Types of HR Outsourcing: A Beginner's Guide

What is outsourcing in human resources?

Outsourcing is a common business practice that involves hiring a third-party vendor to manage certain business functions on your behalf. When it comes to human resources, there are several types of HR outsourcing. Options exist to outsource a single HR process – such as payroll or recruiting – or opt for a comprehensive solution that encompasses most or all HR tasks.

In most cases, HR outsourcing helps alleviate the demands on your in-house HR staff or other employees who may be juggling these tasks in addition to their regular responsibilities. That frees your internal team up to focus on strategic and revenue-generating initiatives that can positively impact your business.

What are the areas of HR outsourcing?

Few organizational functions impact an employee more than human resources. From the initial job description that a job candidate reads to onboarding, payroll, professional development, and exit interviews, HR is involved throughout the employee lifecycle.

Many of these HR responsibilities can be time-consuming and even overwhelming, particularly for small and mid-sized businesses that lack the internal resources to dedicate to HR.

The good news is, most (if not all) human resources administrative tasks are part of common HR outsourcing services, such as:

• Recruiting, from sourcing and vetting candidates to interviewing and hiring.
• Payroll administration, including time-tracking, payroll tax filing, benefits deductions and reporting.
• Benefits administration, such as open enrollment assistance, invoice reconciliation, and COBRA administration, as well as access to high-quality, affordable benefits options.
• Risk management and workplace safety, including workers’ compensation, OSHA assistance, and help developing company policies and procedures.
• Employment and labor law compliance, from expert guidance on workplace regulations to anti-harassment training and access to employment practices liability insurance.
• Performance management that includes streamlined performance reviews and access to online courses for professional development.

Why is it important to outsource HR?

Prior to 2000, human resources was mostly defined by tedious paperwork and administrative tasks. In the past 25 years, however, the practice of human capital management (HCM) has taken centerstage. This shift reflects the increasing recognition of employees as a company's most valuable asset.

Additionally, constantly changing workplace requirements – set by federal, state, and local laws – have also become more complex, making it difficult for businesses to manage compliance.

While large corporations have the capacity to staff a robust, in-house department that can manage HR and compliance, that’s often not a viable option for small and mid-sized companies. This is one of the primary reasons for HR outsourcing – to provide growing businesses access to HR expertise, tools, and technology that might not otherwise be obtainable.

In fact, outsourcing HR can be a game-changer for small and mid-sized businesses for a multitude of reasons – all of which are important to the growth and success of your business.

Here are a few of those reasons for HR outsourcing:

Reduced costs

Businesses that outsource HR generally see a 27.2% ROI. That means when you outsource HR, you are generally spending less on HR per employee than if you managed it internally.

Better benefits

Many small and mid-sized businesses turn to HR outsourcing providers like a professional employer organization (PEO) so they can gain access to high-quality, affordable benefits. This can include (but is not limited to):

• More health plan options for your employees to meet your staff’s diverse needs
• A more robust provider network
• Ancillary benefits such as dental, vision, life, and disability
• Retirement plans

HR expertise

Chances are, you didn’t start your business to become an HR expert. When you partner with an HR outsourcing provider, you tap into a team of HR experts who can provide guidance on complex personnel issues, industry best practices, and more – while considering all applicable federal, state, and local workplace requirements.

Improved recruiting and retention

With HR experts managing your employees’ needs and a competitive, Fortune 500-level benefits package, you can boost employee morale and increase your ability to attract and retain top talent. Employee turnover often comes with a hefty cost, so improving employee retention can also boost your bottom line.

Integrated HR technology

HR outsourcing gives you access to the latest HR technology systems. This provides employees with more self-service options and eliminates the need to reenter data into multiple systems, which saves time and reduces errors. HR technology also streamlines processes such as tracking time, scheduling, and benefits enrollment.

Improved operating efficiencies

Day-to-day HR tasks can be time consuming for you and your employees. When you outsource your HR, you and your staff can dedicate more time to core business functions, making way for improved productivity, innovation, and strategic planning.

What are the 4 primary types of HR outsourcing?

Though several different terms exist to describe HR outsourcing, there are four primary types of HR outsourcing, all offering a range of services and support to meet your specific needs. Let’s explore each.

HR Technology

HR technology helps you save time by streamlining day-to-day administrative tasks. You can access HR technology through a third-party human capital management (HCM) software vendor that provides you with applications to manage HR tasks throughout an employee’s lifecycle. An HCM software solution could include systems such as an applicant tracking system, new-hire onboarding, payroll processing, benefits administration, and performance management.

An HR technology vendor can also provide software to manage HR tasks – though these vendors may specialize in specific functions, such as a payroll service provider or recruiting software.

In either case, the primary service provided is the software, which will help streamline HR processes for your business. These vendors, however, often don’t provide HR support or manage the HR processes for your business, which means you will still need in-house HR staff.

Administrative or Consulting HR Services

(ASO, HRO, HR BPO)

Some businesses may need assistance with a few HR responsibilities. Others may have an internal HR team that needs help with a specific, one-time project. That’s where the following types of HR outsourcing providers come in:

• Administrative Services Organization (ASO)
• HR Outsourcing/Consulting Firm (HRO)
• HR Business Process Outsourcing (BPO)

An ASO, as its name suggests, provides administrative and HR services to employers that can choose which services they want from an a la carte menu. Not all ASOs offer the same services, but examples of services include:

• Payroll processing
• Benefits administration
• Recruitment
• Risk management
• Regulatory compliance
• Employee relations
• Performance management

Businesses may also hire an HR outsourcing or consulting firm to assist with a specific project, such as designing and implementing a performance review process or helping a company assess and improve its company culture. In this situation, the project scope is clearly defined, and the firm typically works with a company for a specific amount of time.

Another option for outsourcing some of your HR responsibilities is through a Business Process Outsourcing (BPO) firm. BPO is the practice of outsourcing a business function to a third party. This can include functions such as HR, marketing, IT, customer service, and more. BPO firms can be located offshore in another country or in the United States, and they are primarily used by larger companies.

Comprehensive HR Services

(PEO & EOR)

Another type of HR outsourcing that provides comprehensive services, support, and expertise is a professional employer organization (PEO). A PEO offers its services through a unique agreement known as co-employment, which allows the firm to act as the “employer of record” for your employees. Through this relationship, a PEO performs most of the administrative HR responsibilities on your behalf and shares some of the liability associated with carrying employees. Small and mid-sized businesses that engage with PEOs like G&A Partners also gain access to high-quality, affordable benefits that can help attract and retain top talent.

An Employer of Record (EOR), also known as an international PEO, legally employes workers in foreign countries on your behalf, eliminating the immediate need to register your business in each country where you have employees domiciled. While an EOR and PEO both become an “employer of record,” there are key differences. A PEO operates under a co-employment agreement, so it shares employer responsibilities and liabilities with your company. An EOR, on the other hand, assumes full liability for hiring and managing employees for the businesses it supports.

Which type of HR outsourcing is best for your business?

Knowing which type of human resources outsourcing is best for your business begins with understanding your HR needs, budget, and the level of support you will require. Consider these scenarios:

As a small or mid-sized business owner, I am currently managing most or all of our HR responsibilities.

A comprehensive HR solution such as a PEO is a great option for business owners who are juggling administrative tasks in addition to managing many other aspects of their company. In this situation, partnering with a PEO ensures your employees receive the care they deserve, allowing you to focus on your core business.

As a startup business, we have a couple of employees who have taken on HR duties, but they lack extensive HR knowledge and are overwhelmed by workplace laws and regulations.

If your team lacks in-depth knowledge about federal, state, and local workplace requirements, your business could be noncompliant and at risk for penalties, fines, and lawsuits. The HR experts at a PEO can help identify areas of noncompliance, offer guidance on how you can become compliant, and help you through common and challenging HR situations.

Our HR team is using spreadsheets to schedule time off and track time for our employees.

An HR technology vendor such as a payroll services provider can offer a time and attendance system that integrates with a payroll platform, streamlining the scheduling and payroll process. This will not only save your HR team time, but it will also reduce the likelihood of errors and ensure a more accurate payroll.

Our medical plan options are limited, and we don’t offer a retirement plan. This has led to some employees leaving for better benefits at other companies.

The labor market remains competitive, and companies are investing more in a comprehensive benefits package that better meets the needs of its employees. But for small and mid-sized businesses, finding better plans at affordable rates can be next to impossible. That’s where a PEO can help. At G&A, we offer business owners access to affordable benefits that rival those offered by Fortune 500 companies, so you can attract and retain top talent.

Our HR team is overwhelmed with daily HR tasks and doesn’t have time to develop strategic initiatives, such as performance reviews or professional development.

In this situation, several HR outsourcing options are worth considering. An ASO gives you the ability to choose which services you need assistance with – payroll processing, benefits administration, or recruiting, for example – giving your HR team time for strategic projects. Some PEOs like G&A offer flexibility in which services you choose and can provide strategic guidance, so it’s worth exploring whether a PEO is a right fit as well. A third option is finding an HCM software suite that can streamline daily HR tasks, lessening the load on your in-house team.

To learn more about which type of HR outsourcing is best for your needs, contact our HR experts at G&A Partners.

How to choose a type of HR outsourcing for your business

Once you have a clear picture of what your company’s HR needs are, it’s time to choose from the various types of outsourcing in HR. The chart below outlines the different types of HR outsourcing and how they can meet your needs.

*Note: This varies amongst HR outsourcing providers.