk management, including the handling of workers' compensation claims and safety program development
Basic HR management, including recruiting, interviewing, hiring, performance review, employee discipline and even termination

Perhaps the most compelling reason for small and mid-size companies to outsource the HR function is to provide employee benefits and services that are competitive to those provided by larger corporations. Doing so allows them to recruit and retain talented employees.

Outsourcing these non-core functions allows managers and business owners to focus their time more productively, on their areas of personal expertise. Most business owners and managers are not HR experts - nor do they want to be.

Partnering with a provider such as a professional employer organization (PEO) that represents a larger group enables companies access to more benefits options, sometimes at a reduced rate. These benefits can be administered for a larger group of people in a more cost-effective manner.

While HR outsourcing has perhaps the greatest appeal to small and mid-size companies, an increasing number of larger organizations are also adopting outsourcing relationships as a cornerstone of their efforts to increase efficiencies, sharpen market focus and re-energize operations.

How HR outsourcing works

The most comprehensive HR outsourcing relationships are provided by PEOs, which take shared legal responsibility of a client's employees, typically establishing a co-employer relationship.

In this, the PEO is the legal employer of record, responsible for administrative and legal issues. Clients maintain complete control over their business and employees, including hiring and firing decisions. The PEO takes over the back office aspects of employee relationships.

PEOs typically provide payroll and benefits services, with additional HR consulting and management services based on client needs. Some PEOs bundle all their services together, while others provide more customized solutions.

There are several other types of service providers that offer a more limited outsourced relationship, including business process outsourcing companies (BPOs) that typically improve the HR process through the use of new technology. Similarly, application service providers (ASPs) host HR software applications on the Internet and rent it to clients.

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