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Outsourcing HR: What Are the Benefits?

  • Human Resources
  • Article
  • 6 min. Read
  • Last Updated: 01/17/2023
two small business owners discussing the benefits of outsourcing hr

Table of Contents

Small and mid-sized businesses with limited personnel often find themselves overwhelmed by HR demands. If you feel your company is stretched thin managing critical areas of business, consider getting help. Many outsourcing HR services are specifically designed to streamline business functions, reduce expenses, and help companies meet their operational goals.

What Is HR Outsourcing?

Generally speaking, HR Outsourcing involves the use of an experienced third-party provider to assist a business with specific HR functions. These functions may include solutions designed to help your business:

  • Attract and develop talent.
  • Legislative and regulatory compliance.
  • Benefits and payroll administration.

In many cases, a relationship with the third-party provider can include access to a scalable HR technology platform, as well as guidance and support from a knowledgeable HR professional.

One option for HR outsourcing for small businesses is a professional employer organization (PEO). PEOs offer comprehensive HR services that help businesses manage day-to-day operations, as well as providing expertise in the areas of employee benefits and other HR needs.

In recent years, PEOs have continued to gain popularity among businesses. According to The National Association of Professional Employer Organizations (NAPEO), PEOs provide services to nearly 175,000 businesses employing approximately four million people. There are 487 PEOs in the United States, with industry revenue estimated at $254 billion.

By shifting your team's focus from administrative tasks to strategic efforts tied to the company's mission, your team can make more comprehensive and lasting contributions with the help of HR outsourcing services.

How Does HR Outsourcing Work?

When it comes to HR outsourcing for small business, there are two key options.

As mentioned above, PEOs offer comprehensive HR outsourcing services where, generally speaking, a PEO assists with a full range of HR administrative duties, although some third-party focus on certain services. Once chosen, a PEO can help alleviate the burden of complex HR administration responsibilities, so a business can stay focused on its core mission, thus helping reduce administrative costs, improve productivity, and increase profitability.

The second option—HR outsourcing (HRO)—involves a third-party provider assisting with HR services, such as payroll processing. This labor- and time-consuming duty is one employers are often happy to relinquish to a knowledgeable partner who can manage their tasks with efficiency and an in-depth understanding of relevant regulatory requirements.

Why Do Small Businesses Outsource HR?

With ever-mounting challenges and today's economy, small businesses should consider all they can gain if they choose to outsource HR. According to a Paychex study1, almost seven in 10 leaders with 100 to 249 employees spend more than one week each month on HR tasks and duties. On average, this costs $233,896 annually and grows to $10.7 million annually for larger employers.2

The number one benefit for leaders who outsourced HR administration according to those surveyed was having fewer mistakes, cited by 51% of respondents. Other benefits included increased productivity (41%), better analytics and reporting (35%), improved regulatory compliance (35%), and reduced costs (34%).1

There are numerous benefits to outsourcing HR, including:

The Ability To Focus on Business Productivity

More than two in five leaders shared that they outsource to increase productivity.1 Instead of spending time handling routine administrative tasks, employers and their HR teams can focus on more strategic business functions that offer greater potential rates of return.

Access to an Enterprise-Class Solution

Small businesses may be able to enjoy similar benefits that are on offer from larger employers when they work with a PEO, which can help them save on costs and compete more effectively for great talent. More than one-third of the leaders said they receive better analytics and reporting from outsourcing HR.1

Help With Compliance

Many small businesses struggle to keep up with changing labor and employment laws and regulations, insurance claims management, and much more. Failure to comply with laws and regulations can lead to serious financial consequences. Outsourcing HR functions to a trusted provider may help business owners understand and comply with these laws and regulations. In fact, 35% of the leaders said they improved their ability to stay in regulatory compliance by outsourcing HR administration tasks and duties.1

More Effective Recruitment Efforts

According to the 2022 Paychex Pulse of HR Survey, "hiring, onboarding, and retention were identified by half of respondents as the least effective HR activities in their organizations." Outsourcing recruitment efforts to third-party providers offers an effective and cost-efficient method of improving a business's recruitment strategies.

Reduced Costs

HR administration can cost a business $309,000 annually for a company that has five to 500 employees, and this can jump to over $10 million for larger employers.1 HR outsourcing, and PEOs in particular, could help small businesses with tight budgets.

Free Up Time and Resources

HR outsourcing may help businesses lower health costs, reduce HR expenses, process fewer workers' compensation claims, reduce turnover, and help generate higher revenue growth. With the help of a third-party HR provider, there are often fewer concerns about hiring, retaining, and motivating employees. Almost seven in 10 leaders reported spending one whole week a month on HR-related tasks. So, outsourcing to a third-party provider could significantly free up time and resources.1

Gain Access to Expert Guidance

Today's leading HR outsourcing providers also offer dedicated guidance from an HR professional. They can educate and guide you through the turbulent waters of laws, regulations, and employee-related matters. With the experience and expertise that an HR professional can deliver, a business may:

  • Elevate customer service relationships both internally and externally.
  • Potentially minimize costs associated with turnover and poor employee morale.
  • Focus more on strategic planning for future growth.

All of these benefits can be achieved without the burdensome expense of additional staff, while retaining the experience and expertise needed for a business to succeed.

HR outsourcing enables companies with minimal resources to use cutting-edge technology that could otherwise be costly to maintain on their own. With outside support running some of the functions, businesses can enjoy the advantages of HR outsourcing without having to purchase this technology on their own.

Potential Disadvantages of HR Outsourcing

Depending on the type of business, there are certain disadvantages of HR outsourcing. Challenges of HR outsourcing can include:

  • An extended period of time needed to fix any errors in outsourced duties (because the third-party provider is not on-site).
  • Possible shortcomings for help with recruitment, when a third-party provider lacks a keen understanding of company culture.

These potential disadvantages can be offset when a business takes time to explore the capabilities and expertise offered by a specific PEO. Paychex HR PEO outsourcing services can help.

What HR Functions Can Be Outsourced?

An HR outsourcing provider can work with you and your team to provide support throughout the employment life cycle. Depending on the services you're looking for, an HR outsourcing provider may offer support in the following areas.

HR Administration

The time and resources needed to tend to HR administration can be challenging for any business. With this in mind, outsourcing HR administration may help you regain precious time that can be better used to focus on your business and your customers. At the same time, experienced HR support can bring many benefits for businesses, including:

  • Expert guidance: An experienced HR professional can offer support and recommendations to help establish your HR operations, develop a customized employee handbook specific to your business, and provide personalized HR guidance to help you mitigate risk, manage employee relations, and potentially avoid costly compliance mistakes.
  • Support to help comply with ever-changing laws and regulations: Outsourcing HR may mean having access to guidance related to federal, state, and local employment laws that impact your business.
  • Personalized policies and procedures to guide employees in knowing what's expected of them each day: Outsourcing HR services may help you better communicate with employees, for example by developing an employee handbook designed to let your team know about specific company policies, procedures, benefits, and training.

Payroll Processing

Outsourcing HR is an effective way to help streamline essential payroll processing tasks. Business owners who do so can:

  • Process payroll efficiently and seamlessly every pay period.
  • Help maintain compliance with payroll tax laws and regulations.
  • Reduce time spent on payroll administration, including tax filing, tax credits, and workers' compensation claims.
  • Generate custom reporting (employee data, expense management, timekeeping, labor management and forecasting) to help them make more informed decisions.

Employee Benefits

In today's quest for top talent, businesses may want to leverage the power of offering competitive employee benefits, including health insurance, 401(k) retirement plans, and health savings accounts.

Outsourcing employee benefits could help you:

  • Recruit and retain quality talent: Third-party providers often have stronger buying power that you could take advantage of by offering employees more variety and more affordable benefit options.
  • Compete for talent against much larger firms: Get help to offer benefits that can rival Fortune 500 companies and still meet your financial and business objectives.
  • Seamlessly conduct open enrollment: An HR provider will typically manage open enrollment administration, saving you time and resources. Plus, integrated employee benefits administration means you could save time on data entry and help ensure accuracy.

Recruiting and Hiring

If your business is struggling to find and keep a quality workforce, you may want to consider HR outsourcing. Some of the recruiting and hiring services that a third-party provider may offer include:

  • Reviewing your talent acquisition strategy.
  • Streamlined and integrated applicant tracking system.
  • Assistance in the development of targeted job descriptions.
  • Development of engaging new-hire onboarding experiences.

These services are designed to help you make the right hiring decisions faster and retain your employees longer.

HR Compliance

Handling HR compliance on your own or without help from a professional well-versed in business compliance matters can be difficult. That's why some HR outsourcing options include assistance to help you understand and stay on top of applicable regulatory and legislative developments that may impact your business.

More specifically, an HR professional can consult on applicable compliance requirements to help you make sure your employment and safety practices adhere to federal, state, and local laws.

Employee Performance Management

Keep your employees on track and help them know what's expected of them with customized performance management tools and training for position-specific performance objectives. These can help you:

  • Align employee performance and development with your business strategy.
  • Develop employees with thoughtful intention to ensure resources are used effectively to build employee career plans that are personalized and aligned with your business priorities.
  • Implement performance improvement plans, disciplinary action, and restructuring plans.
  • Create targeted retention strategies with input from employee opinion and satisfaction surveys.

Workplace Safety and Risk Management

Onsite safety programs can help keep your staff safe, while ensuring that your business stays within OSHA compliance guidelines and other important safety regulations. By designing and implementing a safety program, you can manage and reduce risk while controlling workers' compensation premiums and other costs. Safety and risk management outsourcing may include:

  • Auditing your business for safety risks.
  • Ensuring you have the right insurance policies in place.
  • Developing OSHA training and manuals.
  • Complying with workplace safety posting requirements.

Compliance with applicable laws and regulations is a serious matter. Missteps can cost your business significantly in terms of fines and levies. Finding the right partner can help identify all areas of concern within your business and take the steps needed to stay on track.

When Should You Consider Outsourcing HR?

While leveraging outsourced HR services at any point can be beneficial, how do you know when it's time to get HR support for your small business? Here are some tell-tale signs:

  • Your HR team's entire focus is administrative: When HR staff spends most of their time on data input or forms processing, this may be a signal it's time to look at outsourcing or upgrading to more robust HR systems. Limiting your team to predominantly administrative work takes members' focus off strategic contributions.
  • Employees lack access to self-service: HR managers no longer need to conduct every aspect of benefits enrollment, updating employee information, retirement plan information, or employee training. Leading HR technologies provide employees with self-service portals that help them complete many basic tasks themselves, such as updating their mailing address or adjusting retirement plan contribution amounts. A self-service portal can free up HR staff time, and many employees find the process more convenient since they can often access the portal anytime and anywhere.
  • Your HR system doesn't support mobility: With many businesses now employing remote workforces, mobility for key HR services such as employee time and attendance reporting and reporting for new hires is essential. Cloud-based solutions that support off-site access to the company are becoming the norm. If your employees can't complete essential functions from their smartphones or tablets, your HR technology may need an update.
  • HR is becoming a cost center: Ideally, your HR team should function as a key strategic asset, not a liability. It may be time to ask yourself how external expertise or better technology can help.
  • You struggle to keep up with statutory and regulatory requirements: Your HR team needs to understand current federal, state, and local laws and regulations that may affect your business. Companies lacking in-house support in this area may want to outsource.

How Much Do Outsourced HR and Payroll Services Cost?

There's a common misconception that outsourced HR services are synonymous with high costs. First, consider what the costs may look like: depending on the service you're interested in, you can expect to pay either a percentage cost or a fixed fee. You may also consider narrowing your choices to providers that can tailor its services and products to your organization's needs.

When considering cost, remember that HR matters are unavoidable parts of doing business: you must comply with applicable laws and regulations, you must pay employees in accordance with applicable laws and regulations, time and attendance tracking must be accurate, and so on. Whether you take on the work yourself, hire an employee, or use a third party to help, costs are inevitable.

A DIY approach can be time-consuming, quickly leading to other work falling by the wayside and leaving your business vulnerable. Bringing on someone in-house to handle administrative HR matters means absorbing the ongoing costs associated with additional headcount (salary, benefits, training and ramp-up time, etc.). And a new hire may also become overwhelmed with the volume of responsibilities that comes with the job.

An investment in HR and payroll services and technology, on the other hand, can mean having dedicated resources that can streamline business functions for your staff, and may allow you and your team to focus on more impactful areas of the business.

Find HR Support That Keeps Pace With Your Business

Running a business today means managing mounting labor and employment laws and regulations, demands from staff, and team members who are stretched thin. That's why HR outsourcing may be a great investment for your business this year. Help your business meet larger and more pressing long-term goals with access to scalable and cost-effective HR services and support.


[1] 2023 Priorities for Business Leaders, Paychex

This national survey was conducted with 450 business and HR leaders who employed from five to 500 employees from a broad cross-section of industries. From August 23 to September 1, 2022, the online interviews were conducted by Bredin, an independent market research company located in Boston, MA.

[2] For companies with 250 to 500 employees

Professional employer organization (PEO) services provided by Paychex Business Solutions, LLC (Florida employee leasing license GL7), Oasis Outsourcing, LLC (Florida employee leasing license GL42), and their affiliates, which are licensed or registered to provide PEO services where required by law.

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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.