Employees are the most valuable asset of a company. Multiple surveys assert that motivated and happy employees have a higher probability of performing significantly and contributing to the organization’s success. Hence, companies must have strong HR(Human Resource) divisions, that take care of the employee-focused aspects including hiring, training, administration, payroll, and workplace engagement, to ensure higher employee satisfaction and retain their treasured resources for a prolonged period. However, small companies and start-ups often find it difficult to hire and maintain a team of in-house HR executives as hiring, training, and offering all employee benefits generally turn out to be an expensive affair for them. Besides, when owners try to manage the HR divisions along with the primary profit-generating divisions like marketing, sales, and business development, eventually they find themselves in a mess. As a result, the companies’ growth is hindered and the employees’ welfare gets unattended. Due to the lack of ample knowledge in the particular field, entrepreneurs trying to carry out HR activities themselves usually fail to comply with the various government regulations that must be followed to legally operate in the particular states. Hence, small business owners with budget constraints often look to partner with third-party HR service-providing companies or agencies, backed by teams of qualified and experienced HR executives, who are aware of all the federal, state, and local regulations and policies that businesses need to adhere to. This activity is termed HR outsourcing.
In the case of HR outsourcing, a company and an external outsourcing firm enter into a contract that includes the particular HR services the latter will provide to the former and the fees associated with the services. Entrepreneurs looking to enhance their companies’ working culture outsource HR functions(one or more) and enjoy a slew of benefits like expert guidance for the employees, ingenious perspectives, and implementation of the best HR policies while ensuring optimum employee satisfaction and success of their businesses. HR outsourcing is generally categorized by outsourcing models, which define the type of framework used by an outsourcing firm to offer services, and outsourcing strategies, which elaborate on the approaches taken by external agencies.
Popular HR Outsourcing Models:
- Professional Employer Organization Outsourcing (PEO).
This type of outsourcing builds a co-employment relationship between a company and a third-party firm. In the case of PEO, the outsourcing firm is entitled to pay wages and taxes, collect tax information and report to the government agencies, and strengthen the employees’ relationship with the company. The salaries and taxes that the outsourcing firm pays on its client’s behalf are reimbursed by the client itself. Also, the pre-decided administration fee is paid to the external HR service provider. The outsourcing model is ideal for small businesses and start-ups that have less than 50 employees.
- Administrative Services Organization Outsourcing (ASO).
ASO often turns out to be beneficial for entrepreneurs who are looking to have direct authority over their companies and utilize their technology solutions but want more operational support, along with a collaborative and customized approach. This type of outsourcing model offers business owners trusted partners, who will directly work with their teams, and solve the employees’ queries, but will remain a completely separate entity.
- Human Resource Organization(HRO).
Often preferred by large companies, HROs offer their clients a wide array of services to choose from. These organizations generally excel in one or more HR functions and are ideal for businesses that have the bandwidth to carry out some HR activities but are looking for support only in specific areas.
Common HR Outsourcing Strategies:
- Software-as-a-Service HR Outsourcing (SaaS).
This type of outsourcing involves automating the primary HR functions through a software program that is hosted and managed by the outsourcing firm. Best suited for companies looking to keep some of the HR functions in-house, SaaS HR outsourcing offers organizational support with greater flexibility. SaaS HR outsourcing functions comprise applicant tracking systems (ATS), training and performance tracking, and payroll and benefits management. Though SaaS reduces the workload and increases the efficiency level with the use of software, someone from the company’s in-house HR team or the outsourced team needs to actively regulate the software and ascertain the proper use of the strategy.
- Business Process HR Outsourcing(BPO).
In the case of business process HR outsourcing, only one type of HR function is outsourced to the outsourcing firm, which offers personalized support along with service management, besides a software solution. This type of outsourcing strategy is ideal for companies eager to outsource complex HR functions like benefits enrolment and administration.
- Single Source HR Outsourcing.
Here, a company outsources all its HR requirements to an external service provider that takes the responsibility of handling talent acquisition, payroll, ensuring better time, labor and performance management, etc. However, the business owner must decide on the level of involvement it wants to offer the outsourcing firm when it comes to hiring and releasing employees.
- Shared Service HR Outsourcing.
This type of outsourcing approach centralizes HR functions that are shared by multiple departments and streamlines the entire process by minimizing the involvement of several employees of different departments on a single task. In the case of shared service HR outsourcing, all aspects of a task are assigned to a single unit or person. This considerably reduces chaos and inefficiencies.
Today, HR outsourcing has become a common practice among small and medium-sized companies all over the world. Research says the global HR outsourcing market is forecasted to grow at a CAGR of 6.2% and reach $53.2 Billion by 2027 (source: reportlinker.com). However, entrepreneurs looking to outsource HR functions must keep in mind that favorable outcomes can be witnessed only when the right HR outsourcing model or strategy is selected, considering their companies’ structures and primary requirements.