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Are You Ready To Outsource Your Human Resources Function?

By Lawrence M. Bienati, Ph.D., SPHR, CCP
www.onestophr.com

Many organizations are contemplating outsourcing their human resource (HR) function. The decision to outsource or “in-source HR” depends on current and future organizational direction, size and complexity. Also, certain HR process areas are easier to outsource than others. This paper provides a framework that will help you assess whether a full outsource, partial outsource or no outsource model is best for your organization.

What are the Key Process Areas in Human Resources?

The decision to consider a full outsource model depends on at least three factors:
The organizational strategy,
The organizational size, location and complexity;
The stage in the organizational life cycle (start-up–Level 1, growth–Level 2, maturity–Level 3 and decline–Level 4).
Level 1 organizations (0-2 years in life cycle) or Level 2 organizations (2-3 years in life cycle) that are limited by people and financial resources make excellent candidates for the a full outsourcing model. The full outsourcing model can provide savings of at least 45-55% a year versus having your own internal HR staff.

As an organization grows into a Level 3 organization (3-6 years in their life cycle), certain process areas may be conducive to outsourcing such as benefits/compensation administration, payroll, employee relations, and even recruiting. Level 4 organizations may need to cut overhead expenses and can reduce administrative burdens by outsourcing human resources as well. The decision to in-source or outsource HR should follow a careful organizational analysis. Full outsourcing or employee leasing has its drawbacks and the cost savings may be minimized by lack of internal focus and dedication to HR.

Presently, HR processes can be grouped into one of the following categories. Within each category, there are sub-categories as well. If you are doing business in the State of California, and have two or more employees, then many of these categories will apply.
Assessment/Selection/Recruiting
Benefits
Compensation and Reward Systems
Employment Law/ Employee Relations/Labor Relations
Health and Safety
HRIS/Payroll
Performance Management
Organizational/Management Development and Strategy Formulation
Federal and State Labor Law Compliance
Quality of Work Life/Change Management/Retention
What is the Profile of a Company ready for Outsourcing HR?
Company size of 5-500 employees,
Start-up or growth phase of life cycle,
Limited capital to be placed in overhead functions,
Tight margins or net operating profit ratios,
Focused on operations–“sticking to what they do best,”
Lean and flexible organizational structure,
Little time to stay abreast of legal/labor law compliance issues,
Desire to attract and retain quality employees,
Desire to avoid frivolous litigation by developing the proper HR structure,
Desire to reduce the high costs of lawyers and consultants,
Desire to partner with HR outsourcing team for the long haul,
Desire to work with strong technical HR advisors for daily and strategic issues,
Desire to cut HR/Payroll/Benefits expenses by at least 50% in an Outsourcing model.
Features of a Fully Outsourced HR function

A fully outsourced HR model works best and is most cost-effective if an on-site person is designated to handle paper and other processing issues. It is also desirable to have the “human touch” in the event employees are uncomfortable employing the phone, fax, e-mail and intranet tools available to them. This on-site HR technician will be mentored by the HR outsource team. This on-site technician can generally absorb these HR issues into other administrative processes most organizations need. The HR outsource team will have a designated client manager who will serve as a liasion for key HR process issues. Here is what a typical fully outsourced model will provide (see list of available functions in appendix):
All payroll processing and administration. This includes federal and state filings.
All Human Resource information data management.
The design, development and administration of an employee benefits system–medical, dental, life, 401-K and other insurance including workers compensation.
The design and administration of all legal protocols to comply with federal and state law: required postings, employee handbooks, policy and procedure manuals, job descriptions, offer letters, personnel forms, appraisal systems, health and safety.
The design and implementation of a tailored compensation system.
Resources for recruiting personnel.
7 day, 24 hour coverage for the disposition of employee relations and legal issues.
The support of a labor attorney for special employee relations issues.
On-site training and mentoring of management team.
Assistance in developing strategic plans and organizational development activities.
Client manager to mentor on-site technician and task integration.
Features of a Partially Outsourced HR Model

This type of HR outsourcing model provides a cafeteria style approach to human resources management. After a careful analysis, it may be prudent for the organization to retain certain administrative HR functions and outsource the specialty areas. For example, an organization may decide to manage its own health and safety function, facilitate its own recruiting, manage its own payroll and benefits administration and workers compensation programs. An organization may need benefits consultants support on special benefit issues. For example, a benefits consultant can assist with:
Employee benefit plan communications
COBRA compliance and supervision
Consolidated billing services
Benefit claim resolution
Open enrollment assistance
On line benefits administration
401(K) and retirement plan analysis
Technical and legislative services
HIPAA Information Assistance
ERISA Compliance
1-800 employee benefit hotline
Schedule A and 5500 reporting requirements
Plan analysis and cost effective evaluation
An organization may defer to an outside consultant to for assistance on legal compliance issues, special employee relations problems, labor relations, international human resources issues, change management and leadership development.

The partially outsourced model may be more effective for organizations that are in the Level 3 or Level 4 stages of their life cycle where certain process areas are better served internal to the organization and others (because of specialty) are more cost-effective if managed externally.

So What is the Cost/Benefit?

We know that prevention is the best medicine to manage the complexity of lawsuits and frivolous litigation in California. Also, a proper HR structure is the key to attracting and retaining quality employees in a tight labor market. HR, if approached as a strategy in terms of cost/benefit analysis, and maximizing shareholder wealth, can lead to significant profitability enhancements. Too often, HR is viewed as a necessary evil, “those compliance folks.” This HR thinking is flawed and undoubtedly promulgated by HR people themselves. The new imperative is to have an outsource team that thinks like a business partner and is sensitive to the strategic and financial mission of the company. Profits provide the wonderful dollars to create programs to attract, retain and motivate employees with meaningful careers.

In-Sourcing Model

A typical company of 30 to 100 employees can expect the following HR expenses.

HR Manager with 5 to 7 years experience with burdened benefits costs $70,000
HRGeneralist/Benefits support/Payroll Person with benefits costs $45,000
Outside legal/consulting support for HR issues ($175-$225 per hour) $12,000
Consulting fees/training support in HR Process areas $10,000
Basic Total: $137,000 annually

For every 100-150 employees, one generally adds an additional HR person to support complexity and compliance issues. This fully burdened fee adds a factor of $60,000 for a generalist fully burdened. As size increases so do salary expectations, programs and other HR sponsored activities.

Typical 400 to 500 employee person organization can expect an HR labor/benefits rate in the area of $300,000 to $350,000 dollars per year.

General Cost of Full Service Outsourcing Package

Assumes an organization size of 50 to 100 employees with on-site technician performing the function for 50% of the time.

On-site technician fully burdened $20,000
Payroll/HRIS piece $8,000
Benefits Piece (Consulting fees) $20,000
Human Resources Piece $24,000
Total Fee: $72,000

For every 100 employees add a factor of $20,000 to cover increase payroll and benefit consulting expenses. This amount is a ratio of $20 dollars per employee.

Comparison Chart
(Variability factor at 10%)
Annual Estimated Figures

� Insource Outsource Outsource Savings Percent of Savings
Less than 100 employees $132,000 $72,000 $64,000 55%
100-200 Employees $192,000 $95,000 $97,000 50%
200-300 Employees $247,000 $115,000 $132,000 47%
300-400 Employees $302,000 $135,000 $167,000 45%
400-500 Employees $357,000 $160,000 $197,000 45%

*Note: These are estimates based on previous assignments. Cost savings vary by company. The general savings factor is in the 45%-55% of HR costs range. Also, as a company grows so do programs, procedures and complexity of infrastructure. These costs have not been factored in to the in-source model. Therefore, these are conservative estimates.