The Business Results of Outsourcing HR, Payroll, and Benefits Administration

June 7, 2017 Andrew Larsen

Small to medium size businesses don’t have the resources to staff HR, payroll and benefits departments with the experts found at Fortune 500 companies. But what if they could? Outsourcing HR, payroll, and benefits administration can make that team of experts a reality. The right outsourcing partner can serve as an extension of your own team by managing administrative processes, maintaining employee files, reconciling benefits statements, and ensuring compliance at a fraction of the cost of an in-house department.

All in all, outsourcing HR, payroll, and benefits administration can deliver the business results that every company needs to scale.

A single source solution is key
While some companies use multiple vendors as their outsourcing partners, a study by Pricewaterhouse Cooper (PwC) reveals choosing a single source solution will save time and money, while still providing the needed support a company needs as they scale. According to PwC, a single source solution’s cost of ownership is 32 percent lower than a multi-platform solution. In fact, a single source solution often proves to be more cost effective than staffing an in-house HR, payroll and benefits department. 

Contain costs with outsourcing
A study conducted by IBM on the fact-based business impact of outsourcing, found that, “compared to industry sector peers, outsourcing clients outperformed on every financial metric.” 

In addition, PwC, reports that companies who outsource to a single source solution spend an average of 18 percent less than those who keep HR and payroll in-house. The study also indicates the total cost of ownership for HR and payroll is on the rise due to hidden expenses that aren’t usually considered, such as system maintenance and upgrades, indirect labor, and direct non-labor.

HR costs on the rise
Despite advances in labor-saving technology, it takes more people to manage a workforce than it did just twenty years ago. In the past, an organization needed only one full-time HR person for every 100 employees. However, in 2016 Bloomberg reported that number has increased to 1.4 for every 100. Increasing the workload of one HR employee may not seem like a big deal, but not having adequate HR staff to manage your workforce can turn into a big expense later.

Increased workload quickly leads to employee burnout, which in turn results in clerical errors. This creates an influx of administrative work and employee concerns. It’s estimated that a well-staffed HR department spends 56% of their time on administrative tasks when things are going well. When they’re not, an understaffed HR department won’t have the time to offer strategic solutions to boost employee engagement or attract and retain top talent. If HR is struggling to keep their head above water with just the administrative demands, there won’t be time to keep up with new labor laws and adjust or monitor processes. This could result in government fines that blindside finance.

But hiring two HR employees is expensive. According to Payscale the average HR generalist annual salary is $51,368. With benefits, one HR generalist can easily cost $60,000 per year. Two HR generalists would double that expense.

Many outsourcing partners are designed to scale as an organization grows. So, when an organization grows from 25 to 500 employees, the need to hire additional staff is unnecessary. One HR employee may be needed to help with strategic matters, but all administrative burdens are removed and in-house HR headcount can remain constant through growth.

HR becomes more efficient with outsourcing
Outsourcing provides HR with the ability to become strategic. As administrative burdens are lifted, HR can devote its full attention to developing innovative ideas to put an organization’s people strategy into a higher gear. HR will have the capability of keeping employees satisfied in the workplace, boosting employee engagement, and attracting and retaining top talent.

In the absence of outsourcing help, in-house HR professionals spend 56 percent of their time on non-strategic matters such as auditing, maintaining records, and answering employee questions. Based on the average HR generalist’s salary, a company could easily spend $28,000 annually on HR matters that don’t drive company growth. However, such non-strategic activities cannot be ignored. Companies who outsource these administrative burdens leave in-house HR departments with 90 to 100 percent of their time for strategic matters.

When HR departments are more strategic retention rates can increase and employees will become more productive. This can lead to an increase in revenue from marketing and sales team and, a higher customer retention. When HR has the capability of being strategic, a business can receive a higher return-on-investment (ROI) from their workforce.

Payroll powerhouse
Payroll is an area of business that has many potential pitfalls. With the number of labor laws that govern employee pay and deductions like taxes and garnishments, maintaining accuracy is challenging. Processing payroll isn’t a few math equations tied with money, rather it is a process that requires expertise and the right technology.

In-house payroll requires the right payroll specialist, training, and purchasing technology so they can do their job effectively. This can come out to around $50,000 annually. That amount doesn’t include payroll errors. According to CFO.com, the number of days it takes to resolve a payroll error is greater for companies with fewer than 300 employees because a smaller company has fewer resources. A company with 800 or more employees has teams of payroll specialists that operate in specific areas like tax deductions or medical premiums. A smaller company may have one or two individuals running the whole payroll process.

For small to mid-size businesses, outsourcing can provide the team of payroll, benefits, HR, and tax specialists needed to run timely and accurate payrolls. This can help reduce the time it takes to solve errors, thus reducing costs while keeping employees satisfied.

Hidden costs in benefits
Benefits can be a wild card when it comes to costs. Sometimes a business spends vast amounts of money on a benefit that goes completely unused by employees. Other businesses might operate in a high-risk industry, resulting in employees’ high use of medical benefits, which drives up premiums. Other times, a business won’t even notice small errors and either underpay or overpay carrier bills by one to five percent.

Few small to mid-size businesses have a dedicated benefits specialist, but most of the time benefit administration responsibilities fall to other departments like HR and finance. However, those departments have their normal responsibilities to manage and the chance of small errors and anomalies slipping by goes up.  Only when the benefits carrier sends a potentially budget-crushing corrected bill reflecting months of underpayments, is action taken.

A reliable outsourcing company will have the experts and technology to catch mistakes in benefits administration and fix them before they become a problem. Partner companies can be confident that benefits payments and deductions are accurate every month. 

Choosing the right outsourcing partner will result in the ability to scale more effectively while gaining control, containing costs and ensuring compliance. In-house HR departments will have time to create strategic plans for employee engagement and retention that will, in turn, provide a dedicated, able workforce to help achieve business goals.

 

About the Author

Andrew Larsen

Andrew is the Marketing Communications Specialist for Zuman, the one solution for HR, payroll, and benefits administration that supports growing small to midsize businesses.

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