The Case for Outsourcing

Economic Case

Cost Base – The cost base for a small-medium business (SMB) for HR varies by demand, talent, and task. Most SMBs are forced to accept that SMBs spend more per employee for HR programs and functions than larger ones. Departments serving less than 250 employees suffer a median cost differential that is 98% more than its larger competitors. Even the most efficient SMBs can expect higher costs.

Economies of scale – There are usually major economies of scale available to companies who are on large account purchasers of worker’s compensation (WC) and health programs. These types of programs are not typically offered to SMBs and SMBs pay dearly for this.

Variability of Demand – SMB HR varies by demand, talent, and task. Companies are confined to do 25 items they occasionally must do and ignore an additional 55 items they should do.

Length of Demand – Many of the demands of SMB HR are of short duration but high importance. These make it difficult to afford experts or specialists to solve these issues.

Quality Case

Supplier Focus – Business should do what it is good at. SMBs have a line of business—generally it is not HR. External suppliers focus on HR and live and die by their performance of that service are likely to provide a higher quality service than in-house departments.

Geographical Coverage – External sourcing gives better geographical coverage than internal resources, thereby improving the service quality by providing an integrated service. Access to Skills – Required skills may be in short supply and difficult to recruit or sustain.

Behavior Case

Management Focus – Outsourcing a non-key activity that has been absorbing management time can release time for focusing on more important aspects of the organization.

Professionalism of Function – External sourcing sometimes changes the attitude of the outsourced arena by refusing its activities and increasing its professionalism.

Business Risk Case

Change Decision – HR outsourcing is an easy decision to rescind, as the subject contract allows you to change.

Confidentiality – Confidentiality is an important consideration, so many important steps are taken to increase security. For example, files are off site under lock and key; cameras and alarms, passwords, and need to know permissions are used; and required communications are encrypted.

Core Competency – Unless you are an HR firm, outsourcing HR does not impact your competency. In fact, accessing professionals by sourcing may actually increase results in your core competency(s).

Ability to outsource – There is no need for a special skill set, as the items outsourced are already being self-directed by you. It is assumed clients will have the ability to understand a contact, a desire to see some project management in weak areas, a demand for people skills, a desire for an easy-to-follow set of specifications made by you, and a desire to have the economics of the process simple as pie.