HR 101: Outsourcing your HR department

(November 2007) Alexandra McLean and Shannon Waller from The Strategic Coach examine your experiences and answer your questions about human resources and people management.

Q. We are a small shop but we have decided to delegate our HR duties to a third party. Does it make sense for us to hire someone to handle our HR requirements or should we outsource this to an agency? What agencies work in the financial industry? Are there any who are familiar with our structures and requirements?

Human resources is one of the fastest-growing business segments to be outsourced. Many small businesses, like yours, decide to outsource their HR functions because they do not have the resources for a full-time in-house HR department. There are a few firms that specialize in recruiting needs for the financial industry, but most HR outsourcing firms can meet the needs of almost any company. The compliance issues pertinent to HR are set by the government — any reputable outsourcing firm will be familiar with them. In the financial services industry, pay scales and commission structures vary. Your company’s policies around this and other functions can be discussed with a potential firm during an initial needs analysis.

Since you have decided to delegate your HR functions to a third party, I would say the real question is how to benefit and get the expertise of an HR outsourcing firm without increasing your costs. As long as you do your research, this shouldn’t be a problem. Many business owners sometimes forget the additional or hidden cost of having full-time employees. To hire a full-time HR specialist, you must account for their training, development costs, base pay, benefits, sick leave, vacation and more. Outsourcing your HR needs can be quite cost-effective and will allow you to reduce your overhead costs and concentrate on the core of your business.

Deciding what functions to outsource, or deciding to outsource them all, is another key decision in this process.

Take a look at why you want to outsource. More importantly, which HR functions are you comfortable outsourcing? Do you want someone outside of your office to be responsible for your hiring? What about payroll? You may have different answers for each HR function. Smaller companies quite often outsource payroll, recruiting, pension and health benefits. There are many agencies that provide these services. Determine which functions make the most sense for you to outsource and start from there.

When selecting an outsourcing firm, do your homework. Conduct a basic needs analysis. Clearly lay out the HR management needs and concerns your company has. Ensure that the firms you are looking at have the ability to meet your needs and understand any concerns you have about specific rules and regulations. Be clear about how they deliver their services. Will they work with you in person, on the phone or through a website?

Reference checks are also an important step. When picking a firm, ask the company if you can speak with three of their existing clients. Try to find an agency or firm that fits your business. After all, they will be an extension of your firm.

Keep in mind there are pros and cons when it comes to outsourcing. If you choose to outsource your HR functions, you are essentially handing off the legal responsibility to someone who is an expert. With that responsibility, however, they can also become responsible for hiring, firing and disciplining your employees.

Small companies can usually offer better benefits packages when they outsource this function to a firm with larger resources. This is a huge bonus when it comes to hiring and retaining staff. At the same time, many employees feel the disconnect when their HR contact is not “one of them.”

Outsourcing, however, can bring a higher level of expertise and experience to your firm, provided the company you choose is a good fit. There is an endless supply of firms that specialize in all HR functions. Finding that fit will be the hardest part.

Shannon Waller is a coach at The Strategic Coach. Alexandra McLean is The Strategic Coach’s human resources manager. Visit www.strategiccoach.com for more information.

(11/07/07)