Why Small Businesses Are Outsourcing HR

For eight years, Mickey Swortzel, founder of vehicle control systems start-up New Eagle, watched her employees' health-plan costs steadily increase. Then, in 2016, she made the decision to outsource her one-person HR department to ADP, one of the largest companies in the quickly growing market of Professional Employer Organizations (PEOs).

This is not an uncommon story among businesses today. In the last few years, the outsourced HR industry has taken off, bringing in an estimated $165 billion annually and nearly 85 percent of all firms—not just small businesses—now turn to an outside organization for at least some of their HR functions.

What's the motivation behind this growing trend?

For Mickey, like many others, the primary reason behind making the switch to a PEO was to lower healthcare plan costs and the ability to offer employees benefits that were previously unaffordable. "My number-one reason for outsourcing was to reduce the cost of our health plans, and joining with a PEO allowed better group rates," Swortzel says. And the switch paid off: The prices of family plans were cut in half at her company and her employees now save an average of $5,000 annually.

"Outsourcing gave us benefits that I couldn't afford—or even obtain at any cost—on my own," she says. By giving her small businesses the opportunity to access ADP's Fortune 500-level benefits, she also made the company more competitive when trying to recruit top talent amid a field of much larger competitors.

The increasingly complex regulatory environment that small businesses have to navigate makes it nearly impossible for a small HR team to stay up to date with compliance issues like the Affordable Care Act, worker's compensation, workplace discrimination and much more. HR outsourcing firms often shoulder some or all of the legal liability for maintaining that compliance.

"There are things companies have to do because it's the law," says Deanna Arnold, president of Employers Advantage HR Company in North Carolina. "And small business owners have so many things they need to focus on that when issues come up, they can find themselves unintentionally in trouble. By establishing compliance we protect these companies."

"Between the complexities of payroll, hiring, administration and organizing huge companies, it's often better to shift some of the responsibilities to others who are more focused and more qualified," explains Pierre Tremblay, HR director for Dupray, a Montreal-based company that sells steam cleaners and irons internationally.

Of course, outsourcing isn't right for all companies. Arnold recommends that once companies have 50 or more employees, they should start bringing some HR functions in-house. The downsides of HR outsourcing are most evident in areas like employee engagement or recruiting, where in-house HR people are in a better position to develop the culture, and reflect the values, of the company.

For Swortzel, the decision to outsource one of her core business functions was a tough one to make. "I'm in peer groups of other executives, and they were shocked that I was thinking of using a PEO," she says. "It scared me too. I thought they would tell me how to run my business, who I could hire and fire."

Arnold says this is a common misconception about modern HR outsourcing. While outsourcing won't necessarily provide the same amount of culture or engagement support as in-house HR, most firms try to embed themselves with the clients as much as possible: "We actually partner with the employer and employees to create work environments where they thrive."

Continuing to foster the human side of HR is vital to the success of both the business and HR as a whole. An important part of the service Arnold's company provides is offering her clients' employees a friendly face to speak with when they have questions or concerns. "I have a team of five HR business partners who actually work on-site in some clients' offices for a set number of days or hours per week," she explains. "We fully integrate into that organization, and even when we're not there, we're always reachable if they get injured or have an issue."

Swortzel says her experience was the opposite of what she had feared. "It has been a true partnership. They're not interested in running my business, they want us to be successful," she says.

Photo: Twenty20