Understanding the Growing Trend of Organizations Outsourcing Their HR Functions

Layne Devlin, Sylvia Stokes and Dimitri Flores
November 14, 2007 — 3,224 views  
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Human Resource Outsourcing organizations exist to support, extend, or replace the human resources functions for other companies. HRO's core business is finding the ways to make their clients’ HR functions more efficient and delivering them to the client organizations. For that reason many of these organizations strive to stay on top of the best HR practices, emerging workforce technologies, as well as relevant laws, and regulations. This allows client companies to focus on what’s core to their business and re-allocate internal resources for initiatives focused on increasing revenue and profitability.

To learn more about HRO we interviewed three industry leaders. Our experts shared several key benefits of relocating human resource functions to a third party: taking advantage of the economies of scale, scope, and focused expertise to get the job done faster, better, and more economically.

According to Sylvia Stokes of the Leadership Connection, HRO provides a unique outside perspective and can result in a true strategic partnership that may be much harder to achieve within the client organization. “The internal HR organization is expected to be a partner helping attract, groom and support the key asset of the company – the people,” stated Stokes, ”In practice, internal HR is sometimes viewed as an annoyance, and is not actively encouraged to step outside core perceived hiring responsibilities to engage in strategic tasks.”

As a noncore element of the business, corporate HR often operates within a tight budget and without control over any manageable assets such as the information technology or development projects. Further, even though an organization may also make core professional training specific to the business available to employees, HR tends to be the one department left behind. And while the latter is true, periodically, HR departments could be asked to engage in more complex activities that are not part of its employees’ core skill set and expertise, such as payroll and compliance reviews.

The combination of a relative lack of resources, training and increased business liability associated with their employer’s legal compliance is why internal HR managers tend to stick to a status quo approach that maintains their perceived precarious position.

Layne Devlin, of NetPEO, furthered this argument, “For many HR functions, small-to-mid size organizations do not necessarily need to have an HR department to conduct the one time activities like setting up policies and procedures, as well as developing corporate rules books. Moreover, these could also be longer-term activities, done on a periodic basis like recruiting, training and payroll. In our experience, external HR experts are hired because of the economies of scale.”

Devlin provided additional key insight on issues frequently overlooked by small- to mid-size organizations, often resulting in grim consequences. He explained, “an expanding business can sometimes grow into compliance issues without realizing the risk, before it is too late. Large companies generally have resources to track compliance changes. Smaller companies are aware of their risks, such as harassment suits, workers comp and other legal issues but often fail to realize that the risk increases as the company organization becomes more complex. Even with this knowledge, they don’t know how to prevent those issues.”

According to Flores, IT manager of FIMPE in Mexico, FIMPE works with external and outsourced HR personnel to maintain lower head count. FIMPE manager believed that an external HR organization can provide better results at lower cost without the difficulties of keeping a complex HR department. 

What Are The Most Common Outsourced Functions?

Our experts indicated that outsourced HR functions are not limited to the easily recognizable recruiting. According to Stokes, “HR outsourcing includes payroll, benefits management, and the soft skills of training and development”.

Devlin listed a wide range of HR information systems based activities aimed to educate employers and employees, track policy modifications, manage handbook changes, conduct online training and more.

The emergence of the Software as a Service business model further empowered HROs to offer more advanced HR services without having to develop proprietary technologies. These services encompass time and attendance tracking, performance reviews, benefits tracking and more.

HR outsourcing can also be implemented by using Professional Employer Services. A PEO company provides similar range of functions as HRO. The key difference is that a PEO becomes employer of record and actually employs client company’s employees and leases them back to a client organization. Some PEOs are able to achieve economies of scale and offer some perks such as more competitively priced benefits that could not be available to smaller organizations.

How To Find An Outsourcing Company?

Stokes and Flores stressed the word of mouth approach, which may be attributed to their buyer side perspective. Stokes observed “ HROs make themselves visible by continuous networking with niche nonprofit and small businesses. Larger HROs tend to participate in the trade organizations and attend industry shows.” Devlin’s organization focuses on increasing their visibility through publications, networking and web presence.

Based on these insights, once the company’s needs are identified, and prospective companies found, it is necessary to learn more about these organizations.

It is important to ask challenging questions about their qualification, services portfolio, and organizational focus like:

  • How do they conduct the needs analysis within your organization?
  • Can they present a sample problem and solve it?
  • What is their long-term view? Will they consider a short-term project or a long-term engagement?
  • How do they plan to integrate with the organization?
  • Do they work with other clients in my space? Do they address similar or different needs?
  • What are some of the typical issues they encounter starting out with their client organizations?

Finishing Comments

Experts identified tremendous growth opportunity for HRO. According to Devlin, only 3% to 4% of US companies are using HROs right now. Many areas of HRO are not likely to become overseas outsourcing. Devlin indicated that companies in United States appreciate being able to work with the companies for whom it is easier to keep a pulse on the latest developments with U.S. laws.

Continued technology development is likely to present additional opportunities to HRO. Even if online systems to implement and maintain the rules and policies exis, a human touch is necessary to ensure the company still implements the policies correctly and stays on top of changes.

Stokes recognized that emerging technologies such as Software as a Service will help to solidify the relationship between HRO and client organizations. “When organizations begin to see that the data laden HR Director can have more of an impact when they come to the table as strategic partners, executives will begin to think to weigh the value of outsourcing the transactional elements of HR.”

SaaS vendors deliver solutions that bridge the gap between client organizations and HROs, taking some of the burden off the HRO. Taking a step further, SaaS can alleviate some of the responsibility provided by an HRO – clients are able to manage their needs with a web-based solution without having to rely on a third party. There can be multiple arrangements – HRO controlling a suite of SaaS solutions or clients working with SaaS vendors directly.

Contributors Bios

Layne Devlin, CEO at NetPEO, Lawrenceville, GA
Devlin worked in 1990 for Staff Leasing (IPO’ed as Gevity HR). In his professional career Layne participated in the acquisition of several HR organizations. NetPEO, the expert-run company founded by Devlin in 2000, continuously experiences double- digit growth every year since the inception. Devlin’s accounts of his practical experiences can be found in Entrepreneur and other leading business publications.

Sylvia Stokes, Consultant at The Leadership Connection, Lynn, MA
Stokes brings over seventeen years of experience in state and government services as an HR Director, EEO, and Civil Rights Manager and Administrator. Stokes founded Leadership Connection to share her extensive experience and help individuals and organizations achieve their maximum potential.

Dimitri Flores, IT Planning and Innovation Manager at FIMPE, Mexico
Flores’ career spans over a decade during which he worked directly with information technologies and in management on both vendor and client sides. Cornerstones of his expertise include creation of technology, organization and value. Flores has extensive experience researching, hiring, and managing external HR personnel.

KnowledgeSum.com is a leading provider of web-based labor management and scheduling services. Our communications group enjoys sharing the information about the latest  online technologies. For additional information please visit our website at http://www.KnowledgeSum.com or call 866.405.5786.

Layne Devlin, Sylvia Stokes and Dimitri Flores