HR Outsourcing: The Real Costs

Updated: April 30, 2009

Issue

It should come as no surprise that cost savings counts as one of the top reasons companies are turning to HR outsourcing. In fact, data from Watson Wyatt Worldwide indicates that the average operating expense for HR functions for each full-time HR employee is $284,982. This figure doesn't include training costs or payroll, which are not considered traditional HR functions by the consulting firm.

That's not to suggest, however, that HR outsourcing comes cheap. An arrangement can cost anywhere from $200,000 to millions of dollars. What's more, Mark Hodges of EquaTerra said that while HR outsourcing providers' prices dropped nearly 15 percent per year from 2000 to 2004, they're currently on the rise due to a shortage of qualified vendors.

Still, there are a number of factors that can heavily influence the price of an HR outsourcing arrangement. Here's what you need to consider when calculating a potential return on investment.

Considerations

1. Consider the impact on internal HR staff. Making the decision to hand over your HR processes to a third-party provider can have a traumatic effect on in-house employees. Be sure to communicate your rationale and strong business case for the outsourcing decision or be prepared to face plenty of attrition, which can lead to heavy recruitment, retention and training costs.

2. Carefully determine the scope of the HR processes you wish to outsource. There may be functions such as payroll and benefits that are best handled in-house - a realization that can save you unnecessary outsourcing expenses.

4. Think long and hard before you purchase an HRIS. Convincing your CFO to fork over half a million dollars for a hefty technology investment can be a hard sell. With HR outsourcing, however, a company can avoid real capital expenditures while still benefiting from the latest solutions.

5. Go local. Many HR outsourcing providers, such as IBM, offer global HR outsourcing services. That's good news to companies with U.S.-based headquarters and worldwide offices. But rather than place all their eggs in one basket, companies may want to consider finding local HR outsourcing providers for each country they operate in as an alternative approach.

Next Steps

If you think the price of HR outsourcing is right, you're ready to enter the purchasing process. Focus has developed a set of comprehensive tools to support your buying cycle. Start with the Buyers Guide: HR Outsourcing to get all the information you need on the HR outsourcing industry. Next, read relevant community research and topical briefs to learn more about the market and leading solutions. If you still have questions, join a discussion in the HR Group or ask a question to get advice from industry experts.

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