Outsourcing Human Resources Functions: A Cost-effective Solution for Small Businesses

Owning a small business is challenging. With a limited budget, you struggle to distribute finances, grow sustainably, and maintain streamlined operations. Managing human resources (HR) tasks further hinders you from prioritizing your primary initiatives.

HR is a formidable puzzle that requires wit and strenuous effort, from recruitment to employee retention. You must ensure that every hiring decision improves productivity and product quality. But what if these functions overshadow funding for your core offerings?

Fret not! Business process outsourcing (BPO) is your ticket to cost efficiency. Let us explore why and how HR outsourcing helps small businesses achieve such goals. 

Why Is HR Outsourcing Cost-effective for Small Businesses?

Outsourcing HR functions is cost-effective because it allows small businesses to optimize daily operations while staying within budget. You do not have to worry about creating online job ads or training new hires for the next six months. This strategy lets you tap into specialized expertise at affordable rates. 

HR BPO removes the need to finance benefits, engagement programs, and office equipment for third-party employees. Funding system repairs and maintenance are also out of the picture. You must only pay the provider a fixed hourly or monthly fee for HR support. 

Many small business owners acquire HR outsourcing services to achieve cost-effectiveness. According to Clutch’s recent survey, small companies adopt this approach to reduce expenses and bring in industry experience. Thus, 83% of 500 respondents plan to keep or boost their BPO spending in 2023.

Here are other cost-related benefits that influence small businesses to outsource HR tasks:

• Reduced compliance risks. Adhering to changing labor laws is a complex undertaking. You need dedicated experts to conduct regular audits and documentation. Fortunately, BPO firms offer related support, helping you avoid potential legal and violation fees.
• Streamlined processes. Service providers use artificial intelligence (AI) and automation solutions, such as workforce management software, to speed up repetitive functions. These technologies significantly reduce costs associated with HR administration, including manual paperwork and data entry.
• Enhanced scalability. Small enterprises might encounter difficulties growing their workforce due to budget constraints, especially during peak seasons. Outsourcing provides well-trained workers at affordable costs. It helps fulfill your HR needs during holidays or hectic periods without hiring or laying off in-house staff.
• Improved focus on core competency. HR outsourcing companies take charge of tedious processes, such as payroll processing. They let you allocate most of your capital and energy to enhancing your primary products and revenue-generating initiatives.
• Efficient employment risk mitigation. Third-party vendors assist in addressing HR-related issues, such as compensation disputes or early contract terminations. They employ the best professionals to help you prevent costly lawsuits.

HR Functions That Small Businesses Can Outsource

Now that you understand what BPO’s contribution to cost efficiency is, you might wonder which services you can outsource. Depending on your urgent needs, HR outsourcing for small businesses lets you cherry-pick the functions you want to assign to third-party team members.

BPO companies handle the following non-core tasks on a short- or long-term basis to ease your day-to-day operations:

• Payroll processing and management
• Recruitment support
• Benefits administration
• Employee onboarding and offboarding
• Employee records management
• HR compliance and legal assistance
• Workforce training and career development
• Employee relations and conflict resolution
• HR tech installation, configuration, and maintenance
• Strategic HR consulting
• Safety and health insurance support
• HR reporting and analytics
• Work performance management and evaluation

In-house vs. Outsourced: HR Cost Calculations

In a 2022 survey, Deloitte reported that 57% of polled executives outsource their HR functions. The same percentage of business leaders said cost reduction remains the primary driver of their BPO adoption.  

To illustrate how HR outsourcing is more cost-effective for small businesses than hiring a full-time HR team, we included a comprehensive cost comparison in this section. The data presented here shows sample computations of your in-house and outsourcing expenses.

Let us say you operate in West Phoenix, Arizona. Your 37-member small business needs three more payroll officers as part of your HR unit. Hiring in-house staff means you need to allot extra funds for compensation and work equipment. These costs add up to your existing rent for a 40-person office space, excluding utility bills.

On the other hand, you only worry about a fixed labor fee if you hire three third-party HR professionals from a Philippine-based BPO company. The service vendor already provides office equipment to aid their payroll employees in accomplishing tasks remotely. 

Although you still have to pay rent to accommodate your other full-time workers, BPO gives you up to 90% labor cost savings, as shown in the table below. The table breaks down your possible monthly expenses when hiring new full-time payroll officers compared to seeking external workers. 

Factors Affecting HR Outsourcing Costs

Note that the cost calculations of HR outsourcing for your small business can differ due to several factors. Understanding these aspects helps you make informed decisions when drafting your BPO budget. 

Consider these key factors carefully when conducting BPO cost analysis and estimations. This way, you avoid overspending or encountering unexpected expenses that may negatively impact your core business projects.

• Service scope. The range of outsourced HR functions significantly affects costs. Specific services, such as payroll processing, cost less than comprehensive HR outsourcing. This broad support may cover recruitment and benefit administration.
• Workforce size. The number of required BPO workers influences the provider’s pricing. For instance, multiply the hourly rate per worker by five if you only need five HR virtual assistants for a month-long project.
• Project complexity. If your HR needs involve managing multiple areas, regulatory compliance activities, or global services, expect higher costs due to the high-level expertise required.
• Work frequency. Providers offer various BPO pricing models based on the frequency of service. Most support vendors charge an hourly fee per worker. It is payable monthly or per payroll run. They also have subscription-based payment options.
• Customization. Tailoring HR outsourcing for your small business’s requirements may increase costs. However, dedicated BPO services ensure your provider’s strategies and goals align with your unique business needs and targets.
• Technology. Access to advanced HR solutions, such as cloud-based workforce management software, might come at an additional cost due to subscription fees. However, you do not need to worry about maintenance costs since BPO vendors already provide computer systems for their workers.
• Geographical location. The region where your service vendor operates influences HR BPO costs. Labor fees vary by country. For example, developing nations such as the Philippines have lower labor costs. Hence, third-party providers from these areas offer more competitive pricing.
• Contract length. Longer-term contracts bring more cost savings than shorter ones. Many providers offer discounted rates for multiyear service-level agreements (SLA), bundled services, or longer commitments.
• Additional services. Some BPO firms deliver supplementary services such as employee training and HR consulting. These add-ons can increase outsourcing expenses but may provide significant value to your team.
• Compliance requirements. The level of regulatory compliance necessary for your industry and region influences BPO costs. Adhering to complex laws requires more resources and expertise. Lawsuits and fines due to conflicts also increase your outsourcing expenses.
• Service quality and reputation. Highly credible providers that deliver superior service charge higher fees. But their expertise and reliability justify the increased expense. You need to validate whether this type of HR outsourcing suits your small business’s budget limits and requirements.
• Hidden fees. Be aware of any hidden charges that might apply to your ongoing BPO contract. These include fees for the SLA’s early termination or historical HR data access.
• Economic factors. A country’s economic conditions, inflation rates, and market dynamics impact HR BPO costs over time. So, consider the potential for price adjustments in your SLAs.
• Negotiation skills. Your ability to negotiate BPO contract pricing and terms effectively leads to more favorable rates and service conditions.

Why HR Outsourcing Is Challenging for Small Businesses

Small businesses have limited resources and funds to perform due diligence, contract negotiations, and ongoing oversight of BPO providers. These constraints hinder them from ensuring a successful outsourcing partnership in the long run.

However, thorough research and analysis of these BPO challenges help develop practical strategies to guarantee cost efficiency and enhanced service quality. Begin such an effort by understanding these HR outsourcing issues:

• The upfront costs of hiring a provider impede small companies with limited funds.
• Outsourcing introduces a lack of control over certain functions and output quality.
• Unique in-house HR requirements may not fit neatly into standardized BPO packages.
• Remote information sharing poses security threats to sensitive employee data. 
• Time zone and language differences obstruct smooth communication and collaboration.
• Seeking the right provider takes time and steals your attention away from core initiatives.
• Overlooking pricing models, currencies, and contract terms may incur hidden costs.
• A provider’s country of origin introduces different compliance rules and requirements.

Ways to Ensure Cost Efficiency With HR Outsourcing

Several companies entrust their HR functions to save costs and improve productivity. For example, Mondelez outsources its payroll to cut overhead expenses. Meanwhile, Unilever partners with a global BPO firm to boost efficiencies for its in-house workers.

As many companies experience the value of HR outsourcing, the global industry is expected to continuously grow at a compound annual growth rate (CAGR) of nearly 5% by 2028. In 2022 alone, the market reached $36.6 billion in revenue. Cost savings and performance improvements drive the sector’s expansion.

To achieve similar benefits and address issues with BPO for small businesses, you must know how to ensure cost efficiency when outsourcing HR tasks. The following practices guide you in attaining continued success with a BPO partnership:

• Specify HR outsourcing objectives. Whether you want to reduce HR operating costs or enhance employee experiences, having clear and measurable goals guides your BPO decisions. This step helps monitor milestones in the long term. 
• Assess HR processes and needs. Identify the areas that require urgent improvements but eat up most of your resources. This way, you can plan your budget and organizational structure well. The action also lets you focus on improving your primary products and services.
• Select the best provider. Perform comprehensive research to find an HR outsourcing provider suitable for your small business needs and budget limits. Seek a vendor with a consistent track record of delivering cost-effective solutions and a collection of positive client references.
• Customize BPO services. Coordinate with your BPO provider to customize the HR support you need. Tailoring third-party assistance to your specific requirements helps remove unnecessary costs related to services you do not need.
• Optimize advanced technology. Providers give you access to cloud-based HR solutions. These automation tools streamline processes and reduce administrative overhead costs, enhancing cost efficiency.
• Centralize communication and collaboration. Assign a contact person to handle all transactions between your in-house and third-party teams. A core channel for communicating and coordinating tasks helps avoid the high cost of delays and errors.
• Monitor performance and output. Regularly monitor and evaluate your provider’s work performance and outcomes. Set key performance indicators (KPIs) to measure its progress. KPIs help ensure the BPO partner meets your expectations and the agreed-upon standards. Besides, this move guides you in addressing issues promptly.
• Implement cost controls. These measures include spending caps or approval processes for additional BPO services. This helps avoid unexpected expenses and keeps your budget on track.
• Review HR outsourcing SLAs for small businesses periodically. The practice ensures the contract terms remain aligned with your goals and funds. Renegotiate service conditions if necessary to adapt to changing industry trends.
• Benchmark BPO expenses against industry standards and competitors. This approach assures that you receive competitive pricing and value for your investment.
• Explore alternative outsourcing models. Consider alternative HR BPO structures, such as co-employment or professional employer organization (PEO) services. These measures offer different pricing options and benefits.
• Stay informed about changes in labor laws and regulations. These updates may increase or lower your HR outsourcing costs. A proactive approach to regulatory compliance prevents costly fines and penalties.
• Measure returns on investment (ROI). Continuously track and record the ROI of your HR outsourcing efforts. Determine whether cost savings and operational improvements match your preset objectives.

The Bottom Line

HR outsourcing is a cost-effective solution for small businesses. It offers affordable access to expertise and advanced technology. These resources boost efficiencies and streamline processes, letting you prioritize core products and competencies. 

Despite such benefits, challenges remain when working with a service provider. As long as you understand how to solve them and execute the best practices listed above, you will still gain the advantages of outsourcing. Ultimately, performing cost calculations beforehand will guide you in planning your BPO budget well. 

Let’s connect if your small business requires third-party support to address your HR needs. Unity Communications has a diverse talent pool and modern tech to help streamline your HR functions. The award-winning international service provider offers different pricing models to bring cost efficiency to your small enterprise.