When to outsource HR duties and when to hire

When to outsource HR duties and when to hire


By Dan Emerson – finance-commerce.com

For small businesses, one of the major challenges of rapid growth is properly managing and serving the needs of a growing workforce.

Depending on their stage of growth and other factors, small companies have several options for human resources management expertise, ranging from an “a la carte” approach and outsourcing key HR functions to recruiting and hiring one or more experienced HR pros.

How soon a company will need to hire an HR person partially depends on the sophistication of the organization, its industry category and workforce requirements, said Jan Kruchoski, principal-in-charge of Minneapolis-based CliftonLarsonAllen Search LLC.

For example, a highly specialized professional service firm may want to make that addition earlier than a small manufacturing business with shift workers, who may not need a full-time HR specialist, she said.

The types of HR skills most needed by small, growing companies also varies, depending on the nature of the organization, according to Arlene Vernon, a Minneapolis-based HR consultant. A company that often hires entry-level employees and has high turnover is more likely to need an in-house HR specialist to handle matters such as job descriptions, employee orientation, managing benefits and maintaining personnel files, Vernon said.

A company with less frequent turnover would be more likely to meet its HR management needs through outsourcing.

When a startup begins adding employees, one of the first tasks is developing an employee handbook to spell out HR policies and procedures; that task is often outsourced to a human resources consultancy, Vernon said. Developing some employee-related documents such as noncompete or confidentiality agreements requires the assistance of an attorney specializing in employment law.

Even early-stage startups with only a handful of employees need some type of written document spelling out employee rights and responsibilities, said Alissa Raddatz, an employment law attorney at Faegre Baker Daniels in Minneapolis. A firm with only a handful of employees can sometimes use individual employment agreements — basic letters spelling out entitlements and expectations, she said.

Startup entrepreneurs may think of a small employee group as family and “feel they won’t have any issues because ‘We all know each other,’” Raddatz said. “But employees are sophisticated; they know their rights, and it might feel like a family until they feel they have been wronged.”

One of the thorniest areas for companies is termination. Firing an employee without the written policies and documentation to support the decision can render an employer liable for paying unemployment benefits and potentially trigger legal liability. So it’s essential to have an HR specialist who understands the various nuances involved in hiring, managing employees and firing, Vernon said, whether on-staff or outsourced.

Having an HR consultant on a retainer arrangement can be a cost-effective way to obtain necessary services and expertise, she said.

The most commonly outsourced HR function for small businesses is payroll administration, according to Ken Viggers, HR management services director in RSM McGladrey’s Cedar Rapids, Iowa, office. That typically includes tasks such as bookkeeping, making payroll tax deposits and getting necessary forms to employees.

The two other HR functions most often outsourced are managing benefits — often through a third-party claims administrator — and employee recruitment, Viggers said.

In considering whether to outsource HR functions, small businesses need to determine if a vendor “can provide a higher level of expertise than you have in-house,” Viggers said. The second criterion: Is that expertise available at a reasonable price, with good service? It usually can be cost-effective, typically with a one-year service agreement, he said.

When companies reach the 50-employee level, they often outsource duties to a contract HR manager. Usually, a workforce of 100 employees or more requires a full-time, in-house HR manager, Viggers said, citing a standard industry benchmark of one HR professional for every 100 employees. Those jobs are usually filled by HR generalists.

Companies with several hundred employees usually have a generalist plus one or more specialists in specific areas.

Wayzata-based Rba Consulting Inc. had about 40 employees when Mike Fitzgibbons joined as HR manager about five years ago. Since then, the business has grown to about 275 employees, requiring a time-efficient approach to HR management.

Fitzgibbons said Rba makes frequent use of online HR tools, such as a self-service Web portal where employees can access necessary forms, sign up for benefits, learn about employee recognition programs and find answers to frequently asked questions, Fitzgibbons said.

Investing in HR management systems at the right point in a company’s growth can offer a significant return in the long run, he said.

He also recommends investing in “employee engagement,” such as an annual employee survey and using employee-led teams to discuss issues identified in surveys and make recommendations to senior management on ways to improve the company.

“When a company is smaller, it’s easier to keep a pulse and perspectives on changing aspects of the working environment,” he says. “But as you grow it becomes harder to see everyone on a daily basis.”

When hiring a placement firm to recruit an HR manager, Viggers says it can work by picking a firm “you have an established relationship with and one with good contacts in the HR community.”

If a business is looking for an HR consultant, Vernon recommends seeking one who has been in business for a while rather than settling for a self-styled consultant looking for freelance work to pay the bills until they find another staff position.

“Each organization is different; there’s no hard and fast rule,” Vernon said. “But if you find you are overwhelmed and handling HR matters that may be ‘stretching’ your expertise, you need to call an experienced consultant.”

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