OUTSOURCE HR OR NOT, THAT IS THE QUESTION…
To Outsource HR or Not is an option that should be considered. Most small-business owners know the frustration of spending more time than they want or should on non-revenue-generating activities. From payroll and human resource management to benefits and compensation, entrepreneurs can spend up to 40 percent of their precious day engaged in these necessary but time-sucking tasks.
The answer for many growing companies may be to outsource HR and hire one of the 700 professional employer organizations (PEOs) in the U.S. These companies become the legal employer of your staff and handle all the payroll, benefits and HR functions.
“Most small businesses are under 25 employees, and that means the owner is the most productive, is critical to the success of the business, and has to get out there and generate sales and products,” says Lydia Mannion-Evanson, president and CEO of LME Creative Human Resource Solutions. When small businesses outsource non-core activities, “they can focus on the business of their business,” says Mannion-Evanson.
But when does it make sense to outsource HR and hire a PEO? While PEOs aren’t for every company, those that do use them can often offer better benefit packages and thus hire better talent, says Mannion-Evanson. “We help them set up a Fortune 500 package of benefits,” she says.
In assessing whether or not you should hire a PEO, there are several questions to consider before you make a decision:
- How big is your company? Expert opinion varies on how large a company should be before it hires a PEO. A general rule of thumb is “when administrative processes begin slowing down the productivity of the firm,” says Mannion-Evanson. While it is different for every company, “this typically occurs when a business reaches 10 to 15 employees a week,” she says. Some PEOs won’t work with companies that have fewer than 10 employees. “Once a company gets very big, then it is easier to have an in-house HR department,” says Mannion-Evanson. The sweet spot for a PEO, she says, is between 16 and 80 people. The composition of your workforce is also important. Companies that only offer insurance to a few key executives wouldn’t benefit from PEOs.
- How much does a PEO cost? Like all professional services, the way a PEO prices services varies depending on the company. Industry experts estimate that the cost ranges from about 2 percent to 11 percent of wages. Another way to look at the expense is per employee. With that measure, it would run between $500 and $1,500 per employee per year. For very small companies with only two to five employees, some PEOs might price their services at a flat fee of $150 per month. On the flip side, it is important to try and estimate the total cost of your HR functions. Truth is, most businesses “have no idea what their true costs are, as they only think of wages but never add up all the other things,” says Mannion-Evanson.
- How much control do you want over your HR functions? A PEO acts as a business partner to the client company. If a business owner wants to control all aspects of a business and is not open to suggestions or following through on recommendations a PEO makes, then a PEO may not make sense. Businesses do lose a bit of flexibility in the coverage they can offer when they use a PEO. Related to the issue of control is the perception of your employees. “Employees are used to seeing [your business name] on the check,” and the PEO becomes the check signer, says Mannion-Evanson.
- What services do you need? “Picking the right PEO is of paramount importance.” Also bear in mind that some PEOs specialize in a Web-based high-tech approach, while others are focused on face-to-face support.
Remember — each PEO is different, and business owners would do well to read the fine print.