HR Outsourcing in a Down Economy

Updated: October 01, 2009

HR Outsourcing: Can it help your business in a down economy?

The mid-way point of 2009 has come and gone and the economic forecasting remains positive, however the statistics still remain grim. Unemployment remains at a 20 year high, consumer spending is at the lowest levels since the early 1980s, and disposable income has sunk to levels not seen since 1947. To add to this, health care reform has the country in a tailspin, especially the large populations of employees who make their living in the healthcare industry. Concerned employers wonder how it may impact their businesses in the short and long term. As the economic downturn continues, employers across all market sizes report their top business concerns or threats to their business:

Threats to the Business

  1. Diminished productivity due to deflated employee morale and leaner staff
  2. Dropping revenues and unpredictable cash flow
  3. Increasing layoffs and the potential for rising lawsuits
  4. Increasing insurance for healthcare premiums and operating expenses

Employers, both large and small, are not prepared to watch and wait from the sidelines. They have taken matters into their own hands to offset rising operational costs and dropping profits through the use of outsourcing. "Outsourcing" is defined as, "the procuring of services or products from an outside supplier or manufacturer in order to cut costs." Almost every employer engages in at least one form of outsourcing. In recent years, and continuing through the recession, Human Resources and Accounting top the list as key areas where businesses can immediately realize cost savings and operational efficiency. Because both of these processes are not core functions of the business itself, a return on investment or business case for outsourcing to a third party is easily made.

HR Outsourcing Industry Continues to Soar

Human Resource Outsourcing is a business strategy that allows an employer the means to reduce overhead expenses, reduce employer liability, and improve employee productivity. While some employers may select to outsource only specific HR functions like payroll or recruiting, others have opted for a comprehensive, single source solution.

HR Outsourcing continues to gain momentum as a viable solution for challenged businesses. According to IDC, a global research firm, outsourcing Human Resources functions has become the fastest growing segment of the broader business process outsourcing (BPO) industry. It grew close to 70 percent over the past 6 years, with companies worldwide spending more than $103.3 billion.

Additionally, Centripetal Consulting Group obtained information from Everest Research Institute, an independent research and analysis organization which states that North American HR outsourcing transactions reached $25.4 billion by the end of 2007, an increase of 19 percent over the previous year. In 2008, despite the slowing economy, HRO transactions grew an additional $2.9 billion, an increase of over eleven percent over the previous year. Everest Group, the parent company of Everest Research Institute contributes to this growing number of business utilizing an outsourced HR strategy. Centripetal Consulting Group is currently working with this 70 employee firm to select the right HR outsourcing technology partner which will enable the company to streamline and automate employee related transactions and internal processes.

Why Outsource?

While large corporations feel the impact of a recession, these factors are magnified for small businesses and their recovery time is significantly longer. Public corporations may report diminished returns for their shareholders and are subject to public scrutiny. A small employer can easily go out of business overnight. This is frightening for everyone because small businesses or the SMB market are the lifeblood of the economy. These businesses are run by innovative and motivated entrepreneurs who invest their personal savings, time, and livelihood. They need protection more than a large company, yet many times either cannot afford the internal HR resources or aren't really aware of their true exposure as an employer.

One of the reasons for the continued growth in HR outsourcing may be attributed to employers who had not considered outsourcing in the past, are now seeing the benefits of HR outsourcing as a means to reduce overhead and cut operational expenses. They've been forced to slash headcount. This creates a "do more with less" environment which can compromise productivity. But from a legal and compliance standpoint, employers feel vulnerable to increased regulation associated with employee terminations. The changes to COBRA are one example. This fear has motivated employers to consider the outsourcing to alleviate the burden of dealing with employment related compliance and administration.

The key for small employers to successfully navigate through a recession is to stabilize revenues and improve employee productivity. The cost associated with labor and employee benefits are reportedly the two top line items on the balance sheet, thus making HR accountable and responsible for maximizing employee productivity while minimizing costs and risk. Employers look to HR outsourcing as a means to achieve these objectives:

  1. Stabilizing operating expenses increases company value and calms corporate anxiety.
  2. Streamlining operations reduces unnecessary overhead and cuts wasteful spending.
  3. Lowering insurance premiums reduces overhead and expenses.
  4. Minimizing employment risks reduces the potential of lawsuits and complaints to the federal and state agencies, and the resultant legal fees and judgments.
  5. Training and motivating staff increases employee morale and improves productivity.

Despite the recognition by many small employers as critical priorities to their success, most simply cannot afford to institute the necessary changes. Even the most efficient employers will be unable to devote the time required to make meaningful changes to corporate policies and procedures. Partnering with an HR Outsourcer helps an employer achieve relief. According to Hewitt Associations, a world-wide provider of HR consulting services and research data, the most common reason for engaging an HR Outsourcing firm is to reduce overhead. Companies clearly recognize the value of utilizing an outside resource to conduct various business-related activities, as compared to maintaining these functions internally. Other reasons to outsource include:

1. Access to outside expertise
2. Improving service quality
3. High cost of remaining up-to-date with rapidly changing environment
4 Eliminate high volume of low-value transactional activities
5. Reduce management distractions away from core business
6. Leverage existing staff to focus on key competencies

Although there are several "flavors of outsourcing", the providers are not all created equal. However, there are two main types of HR Outsourcing providers: Traditional HR Vendors and Professional Employer Organizations (PEOs). Some employers may select to outsource specific functions, others have opted for a comprehensive solution.

Traditional Human Resource Vendors

Traditional HR vendors are firms that specialize in one particular service area, such as payroll, benefits brokerage and administration, recruiting, or training. In a traditional outsourced model, the employer selects a mix of HR vendors to perform specific function that encompass all of their outsourcing needs.

Professional Employer Organizations

The second main type of outsourcer is a PEO or co-employment vendor. In this relationship, the PEO shares many of the responsibilities of being an employer on behalf of their client. Through co-employment, small organizations access the economies of scale enjoyed by large corporations. In contrast to traditional HR vendors, the PEO provides a wide array of HR services, effectively consolidating multiple vendors under one roof.

The four key service areas include:

  • Human Resources compliance and administration
  • Employee Benefits and administration
  • Workers' Compensation insurance and safety consulting
  • Payroll and tax filing services

This type of employment arrangement can offer several benefits to an employer, especially in a down economy. Many times a PEO can be a savior to a business owner who cannot afford expensive health premiums, is overwhelmed with paperwork, or is concerned with maintaining HR compliance. Click here to explore if a PEO is a good fit for your business.

On the flip side, an employer may only benefit from a co-employment arrangement for a short period of time as it no longer seems financially compelling to fully outsource the HR function. This trend may occur once the economy strengthens or changes in healthcare occur. Because the PEO performs all HR transactions, it is sometimes confusing or difficult for a company to determine their true costs for each of the services delivered by the PEO. Even if you do determine that it makes sense financially to leave the PEO, it can become even harder to piece the right vendors together to unbundle from the PEO.

Featured Research
  • The New SMB Phone Systems Comparison Guide

    Does your small or medium-size business need a new phone system? Then you're in luck! Our new, updated comparison guide helps you cut through superfluous information and narrow down your list of solution providers. Get the latest data on phone system features, pricing, and performance metrics in an easy-to-use format. more

  • Contact Center Software on a Budget

    Although contact center software is necessary for a modern contact center, it can be outrageously expensive. Many companies find that their budget bloats during the implementation process. more

  • How UC Can Help Your Business Survive the Holidays

    The holiday season is filled with frenzy and excitement for businesses and consumers alike. Consumers prepare gift lists, compare brands and prices, and begin shopping with a vigor that is not present most other times of the year. For many businesses, the holiday season accounts for a large profit bump at the end of each year, and companies strive to exceed their goals and keep customers happy during this rush late in the year. more

  • [Infographic] Switching Phone Systems

    There are a lot of possible reasons you might want to switch to a new phone system. The old one might cost too much or be too troublesome to operate and maintain. It might not be flexible enough. It might not be reliable enough. Or it just might not have the kinds of features and capabilities that you need in today’s competitive business climate. more

  • Business Intelligence Software Cost Guide

    Your choice in a BI (Business Intelligence) provider can lead you to make better, data-driven decisions for your business, resulting in significant ROI. Or it can cost hundreds of thousands of dollars with mixed results. more