When Should you Outsource HR?

For the small business owner, the decision to outsource your human resources department is not one that should be taken lightly. By moving your HR functions to an external firm you will be drastically changing the organizational structure of your company. The choice is ultimately yours to make, but there are a number of signs that let you know that your company is a good candidate for outsourcing HR functions such as payroll, labor relations, and employee compensation. First, however, you must identify what stage your business is in. Are you just starting your company or has it been around for a while? In his article, "At What Stage is Your Small Business Growth?" consultant Dino Eliadis explains there are 5 stages in the life cycle of a small business:

1. Existence 

This stage is often thought of as the “start-up” period of a business, which often is the case. However, even some companies that have long been established struggle to churn out a profit. In order to reach success, growth and maturity, the small business must be able to at least break even.

2. Survival

This is the stage in which the small business becomes a lucrative endeavor and stays alive. The company is approaching the turning point in its lifespan; your business goes from breaking even to generating profits because you, the owner, are truly invested in it. At this stage, you must up your game by becoming more knowledgeable, and more importantly, more profitable. Otherwise, your business will remain dormant.

3. Success

Somewhere between Survival and Success is the turning point I was speaking of. If you have developed profitable systems within your company and your employees are efficient and effective, you have reached the success phase of your company’s cycle. Here, your company is capable of staying profitable even in your absence. Many times, owners confuse the Success stage with that of Survival; a common mistake that can spell the end of your small business’s growth. Survival is dependent upon you, the owner, whereas Success stems from the company as a whole. Your company can survive if you work hard enough, but you must create systems within your company to sustain your small business in your absence.

4. Rapid Growth 

This stage requires a large amount of labor and capital. At this point, your small business can potentially become a large company or a large bust. If the company is monitored to make sure that financial and physical resources can support growth, it can become the large, successful business that you desire. However, if this is not done, the Rapid Growth stage can lead to a rapid death of your company.

5. Maturity

You have made it. At this point, your company has reached a plateau. It has reached its growth capacity and has saturated its market. Often times, corporations at this stage are so large that they cannot react to major shifts in the market and they die out. However, if managed well, an owner can always mix things up to keep things fresh and keep the company growing. This is the ultimate goal: keep growing.

Once you have identified your company’s stage of development, you can decide whether outsourcing payroll and other HR functions is right for you. Often, outsourcing HR is best suited for the company that is somewhere between the Survival and Success stages, but it can also be helpful at the other stages. According to Dr. Lawrence M. Bienati,* in addition to assessing your company’s stage of development, there are two more considerations you must take into account when deciding to outsource HR: your company’s organizational strategy and your company’s organizational size, location, and complexity. Bienati suggests that companies that are focused on operations with little time to stay abreast of compliance regulations match the profile of a company that would be ready to outsource, along with those that have a “lean and flexible” organizational structure. If we take a flexible structure to mean that many people are currently handling administrative functions (i.e., who is in charge of HR is flexible), we can see the need to outsource HR. By assigning the HR tasks to one person or outside company, everyone else’s efforts can be focused on operations. If currently there are only a few members within the company or a large portion of the company seems to be focused on HR, which may be an indication of Dr. Bienati’s “lean” organizational structure (lean in total number of employees or lean on employees focused on operations and business development), it may be the time to consider outsourcing.

With respect to location, laws regarding healthcare, taxes, and insurance vary by locale. If your company is located in an area prone to a constantly varying regulatory atmosphere or it stretches across different locales, it may be time to seek outside expertise. Of course, based on your assessment in each of these areas, you can decide whether your company is a good candidate for partial outsourcing, full outsourcing, or no outsourcing at all.

Usually, HR functions are divided into categories such as

  • Employee Benefits
  • Recruiting
  • Compensation
  • Employment Law/Labor Relations
  • HRIS and Payroll
  • Management Development
  • Labor Law Compliances
  • Retention of Talent

Fully outsourcing all of these functions is not for everyone; that is why many PEO companies offer both full and partial outsourcing to small firms. Running a small business, though, owners want to focus on the most important thing, making a profit. Often times, administrative tasks and endless paperwork can pull you away from this goal, so a Professional Employer Organization is a useful tool in any stage of development, especially if your firm finds itself somewhere between Survival and Success. This is a pivotal moment when you need to decide whether HR outsourcing will help push your small business to the next level. It should not be too difficult to do this, simply look over the costs and benefits of outsourcing and ask yourself the following questions:

  • How much time do I, as a small business owner, have to devote to HR and compliance issues?
  • What will allow my company to attract and retain the best employees?
  • Is it worth losing some control over HR issues in exchange for significantly reducing my HR costs?
  • What is the size of my company and what stage is it currently in?
  • Does my company’s organizational structure and direction warrant the use of an outsourcing firm?
  • Will it cost less to outsource my HR functions than pay the cost of consultants?

Ultimately, the decision to outsource your company’s HR is your own and should be done after much consideration. First, identify your stage of growth. Then weigh the costs and benefits. Finally, decide which, if any, of the HR functions you think you need to outsource.

*Lawrence Bienati’s doctorate is in Business Administration and he is a consultant for large and small businesses.