HR is one of the most commonly outsourced functions, as it involves both complex and time-consuming tasks. Outsourcing HR services can have a positive impact on an organisation, effectively saving money whilst simultaneously increasing the quality and efficiency of the company’s HR and payroll. Outsourcing results in more final output but requires lower input costs than in-house HR.
Maintaining an in-house HR team and payroll function incurs a number of financial costs. As well as the salaries of HR staff, there will be outgoing costs for purchasing, hosting and maintaining an HR and payroll system, managing the in-house HR teams and improving internal processes, training and development sessions, and recruitment costs.
One of the biggest financial savings from outsourcing HR is staff salaries. On top of salaries, keeping HR employees trained and up-to-date with the latest legal policies in your industry is an ongoing expense that can be very costly. Employee turnover is also at a very high cost to an organisation, estimated at £7,000 for a manager or professional in the UK, and an estimated $16,000 to replace an entry-level employee (and as much as $120,000 to replace a mid-level employee) in the US. By outsourcing, these added costs can be avoided.
According to a study from Bersin, in the US spending on HR has increased by 4% year-on-year and this is partially due to the increasing difficulty that businesses are facing when it comes to hiring HR professionals. It also notes that there is a disparity between the lower performing HR teams and those that invest heavily in management, training, development and performance programs.
CIPD previously conducted a survey of UK firms which anticipated an increasing shift towards outsourcing HR over time. According to figures from this year, the total spend on outsourcing HR has risen 50% above 2014 levels, proving CIPD’s predictions correct. Figures estimate that outsourced HR and payroll can save small businesses a significant amount of money.
One advantage of using an outsourcing company is that many of the HR components can be split across various client organisations and therefore costs can be lowered. Costs may also be lowered further as automated workflow processes allow HR and payroll administration to be carried out more efficiently.
It is common for small businesses to opt to outsource the majority of their HR needs instead of hiring a full-time HR specialist. This is often most cost-effective for businesses that are smaller in size and unlikely to require a full-time HR professional or team, but whose current employees do not have the capacity or are not qualified to take on particular HR activities.
Larger organisations who do have their own HR team tend to be more selective regarding which HR activities are outsourced. Often these organisations will decide that their in-house HR team is best placed to focus on more strategic business activities, and therefore choose to outsource HR tasks such as benefits administration, payroll or recruitment.
Before entering into a contract with an outsourced HR and payroll supplier, it is important to ask some key questions to ensure that this is the best option for your business. These include the contract length and whether there is any flexibility to tailor the service as your business grows, which software provider will be managing data and what data security measures are in place, as well as the total costs.
It’s also essential to establish who your key contact will be. It may be that only one individual will be providing the service, but it’s entirely possible that your calls may be directed to a call centre. You want to be sure that communication will be clear and efficient and that the company you are outsourcing to is trustworthy and fits with your own company culture.