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Outsourcing vs. Insourcing Human Resources Functions

Posted on May 14th, 2016 Read time: 3 minutes

By Katherine Duru

Employers with a nationwide workforce face an array of responsibilities with respect to complying with Federal, State, and Local regulations. The Human Resources department is generally tasked with compliance, in conjunction with legal counsel. In most organizations, HR is responsible for talent management and acquisition, employee engagement, employer branding, organizational development, benefits and compensation. Faced with many competing priorities, it makes sense to consider outsourcing administrative functions to a third party vendor. The purpose of this article is to determine which services are best outsourced and which are best kept in-house.

As an employer of record providing payrolling services nationwide, Innovative Employee Solutions has to use outsource services wisely in order to control costs while still complying with all applicable laws. Some of the functions that we have evaluated for outsourcing include unemployment claims, workers compensation claims, I9 processing, reference checking, reporting and tax filing for the Affordable Care Act, verifications of employment, wage theft notices, local and state paid sick leave accruals, and COBRA administration.

IES has developed many successful HR Outsourcing relationships with key vendors over the years and has learned that mutually beneficial relationships depend upon a number of factors including cost, experience of the vendor, complexity of the process to be outsourced, the presence or absence of exceptions, and the consequences of failure to comply with regulations. Cost is a key driver of the decision: can the process be outsourced to a third party who can perform the function as well, at a lower cost than the cost of the internal staff. Factors to consider when reviewing cost are the internal staff time to set up and manage the ongoing vendor relationship, and the opportunity cost to keeping the process in-house in terms of using time better spent elsewhere.

The experience and number of years in business of the outsourcing service is another important consideration, along with cultural fit with your organization. Turnover of vendors can be costly, especially if they are maintaining your data in their systems, so vendors who can provide references for long term satisfied customers are a safer bet. Cultural fit includes hours of operation, sense of urgency, and availability of a central point of contact to handle all concerns and issues.

Complex processes can be successfully handled by an outsourced vendor so long as the process is repeatable. Processes best maintained in-house are those that require substantial customization on a case by case basis, frequent changes to process based upon each circumstance, and where the data or information required to perform the process is not maintained consistently. Another factor to consider is how timely information is gathered to provide to an outsourced vendor. Payroll processing is an excellent example. Many contingent staffing firms allow their clients to submit payroll data as little as four hours before a pay check is cut. For these staffing firms, outsourcing payroll processing is not realistic; a third party provider will typically require at last 18 hours of processing time.

Finally, an important consideration is the costs of non-compliance with human resources law. For high stakes, extremely complex functions, with substantial penalties for non-compliance, all but the largest of organizations may consider outsourcing, especially during times of regulatory uncertainty. For example, Innovative Employee Solutions made the decision to outsource the creation and filing of our 1094 and 1095C forms for the Affordable Care Act. We simply did not have software in place that could respond fast enough to the rapidly changing laws around health care reporting.

Companies increasingly want to focus on their core competencies, which for Innovative Employee Solutions is providing payrolling and employer of record services. However, even within that specialty, it can make sense to outsource portions of our business processes to a company like Innovative Employee Solutions to ensure compliance, focus on areas that add greatest value to our clients, and efficient business operations.

 

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