Human Resources: Should We Outsource HR Activities?

Our management has asked me to explore the possibility of outsourcing substantial parts of our HR function. (They’re not singling us out—other functions are doing the analysis, too). How can we tell what to outsource, and to whom?   — Tammy, HR director in Cupertino

First, I must disclose that I work for a professional employer organization, a full-service human resources solutions provider. While I believe that outsourcing HR allows many organizations better opportunities to focus on their core business strengths, I have observed that this model is not a good fit for every organization. Therefore, the evaluation process you are undertaking is critical.

How to Avoid Pitfalls

The best way to avoid pitfalls in deciding whether your organization would benefit from having some or all HR activities outsourced and in selecting an HR outsourcer is careful evaluation.

First, conduct an internal HR analysis. Try to determine:

• What is working well?
• What is not working and why not (e.g., process, knowledge, resources)?
• What is missing (e.g., training, infrastructure, competitive benefits)?
• What is going to be needed in the future (e.g., safety risk management, hiring different talent, performance management processes)?
• Are there redundancies or inefficiencies that could be streamlined (e.g., multiple groups maintaining personnel files or conducting vendor research and negotiation)?

Once this information has been gathered, try to ascertain not only direct costs but indirect costs of your current system, such as whether the inability to retain talent because of lack of benefits, infrastructure, or management focus has been a drain on resources. Are there potential costs in the future? For example, has recent growth increased exposure to liability issues? Has a family-type or very casual atmosphere started appearing unfairly inconsistent to some employees?

Your analysis of the answers to these questions will help you to determine what you might want to outsource. Then generate critical questions for potential HR outsourcers. Some tips for various functions follow below.

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Benefits Packages

Small- to medium-sized employers often have trouble negotiating quality health care and other supplemental benefits, such as an employee assistance program, vision plan, 401k, or health savings accounts, at cost-effective rates. Many outsourcing firms can make these benefits available to all of your employees at reasonable rates. Such packages can be key to recruiting and retaining talent, especially in competitive markets.

Besides analyzing costs of benefits, be sure to find out which health plan providers (e.g., Kaiser, PacifiCare, UnitedHealthcare) will be available to your employees in all locations you operate in. (If you have employees in other states, be aware that certain plans may not be available to them.)

Determine the automation level of the service: Can employees go online 24/7 to review, update, and download information? Does the outsourcer offer such services as new employee orientations, “live” assistance, or assistance with communicating and educating employees about the benefits programs?

Recruiting/Hiring

Some HR outsourcing firms place employment ads, screen applicants, test them, and run drug screenings and background checks. Ask about costs, rapidity of response, and level of service. In addition, ask if the organization provides manager training in interviewing and selection.

Payroll

Payroll and all the documentation and reporting it requires is an area that outsourcers can cost effectively handle for many organizations. Find out whether the outsourcer can comply with all of your requirements in all of the states in which you have employees.

HR Paperwork

The compliance issues of HIPAA, FCRA, FMLA/CFRA, ADA, ADEA, FSLA (Health Insurance Portability and Accountability Act, the Fair Credit Reporting Act, the Family and Medical Leave Act/California Family Rights Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Fair Labor Standards Act), and numerous other employment-related laws can be a major drag on business and human resources professionals’ time, which could be much better spent on strategy development and implementation.

Ask what resources an outsourcer has for ensuring that your organization stays in compliance.

Liability and Risk Management

Developing employment policies and practices and dealing with employee relations issues are two critical liability areas that require a great deal of knowledge and experience on the provider’s part. Ask an outsourcer which services and expertise are available to assist in dealing with the numerous federal and state employment laws. Also determine if there are added fees for extra assistance, such as developing employee policies, handbooks, and job descriptions or providing required sexual harassment prevention training.

Finding a Quality HR Outsourcer

Here are some tips for finding out whether you are dealing with a quality outsourcer:

1. Ask to speak to current client references, at least one of which should be an organization of your size and in your industry or line of business; it would be best if the client references have been using the outsourcer for a year or more.
2. Find out which, if any, organization certifications the outsourcer has, such as a Workers’ Compensation Risk Management Certificate.
3. Determine whether the individual service providers, such as payroll, compensation, and employee relations consultants, have ample experience, training, and preferably certifications in their specialties, e.g., Senior Professional in Human Resources (SPHR), Certified Payroll Professional (CPP), or Certified Compensation Professional (CCP). If possible, meet at least some of these people.
4. Ask if the outsourcer is accredited through the Employer Services Assurance Corporation.
5. Visit the outsourcer’s website and review the information available there; is it user-friendly? What is the focus of the site?
6. Consider a Better Business Bureau check.

Finally, be aware that no HR outsourcing provider runs your day-to-day operations, sets your business objectives or goals, or develops your internal talent. A good outsourcer partners with your organization so that the management team can focus on those things while the outsourcer provides administration, consultation expertise, tools, and resources.

To sum up, analyze your current internal HR processes and needs, ask the specific questions, and check up on the HR outsourcer’s track record. For more information, visit the National Association of Professional Employer Organizations website.

Diana Gregory, SPHR, is senior human resources specialist at the Walnut Creek office of Administaff, a professional employer organization and human resources outsourcing firm.