To survive and thrive in this economic environment, companies more often are seeking to control expenses by focusing on efficiency. One way this is happening with larger organizations is by turning to strategic outsourcing arrangements to maximize cost-saving opportunities and reduce the burden of noncritical activities. According to the latest study by Towers Perrin on HR outsourcing (HRO), cost reduction was the top goal driving HRO for 73% of the companies polled in 2009. While this poll was primarily of companies large enough to have HR departments in the first place, it is a lesson not only applicable to the small and medium marketplace but even more vital to their survival or success.
Many clients in the SMB marketplace are of 20-100 employees and often do not have a resident HR team. More likely, the “HR” responsibilities are being handled by an administrator, finance professional or often by the business owner themselves. This means that not only are HR activities being handled by someone who may not be fully fluent with State and Federal regulation surrounding employment, but who may not be focused enough on it (due to their other job duties or “hats” that they may wear) to stay current, who may, as a result, often make decisions based on hearsay, and draw incorrect conclusions drawn from experience and not necessarily what is legal or right.
While the easiest decision for most companies in this position is to address HR requirements and issues at the point of pain, this can be devastating to a company who allows HR process and strategy to take a back seat in what may be a critical juncture in their growth and maturation, or what many in the consulting world refer to as the “professionalization” of the management of a company.So business owners need to make a decision at their point of significant headcount growth.
One choice is to take the path of immediate least resistance (the “Point of Pain” approach) which is certainly can be the least expensive, require the least mental and organizational effort, but which may carry a large amount of risk in the form of employment-related claims, litigation and cost the company from a culture and ultimately, competitive perspective. Another is to recognize their shortfalls, and address transactional HR and its required expertise in some more direct way. This, in the eyes of many business owners and management teams means the hiring of an “HR Professional” and may not be congruent with their goals for the company P&L.
But there is another option. HRO, or fractional HR.
According to the Towers Perrin survey, the emergence of improving service quality (in the form of employees’ experience interacting with HR) has become a very strong driver of companies’ decisions to outsource. In 2009, 50 percent of those polled said improving HR service quality was a top goal of their HRO efforts–a jump from 33 percent in the 2008 study. Curtailing time-intensive administrative tasks that added minimal value also remained a top reason for outsourcing, with 73 percent of respondents listing “eliminating the distraction of administrative and transactional work” as a top priority for their HRO strategy.
For the SMB marketplace, adopting fractional HR still often represents adding additional cost where there was none before and this fact makes it a more difficult decision for the management team. But with some companies (and I know one in particular) this decision does not need to be so binary. In other words, fractional HR can be more efficiently combined with the execution of the payroll process and as a result, replace a cost already incurred by the SMB.
And with justification, HRO is simply added value. A tremendous value at that.