Regardless of size, businesses require HR services to streamline their everyday tasks and operations. HR services work as the essence of the smooth functioning of an organization. The downside of all this is, however, the cost.
For startups, establishing a dedicated HR department calls for a significant investment. Also, a dedicated department might not even be needed.
Big companies, on the other hand, have full-fledged HR teams. But, with the HR functions broadening significantly since remote work came into play, the core objectives have shifted from work-centric operations to employee-centric roles.
All this leads to the importance of outsourcing HR. It is also necessary to know about HR outsourcing costs because 64% of companies consider cost-savings as the main factor driving them to outsource. HR outsourcing is also an excellent time-effective alternative to having an in-house team.
Table of Contents
An Estimate of The HR Outsourcing Costs
HR outsourcing is subcontracting your organization’s human resource functions to an external provider. It is an agreement with a third-party provider to transfer the liabilities and management of your HR.
HR outsourcing is a strategic HR initiative as it allows you to focus on your core functions while effectively controlling your HR operations.
So, how much is the cost of outsourcing HR?
The standard industry pricing ranges between $45 and $1500 per month. However, outsourcing costs depend on a wide range of factors. You can customize it based on individual requirements.
The outsourcing service providers offer different HR outsourcing pricing models, such as:
- A flat fee charge or a standard fee
- Hourly basis or per employee per month basis
- At regular intervals like monthly, quarterly, or annually
- Percentage of each employee’s gross income (the charges range from 4% to 8% of the gross income, implying that the total costs will vary based on your company’s size)
The model followed depends on the type of HR services offered and the one that best suits your requirements. This brings us to HR services available in the outsourcing industry.
Types of HR Outsourcing Services
Following are the types of HR services and providers for organizations to consider:
1. HR Organizations
These are organizations offering end-to-end human resource services. They function like your HR department, executing every task from talent mapping, planning, and strategizing to managing everyday activities. They work as independent entities, taking complete responsibility for all your HR functions.
These organizations charge you based on your company size. The per-employee cost can be up to $300 per year. It can be a percentage of the employee's pretax income or a flat fee.
2. Professional Employer Organization (PEO)
PEOs work as employment partners or co-employers. They undertake shared legal responsibilities and liabilities. The approach enables organizations to control their core HR activities.
PEOs offer expert support in compliance management, onboarding, payroll administration, employee benefits, etc. However, they refrain from taking control of your business and strategies, employing or supplying human capital, and taking part in your company's final hiring and firing decisions.
Their prices range from 2% to 12% of employees’ pretax income or flat fees between $900 and $1500 annually.
As per a NAPEO report, businesses working with PEOs are 50% less likely to go out of business and enjoy 7% to 9% more growth than usual, which makes them a more advantageous option than in-house HR.
3. Specific HR Services
HR outsourcing agencies as well as staffing companies also offer individual services. Custom service arrangements are ideal if you need only a few specific HR services. The costs, in such cases, will depend upon the company size and the services required.
Costs of Outsourcing HR Based on Services
Let us now look into the costs of outsourcing specific HR tasks and find out how outsourcing is, in most cases, a more cost-effective option than managing the same tasks internally:
- Training and Development
- Compliance Management
- Payroll Regulation
- Benefits and Compensation
- Software as a Service (SaaS)
Recruitment is one of the most critical and expensive HR tasks. Recruitment Process Outsourcing, or RPO, can cost up to $800, even if it is about handling just 100 candidates.
Professional recruitment is not restricted to conducting interviews only. It encompasses applicant tracking, candidate screening and selection, onboarding activities like drafting the relevant contracts, policies, documentation processes, and so on.
Remote recruitment and onboarding as global recruiters can be pretty challenging. Hence, outsourcing is an ideal option.
While the PEOs offer help with services like onboarding and contracts, some full-fledged HR organizations provide management of the entire recruitment process of your organization. Thus, you can either get assistance for specific tasks or completely outsource recruitment.
The industry standard costs for recruitment vary between 40% to 50% of the employee's annual gross salary. Alternatively, an hourly rate of up to $125 is also commonly practiced.
2. Training and Development
The hired candidates will require training to understand an organization's work structure and culture. In-house training can cost up to $1300 per employee per year. Hence, businesses can outsource training and development to save costs and provide the candidates with scopes for improvement.
3. Compliance Management
Global recruiters must be familiar with the strict penalties they incur should they fail to follow and abide by the labor laws and regulations across countries. So, compliance management is another HR task worth outsourcing.
The HR outsourcing service providers will revise and review your policies and laws from time to time to ensure that you stay compliant with the regulations.
The cost for outsourced compliance management is around $12,000 per year, which is way less than about $200,000 when managed internally.
4. Payroll Regulation
Much like labor laws, payroll regulations and tax norms vary across countries. Additionally, the payment norms for contractors and part-timers will differ from that of full-time employees. That is why; global companies popularly outsource payroll regulation to third-party service providers.
The outsourcing cost per employee for payroll regulation is up to $250. The services include payment processing, tax filings, direct deposits, online portals, etc.
5. Benefits and Compensation
Employee benefits and compensations like bonuses and hikes vary depending on the hierarchical role and position. HROs and PEOs follow industry standards to ensure that the employees get duly compensated for their job.
On the other hand, benefits include LTA, insurance plans, data consumption reimbursements, and so on. The HR outsourcing costs for managing benefits and compensation are up to $165, which is about 17% less than in-house costs per employee per year.
6. Software as a Service (SaaS)
Apart from the core HR functions, organizations can choose to outsource with the primary purpose of tapping into the technological expertise of an HR services company.
SaaS companies provide technical assistance in employee dashboards, online HR portals, and so on. Technological HR outsourcing costs can be up to $70 to $100 per user per month.
How To Optimize Outsourced HR Costs?
With vast HR outsourcing options available, it is crucial to identify the factors affecting the outsourcing costs and optimize them. This will help supplement more capital for the core operations. The key is to find a balance between maximizing business value and curtailing HR outsourcing costs.
The costs depend upon the organization’s size, the number of employees, and the required services. The bigger your company, the more the volume of your HR functions, and therefore, the more the outsourcing costs.
To optimize your HR outsourcing charges, you should address the following questions when deciding to outsource:
- Would outsourcing support the organization’s operations?
- Will it help focus more on the core activities?
- Does the situation call for outsourcing?
- What type of outsourcing provider and service suits your business?
The answers to these questions will give you a clear view of whether to go for outsourcing, which services to opt and how to plan the costs.
HR Outsourcing Costs Takeaways
HR outsourcing enables you to do more by doing less. Hence, it is the future for small businesses and global organizations.
You can find a lot of HR outsourcing providers today. If you are a startup, an experienced outsourcing HR team can even help you chalk out your organization's human resource mission statement.