“Human Resources isn’t a thing we do. It’s the thing that runs our business.” This Steve Wynn quote about human resources (HR) says it all.
Whether working remotely or in-office, your employees are the lifeblood of your company’s operations. And you better move heaven and earth to secure your employees’ welfare. This function rests squarely on HR. Your HR department must be on point from the word go.
But as companies soon find out, establishing an in-house HR department is cost and time intensive, especially if you’re a fledgling company with limited financial muscle. Not to worry, though, because there’s a way out — outsourcing HR services.
Understandably, you’ll want to know the cost of outsourcing HR before you jump in. Good thing we’ve done some knowledge hunting and compiled this detailed guide explaining the ins and outs of HR outsourcing costs.
Let’s start with the definition.
What is HR outsourcing (HRO)?
Human resource outsourcing refers to an arrangement where you engage a third-party (HR outsourcing provider) to administer HR functions on behalf of your company. You may outsource all your HR functions or individual services depending on your company's HR needs.
Outsourcing HR functions frees your time, allowing you to focus on growing your company or developing your product. Considering that about 45% of business owners spend one or more days a week sorting out administrative HR issues, outsourcing HR functions is a strategic move for many developing companies.
For HR operational enablement, outsourcing ticks all the right boxes, particularly if you have 200 or more employees and your company is scaling fast. The cost of outsourcing HR may be the only deal-breaker if you figure you aren’t getting value for your money.
But after reading this post, you’ll be well placed to make an outsourcing decision that gives you more bang for your buck in the short and long term. So let’s explore HR outsourcing costs and the factors behind HR prices.
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The cost of outsourcing HR services
HR outsourcing costs vary by provider and depend on how much of your HR functions you’ve outsourced and your company headcount. Like any other competitive business space, you’ll get varying HR services price lists for the same or different service tiers depending on where you look.
You can expect to pay anything between $53 to $1,510 monthly. Your company's specific HR needs will determine the final cost.
For instance, your costs will be higher if you opt for end-to-end HR services — where providers manage all your HR functions, from hiring and payroll processing to training and performance review. Conversely, if you only outsource your payroll processing, you’ll get a smaller bill because your provider will only charge you for processing your company’s payrolls.
Providers may apply outsourcing pricing models to calculate their outsourced HR costs.
Charge you a flat fee per employee per month
Following the per-employee per-month (PEPM) pricing model, your HR outsourcing provider charges you a flat fee for each employee in your company. This is the more favorable pricing model for a scaling company because you can anticipate cost increases throughout the year.
Charge you a percentage of employee gross income
With this pricing model, your outsourcing company charges you a percentage (usually between 4% to 8%) of each employee’s gross income. The charges can be monthly, quarterly, or annually as per your agreement. One downside to this model is that you’ll pay more every time you increase your staff’s pay while still getting the same service value.
Charge you per service
Outsourcing providers use this method to set a flat rate for each HR service and bill you for your chosen services. This gives you the autonomy to outsource the HR functions you deem necessary at any point in your company’s development.
Charge you per bundled service
Under the bundled service model, you pay one lump sum — usually annually, quarterly, or monthly — and enjoy all the HR outsourcing services your provider offers. This model seemingly benefits more prominent companies with broad HR needs. If you’re a small or midsized company with average HR needs, you may end up paying for some services you currently don’t need if you opt for this model.
Types of HR outsourcing providers available
Generally, HR outsourcing providers fall into two main categories:
General human resources organizations
These are HR outsourcing companies offering end-to-end HR services. These firms undertake all the HR functions you outsource but operate as independent HR contractors. This means you remain liable for your employees’ legal and tax responsibilities.
Most of these HR firms can meet all your HR needs, such as hiring, onboarding, training, payroll processing, and administrative duties. However, they still offer individual HR services if you only want to outsource select HR functions.
Professional employer organization (PEO)
For the most part, PEOs offer the same HR services as HR outsourcing organizations. The main difference is the legal and operational structuring. PEOs apply a co-employment model that sees them manage your employees from their books, thereby sharing legal and tax liabilities with your company.
Sharing these legal and tax responsibilities allows a PEO to operate as a co-employer or business partner, not as an independent contractor like outsourcing firms. Still, you retain control of your core HR functions, such as hiring, firing, and strategizing.
Main HR outsourcing services that providers offer and their pricing
PEOs and HR outsourcing companies provide the following core services:
Staffing and onboarding
While recruitment is a fundamental and recurrent HR function, it’s also capital-intensive. Recent data from the Society for Human Resource Management (SHRM) states that the average cost per hire is almost $4,700.
HR outsourcing providers manage recruitment, from conducting interviews to drafting employment contracts. They do it at a fairer rate, equivalent to around 40-50% of the employee’s yearly gross salary.
Employee training and development
On average, large companies spend $17.5 million on employee training and development, mid-size companies spend $13 million, and small businesses spend $341,505. This proves training and upskilling employees is essential to ensure new employees get to value quickly.
Fortunately, you can outsource your training and upskilling function to outsourcing providers at a better cost than handling it in-house. PEOs and HRO companies typically offer this service as part of their recruitment packages.
Legal compliance and risk mitigation
With today’s remote working trend, you’re likely to manage a distributed team spread across the globe. This means you would spend more resources and time ensuring compliance with labor laws in multiple countries and mitigating risks, such as data breaches.
Good thing outsourcing providers are well-versed in international labor laws and the modern risks associated with remote working. Across the board, the average cost of compliance is $5.47 million. You can get better rates from your outsourcing provider.
Payroll and tax regulation
Payroll processing can take a toll on growing companies, mainly if you manage a global workforce. Keeping tabs on the evolving tax laws in multiple countries can be exhausting and costly.
HR outsourcing firms typically handle tax filing, payment processing, and direct deposits worldwide. Thus, they’re well suited to manage your payroll and tax processes at a lower rate ( $20 - $250 per month) than it would cost you in-house.
Software as a service (SaaS)
HR technology is a game changer in modern HR administration. However, in-house HR software has a steep price tag compared to outsourcing. You can expect to pay about $210 monthly per user for an outside HR software subscription.
Conversely, building your HR software would be part of your in-house IT support team, costing you around $77,500 annually per in-house IT employee.
Benefits and compensation administration
Employee compensation is a sensitive matter for your company. Today, with the 'Great Resignation' phenomenon still happening, employees will jump ship immediately at the promise of a better offer.
HR companies and PEOs have the aptitude to review and update your company’s compensation packages to match prevailing market rates.
Why HR outsourcing is right for your business
Ideally, HR outsourcing should help you achieve the following:
- Free your time to empower you to focus on your company’s core activities
- Augment your company’s entire operations
- Reduce the long-term costs of managing the same services in-house
- Stay on track of industry developments affecting your company’s HR administration
- Avoid tax, legal, and compliance issues across all pertinent jurisdictions
How Skuad can help you manage HR outsourcing costs
Skuad is a global employment and payroll platform that enables organizations to hire employees and contractors in over 160 countries without setting up subsidiaries or local entities. Skuad also helps organizations to efficiently manage payroll, onboard talent and ensure compliance with country-specific employment laws and tax regulations.
Skuad handles the entire employment lifecycle on behalf of organizations so they can scale business operations by reducing HR outsourcing costs and ensuring an efficient HR administration.
To know more about Skuad, book a demo today.