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According to reports, over 45% of companies spend a day or more each week dealing with HR-related tasks. Do you know why? Human Resources Management is the backbone of any organization. It is an operational approach to managing the workforce, recruitment, payroll, training, performance, and maintaining a healthy work environment. When all this happens without hassle, it nurtures a more productive and happier workforce.
However, striking the right balance between HR responsibilities and strategic goals can take time and effort for many businesses. Thankfully, outsourcing HR operations can help you reduce your workload and redirect resources toward other core business objectives.
But, as with any decision, there's a catch – how much does HR cost? Budget considerations often make companies hesitant about outsourcing HR. However, understanding the factors that impact these costs and how to utilize the full potential of HR outsourcing services can lead to significant savings.
This comprehensive guide will help you understand just that. At the end of this article, you will learn to make informed decisions about HR outsourcing costs.
What is HR Outsourcing?
HR outsourcing, or human resources outsourcing (HRO), is a business practice where an organization delegates certain HR functions and responsibilities to an external service provider. This implies that instead of managing all the HR activities in-house, companies can outsource specific tasks. They may even outsource the functions entirely to a specialized third-party provider.
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Types of HR Outsourcing Services
HR outsourcing services can be categorized into various types, each designed to address HR functions and business requirements. Some of the most common ones are:
1. Transactional HR Outsourcing
Transactional HR Outsourcing focuses on the administrative and transactional tasks of HR, such as payroll processing, benefits administration, and employee data management.
These tasks are generally repetitive and time-consuming. When the service provider handles these HR activities, your organization can free up time and resources for more strategic initiatives.
2. Functional HR Outsourcing
Functional HR outsourcing involves outsourcing employee-related HR functions or processes, such as recruitment, training, and development.
This allows you to tap into expert knowledge and hire the best talent. Moreover, it also helps boost the work environment's efficiency through effective performance management techniques.
3. Strategic HR Outsourcing
Strategic HR outsourcing is the highest level of HR outsourcing. In this type, you partner with external providers to handle critical and complex HR activities aligned with the overall business strategy.
This can include HR planning, talent management, succession planning, organizational development, and HR analytics. The service provider works closely with your organization's leadership to align HR strategies with business goals and drive long-term success.
How Much Does it Cost to Outsource HR?
Thecost of outsourcing HR can range from $53 to $1,510 per employee per month. The cost depends on several factors, such as the scope of HR services, the organization's size, and the experience required.
You can understand it better through the following cost breakdown based on the size of the organization:
Nearly 24% of small businesses outsource HR tasks because of factors like
They lack a dedicated and comprehensive HR department,
Reduce operational costs,
Improve employee experience and benefits,
Do not have many resources to spare for HR functions,
Want fewer concerns related to finding, hiring, and onboarding employees.
Besides overseeing the above, outsourced HR tasks might include payroll processing, attendance tracking, and benefits administration.
The outsourcing provider offers a standardized package covering these essential services, and the company pays the said amount per month per employee. Generally, the cost of fully outsourced HR services for small businesses, which only require occasional support, is $50-$1500 per month.
For example, ABC Company has 20 employees and has decided to outsource its payroll and attendance tracking. They opt for a low-cost HR outsourcing package and pay $53 for 20 employees. So, the HR outsourcing cost will be $1,060 per month.
A mid-sized company with more complex HR requirements chooses to outsource both transactional and functional HR functions. This could involve payroll processing, recruitment, performance management, and employee relations. The outsourcing provider customizes the services based on the company's needs and charges per employee for this comprehensive HR support.
So, assume XYZ Corporation has 50 employees and decides to outsource payroll, recruitment, and performance management. They choose a medium-cost HR outsourcing package and pay $50 for 50 employees. Thus, the HR outsourcing cost will be $2500 per month. If you add more employees or opt for more services, the price may increase accordingly.
A large enterprise with global operations and strategic HR goals would require top-tier HR outsourcing services. They need comprehensive support, including strategic HR consulting, talent management, leadership development, and workforce planning. Moreover, large corporations have hundreds of employees working for them. Consequently, the HR outsourcing service provider will offer highly customized services tailored to the company’s requirements. Intuitively, the price would be relatively higher and cover all the customizations and employees.
Factors Influencing the Costs
As said above, several factors can influence the cost of outsourcing HR. Therefore, it's essential to consider the following factors and evaluate your needs before outsourcing HR functions:
1. Scope of Services
The range of HR services you outsource will directly affect the cost. With the cost breakdown explained above, it's clear that if you outsource only specific functions like payroll or recruitment, the cost will be lower than outsourcing the entire HR department.
2. Complexity of HR Processes
The complexity of your HR processes and the level of customization required can affect the cost. Highly specialized HR services that require advanced knowledge and experience may come at a higher price.
3. Service Provider
Different providers have varying pricing structures; their expertise and reputation can also influence the cost. Reputable and experienced HR outsourcing providers may charge hefty sums for their services due to their track record and expertise.
4. Service Level Agreements (SLAs)
SLAs define the level of service and performance expectations between you and the outsourcing provider. The more comprehensive and demanding the SLAs, the higher the cost is likely to be.
5. Technology and Infrastructure
The use of advanced HR technology and infrastructure by the outsourcing provider may be reflected in the cost. For example, the overall cost may increase if specialized software or IT support is needed.
6. Geographic Location
The geographic location of the outsourcing provider can also influence the cost of HR outsourcing. Labor costs and market dynamics vary across regions, so choosing a provider in a different country or region may result in cost savings or additional expenses.
Advantages of HR Outsourcing
There are numerous benefits of outsourcing human resources:
1. Cost Savings
Outsourcing HR functions can lead to significant cost savings. You could save up to 30% on employment costs by HR outsourcing. It will help you avoid the expenses of maintaining an in-house HR department, such as training, office space, etc.
2. Expertise and Specialization
HR outsourcing firms are experts in their field. They are equipped with proper knowledge and experience. This allows you to access top-notch HR professionals up-to-date with industry best practices and the latest HR trends.
3. Focus on Core Business
Outsourcing HR functions frees up valuable time and resources for you to focus on your core competencies. It allows management and employees to concentrate on activities directly contributing to business growth and success. Moreover, nearly 76% of businesses outsource one or more major HR functions to better concentrate on their core business.
HR Services Companies Can Outsource
HR services that can be outsourced include:
1. Recruitment and Talent Acquisition
Outsourcing recruitment involves partnering with external agencies or HR firms to handle the hiring process. This includes everything from candidate sourcing to shortlisting potential candidates.
Remote payroll management across multiple countries can be complex and time-consuming. Payroll outsourcing involves assigning payroll-related tasks, such as salary calculations and paycheck distribution, to an external service provider.
This guarantees accurate and timely employee payment while helping you comply with tax regulations and employment laws.
3. Employee Training and Development
Investing in employee development and training is essential for enhancing skills and performance. Training experts or consulting firms will design various employee development programs when outsourcing training and development.
This can include orientation sessions, skill development workshops, and other professional development programs to enrich the workforce's knowledge and capabilities.
4. Compliance Management
Complying with employment laws and regulations while meeting industry standards can be challenging, but it must be done without any mistakes. Therefore, approximately 24% of companies outsource some or all of their compliance functions.
They do so to obtain added confidence in their compliance processes and tackle the absence of in-house compliance expertise. The tasks can include handling documentation and managing changes in labor laws to minimize legal risks.
5. Benefits Administration
It is the process of creating and managing various benefits for your employees. Around 36% of businesses prefer employee benefits outsourcing, making it one of the top 5 HR functions that are outsourced.
Redistributing this work makes it easier to administer employee health insurance and retirement plans, manage their leaves and compensate for overtime. An accurate and timely administration of these benefits keeps employees happier and improves their work efficiency.
6. Performance Management
Performance management involves managing and improving employee productivity and overall organizational performance. It involves setting clear performance expectations, providing feedback, and identifying areas for improvement.
However, managing these processes internally can be resource-intensive for you. You can create a performance-driven culture that maximizes productivity and encourages continuous improvement through proper communication and partnership with the outsourcing team.
How Skuad Can Help
HR outsourcing has become a strategic imperative for businesses seeking to optimize HR operations. Considering HR outsourcing prices, the decision must be taken with utmost precision.
Skuad offers an Employer of Record (EOR) platform that enables companies to hire and onboard talent in more than 160+ countries.
With over two decades of HR experience, our leadership team brings expertise in building globally diverse and distributed teams. This makes us a reliable partner for businesses looking to expand their workforce globally. Book a demo today.
Q1. How do Companies Price Their HR Outsourcing Services?
The pricing for outsourcing HR services depends on various factors like the complexity of the services, the size of your organization, etc.
Q2. Are There Ways to Minimize Your HR Outsourcing Costs?
Yes, if companies evaluate their HR needs properly and compare multiple service providers before finalizing the right one, they can significantly save on HR outsourcing costs.
Q3. What is the Average Cost of HR per Employee?
The average cost of HR functions per employee can range from $1350 to $3800.
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Sandeep Patel is a Content Marketing Manager and Strategist. Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance.