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Pitfalls of Outsourced HR

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My company is in the process of outsourcing our HR function. We currently do not have an HR professional on staff. We are looking hard at a couple of companies. They are coming in next week to pitch their services. What pitfalls are in outsourcing? What should we look out for, hidden or forgotten tasks that outsourcing doesn't normally cover? What questions should we ask to ensure we understand the proposal and nothing is neglected?

Answers

Topic Expert
John Kogan
Title: CEO/CFO
Company: Proformative, Inc.
(CEO/CFO, Proformative, Inc.) |
I have used outsourced HR a number of times during my CFO tenures and the services can be handy, but I find them most useful for very specific tasks. Yet they typically want to sell you on a whole host of services they offer which you either don't need, or only need occasionally, so baking them into a monthly fee won't make sense. You will want to have them break down their bid into very specific areas so that you can compare them one by one across providers. Break out costs for 1)payroll mgmt, 2)benefits mgmt, 3)401k mgmt, 4)onboarding/offboarding, 5)recruiting, etc. etc. Remember what they are doing is replacing your need to hire one or more HR specialists or generalists which are fixed costs, and replacing them, supposedly, with variable cost based on activities. Or at least that's how I look at it. So I look to get activity based costing from each provider that is granular that I know precisely what I am paying for. They have their own overheads which makes them more expensive on an hourly basis, but they are supposed to make up for it by having experts in each area and only charging you for their activity on your specific needs. What I find they really try to do is to get you to pay not just for specific activities but for all of the other specialists and generalists that they have on board and they need to keep busy. So ironically you can unwittingly end up paying for the same people you are trying to avoid paying directly as employees. This can show up when they pitch you on their expertise in legal, training, employee relations, and other areas where, depending on what kind of company you have, you may have little or no need for, or perhaps you reach out to your own specialists. So be on the lookout for those adders. Finally, there is a size threshold you will pass where it makes more sense to bring on your own than outsource b/c your overhead is actually lower than theirs. So HR outsourcing tends to work better for smaller companies. The exception is when you are outsourcing highly menial tasks to very efficient providers, e.g. payroll, where it makes perfect sense to have someone else process it for you in a low cost geography.
Scott Lane
Title: CFO and CRO
Company: TPG Credit Management
(CFO and CRO, TPG Credit Management) |
I agree with John. I am at a small company, we only outsource payroll, benefits, and 401(k). Other needs are covered by a team effort internally and we avoid wasting money on services we don't really need.
Topic Expert
John Kogan
Title: CEO/CFO
Company: Proformative, Inc.
(CEO/CFO, Proformative, Inc.) |
Whenever I'm quoting out a "sum of the parts" project like this I will also quote out the component parts. So for this example it would mean quoting out ADP (for example) for payroll, and someone else for benefits mgmt, etc., so you can compare the outsourced DIY method vs. the "pay someone else to GC (general contract) and provide" your services method.
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