Mastering the HR Outsourcing Process for Business Success

HR outsourcing (HRO) is a strategic practice where an organization outsource specific human resources functions to a third-party provider. Typical tasks supported by the provider include payroll administration, recruitment tool to help with the process, benefits administration, compliance support, training, and onboarding process.

The main objectives are to streamline HR operations, promote cost efficiency, access specialized expertise and allow internal teams to focus on critical business strategy.

The HR outsourcing process generally involves the following four stages that we'll dig into in this article:

1. Deciding whether to outsource HR
2. Selecting an HR outsourcing company
3. Implementation and getting started
4. Measuring success

Stage 1: Deciding Whether to Outsource HR

Both small and medium-sized businesses tend to face the same problems when it comes to satisfying their human resources needs. When complex HR issues arise and expenses mount, many consider turning to a strategic relationship through HR outsourcing.

SMBs can follow an organized process for deciding whether to outsource HR.

Look for signs that you need HR help

There are certain signs an SMB can look for. These include:

• Employee count reaching 10-50 employees, or more
• Spending excessive time on HR administrative tasks
• Struggling with compliance requirements and changing regulations
• Lacking HR expertise for complex issues
• High costs of hiring internal HR staff
• Need for competitive employee benefits to attract talent and enhance talent management

Evaluate your HR needs and capabilities

If you start to see those signs, the next step is to analyze your HR situation. You could:

• Conduct an assessment of internal HR skills
• Catalog your HR needs and identify bottlenecks and vulnerabilities
• Calculate time spent on HR tasks vs. revenue-generating activities
• Determine the full cost of DIY HR through detailed financial planning—factoring in time, potential compliance risks, missed opportunities

Weighing the pros and cons

Now it's time to weigh your options.

Among the benefits of HR outsourcing reported by many SMBs, you may find:

• Access to HR expertise and specialized knowledge, including complex employment-related laws
• Better able to navigate compliance and mitigate risk
• Access to premium employee benefits packages
• Time savings for business owners and managers
• Scalability as the business grows
• Cost efficiency in the long term

There are some potential drawbacks to consider, however, including:

• Initial cost investment
• Change in HR processes
• Need for clear communication with your outsourcing provider

Making the decision: Key questions to ask yourself

The answer to these questions can help you decide where to go.

• What are your primary pain points with current HR administration?
• What's your budget for HR solutions?
• How important is maintaining status quo vs. gaining expertise?
• What are your growth projections for the next 2-3 years?

Stage 2: Selecting an HR Outsourcing Company

Once you decide you want to outsource, there are many options.

Essential services to look for

First, let's think about the common types of services businesses decide to outsource. How do they compare to your needs?

• Payroll processing and payroll tax administration
• Benefits administration and employee enrollment
• Compliance support and regulatory updates
• Employee handbook support and policy help
• Workers' compensation and risk mitigation
• Recruitment and onboarding tools for support
• Talent management

Understanding different types of HR outsourcing

Let's look at the different ways of outsourcing HR functions.

Comprehensive HR outsourcing means outsourcing most of  HR tasks, including payroll administration, benefits, compliance support and training tools, to an external provider. Specific-function outsourcing refers to contracting out only selected HR tasks, such as payroll or benefits administration, while retaining other HR responsibilities in-house.

Here are some specific examples of comprehensive and specific-function outsourcing.

• Professional employer organization (PEO). PEOs are HR outsourcing companies that offer comprehensive HR services and become a co-employer with each client. The PEO shares certain employer responsibilities with your business as pursuant to a client service agreement. The PEO helps handle HR administration (payroll, benefits, compliance), while you retain control of daily operations and direct your staff. Employees are technically co-employed by both entities for payroll tax purposes. The arrangement enables PEOs to give clients access to large-group benefits. This type of service provider may be more suitable for small and mid-sized businesses without an internal HR team that need robust HR support.
• Administrative services organization (ASO). ASOs deliver a bundle of HR services, often including payroll, benefits administration, compliance and HR support, but do not become a co-employer. With this model, your company remains the sole employer of record for benefits and payroll tax purposes. ASOs don't provide access to employee benefits. You are able to sponsor your own benefits but leverage the ASO’s expertise and systems for benefits administration. This is an ideal relationship if you want HR administration services without becoming a co-employer with a PEO.
• Human resources information system (HRIS). An HRIS is a software platform that collects, stores and manages employee data. These platforms include programs for automating and streamlining HR tasks (e.g., payroll, timekeeping, benefits and compliance tracking). An HRIS can help a business manage HR in-house with enhanced efficiency, but usually doesn't provide human advisory services. This arrangement is best for companies that want to only leverage advanced technology for routine processes. A PEO or ASO will most likely include an HRIS as part of its services.

Evaluating potential providers

Now you have a good idea of what services you want to outsource and what type of HR outsourcing company you need, it's time to find the optimal provider.

You can begin this process by performing research and doing an initial screening. When you look at outsourcing solutions, consider:

• Industry reputation and years in business
• Client testimonials and case studies
• Technology platform capabilities
• HR support and expertise track record

During the Request for Proposal (RFP) process, you solicit detailed information from the HR providers. The RFP is a list of requirements you send to vendors. Their responses will indicate whether a provider can meet your needs and how much it will cost. The steps here include:

• Creating a comprehensive request for proposal
• Asking key questions about services, pricing, and support
• Comparing proposals against each other and against your needs and budget

The final step includes checking references and evaluation, and possibly contract negotiation. It involves:

• Speaking with current clients in similar industries
• Understanding the onboarding process
• Clarifying service level agreements and response times
• Choosing a provider

Pricing models and contract considerations

Two of the most common pricing models are per-employee-per-month (PEPM) and percentage of payroll. However, these are not the only costs you will have to consider.

In your RFP, be sure to ask about:

• Setup fees and implementation costs
• Contract length and termination penalties
• Fees for other special services
• Potential hidden fees

Stage 3: Getting Started

Here's a look at the typical process for getting started with HR outsourcing. Experiences will, of course, differ according to the type of HR outsourcing you opt for and the provider.

Pre-implementation planning

Once you make a decision, a new round of work begins. It's time to:

• Assemble your internal transition team
• Gather necessary documentation and data
• Communicate the change to employees
• Set realistic timelines and expectations

The onboarding process: What to expect

The typical onboarding process includes several steps. An experienced HR outsourcing company should be able to do this smoothly and communicate with you throughout the process.

To begin working with a new outsourcing provider, you will have to submit data about your company and employees to the provider's tech platform. You can expect to work together on:

• Employee data migration
• Payroll system integration
• Benefits enrollment setup
• Integrating with the providersystem

One milestone of onboarding is conducting payroll processing. Because of the need for data security and privacy, as well as the importance of performing this function timely, there will be a period of training and testing. Some members of your staff may see their duties change as you shift to outsourcing. You can look forward to:

• System testing and validation
• Manager and employee training sessions
• Establishing communication protocols and new staffing solutions

Soon it will be time to go live. Again, you will be working together with your new HR provider on things like:

• First payroll run under new system
• Intensive support during transition period
• Addressing initial questions and concerns

Building a successful relationship

A good relationship with your service provider is crucial to a successful outsourcing process. Make sure you keep these details in mind:

• Establishing regular check-ins and reviews
• Understanding escalation procedures
• Maintaining open communication channels
• Setting performance metrics and expectations

Common implementation challenges

These are some common pitfalls that you might have to work through during human resource outsourcing (HRO) implementation:

• Data migration issues
• Employee resistance to change
• Communication gaps between company and HRO provider
• Unrealistic timeline expectations

Stage 4: Measuring Success. What Good HR Outsourcing Looks Like

It's important to measure and track your progress with your service provider. Read on for both positive data indicators and qualitative signs of success.

Key performance indicators (KPIs) to track

Your KPI will depend on your overall goals for outsourcing HR, but whatever they are, tracking is essential. Common KPI include:

• Time savings for leadership team
• Ease of the use of the platform
• Employee satisfaction with HR services
• Cost per employee for HR functions
• Response times for HR inquiries

Long-term benefits to look for

In addition to reaching your targets on KPI, there are other signs that may indicate that things are going well, including:

• Enhanced employee retention and satisfaction
• Compliance support and mitigated risk
• Enhanced ability to focus on core business growth with optimized time management
• Access to premium benefits and competitive packages
• Scalability for future growth

Navigating the HR Outsourcing Process

TriNet offers comprehensive HR outsourcing solutions designed to simplify and streamline your HR administration. This relationship allows you to focus more on your business’s growth and less on administrative complexities.

With expertise tailored to diverse industries, TriNet delivers operational excellence, premium benefits, compliance support and an array of personalized services for businesses of all sizes.

To make an informed decision and learn how to get the most value for your company, download our free eGuide: Finding the Best Value in an Outsourced HR Solution.