Entrepreneurial business owners are often frustrated with the time and energy they spend on administrative issues relating to employment. Savvy business owners also see the risk they are exposing themselves to by not proactively managing their employee issues. However, these same business owners want a cost-effective solution to these issues. That’s where outsourcing their HR functions comes in.
According to Daren Fristoe, president of The Fristoe Group, a human resources firm in Lee’s Summit, Mo., there are three key levels of outsourced HR offerings.
“The first level is a complete redirection of the HR department, where the client outsources the entire HR function to a third-party provider, including staffing, salary and benefits administration, performance management, payroll processing, compliance and record keeping, training, unemployment and workers compensation claim processing,” Fristoe says. “In this scenario, the HR provider becomes part of the company’s organization chart, and our role is seamless to the balance of the employees as a retained resource, typically with an onsite and e-mail presence.”
The second level is a more blended model that allows for outsourcing of selected tasks and responsibilities, working in conjunction with existing client staff.
“Under this model, the client may have someone on staff already handling basic HR functions, and the third-party HR provider becomes a resource that fills any gaps, audits and modifies existing processes as needed, and provides overall administrative support,” Fristoe says. “Again, the HR provider is seen as part of the team onsite and online.”
Finally, the third level is truly one with à la carte services. In this version, the client has specific needs and the HR provider creates and implements targeted solutions. Typical offerings in this area include handling employee hiring and terminations, training, performance management and counseling, employee/management development, and the creation of an HR documentation system with integrated employee handbooks, job descriptions, performance appraisals and other requisite documents.
“While still an ongoing relationship, the HR provider has less of an onsite presence in this role,” Fristoe says. “The primary advantage of using an outsourced HR provider is the assurance of professionally trained HR staff handling the client’s employee matters, allowing the business owner and operator to focus on doing what they do best—making a sustainable profit for their business.”
Yearly fees are determined by several factors, including number of employees, salary rate, industry, and additional services the human resources firm may be providing.
According to Fristoe, the cost of such services is contingent upon a number of client-specific factors, including the required level of services desired, the number of employees, the proximity of locations (if the client is a multi-unit organization), the marketplace costs, and the need and frequency of onsite versus virtual HR staff presence.
“As an example, if an owner is requiring a full-time onsite HR provider handling all of the standard HR functions, the owner could expect to pay somewhere in the broad range of $3,000 to $6,000 per month,” Fristoe says. “Any derivation of the client-specific needs will obviously impact the cost.”
Outsourcing and Growth
Andrew Hetzel, consultant at Cafemakers, a specialty coffee consultancy, says that single or small multi-unit operators (one to three locations) tend to provide their own services with the assistance of an accountant, but move to a partially or fully outsourced program as the size and complexity of their business grows, specifically to handling payroll, tax and health insurance coverage.
“General HR training for these companies is typically provided by on-staff personnel, such as a shop manager, using commercially available templates,” Hetzel says.
With outsourcing HR, the business owner and his or her designated managers maintain the same control over their employees as they would in a traditional business by proxy though the company. All normal functions—hiring and firing, setting wages, submitting hours, designating company health benefit contributions—are controlled by the business owner by proxy through the employee leasing company in regular online or faxed instructions.
“At first, business owners, particularly those who have operated a traditional employee structure for years, feel uncomfortable with the idea that they are relinquishing control to some other company,” Hetzel says. “Employees also may be concerned [about] the idea that they now need to conform to the standards of a larger employer, with requirements often including strict documentation procedures and drug testing to qualify for health programs. In the long run, however, I find that both business owners and employees are happy with the arrangement: the owner saving a substantial amount of time and money for HR administration, and employees receiving enhanced healthcare coverage, direct deposit and participation in retirement savings plans.”
One unique avenue of outsourcing human resources is employee leasing, which is a process where clients can contract with an outside firm, often called a PEO (professional employer organization) or employee leasing company, to provide staff and employment administration for a fee.
As Fristoe explains, the fees can cover not only the employee’s wages, but also the collection and processing of taxes, garnishments, workmen’s compensation, and employee benefits costs.
“Employees are considered ‘permanent’ or long-term vs. temporary in their position,” Fristoe says. “While reporting to the client for supervisory purposes, their respective paychecks are issued by the leasing entity. The leasing company can also provide the assurance that legal employment compliance is adhered to and reviewed on a regular basis. This form of handling employees can be appropriate for any size or type of business and can save time, but also comes with an additional cost to be weighed.”
According to Dave Rettig, director of corporate development at Odyssey OneSource, a human resources outsourcing firm, the PEO arrangement allows the client company to focus on what it does best and dedicate more energy to propelling its revenue generating activities forward rather than focusing on non-core tasks.
“Companies with a few employees or hundreds of employees can benefit from a co-employment relationship,” Rettig says. “A PEO can be used to supplement current HR staff or to act as the off-site HR department altogether. PEOs open doors to small business owners in particular, providing access to resources that tend to be out of their scope and/or budget if they tried to piecemeal it together on their own.”
Rettig points out that PEOs have been labeled as employee leasing firms, but that is a bit of a misnomer. “We are still sometimes referred to as staff leasing companies in state statutes, but we’re actually considered ‘co-employers’ or ‘joint employers.’ Staff leasing companies are typically more along the lines of temp agencies, where the agency is providing or assigning employees to a worksite for a project or as a new hire for a specified period of time,” Rettig says. “PEOs don’t assign employees to their clients, so the easiest way to think of it is PEOs are service providers, not people providers.”
Choosing Your Partner
When choosing a human resources partner, experts agree that specialty coffee retailers should first identify what their needs are and what areas of expertise are most important to them. Then they should review different companies to see if they match those needs.
Areas you may want to consider are:
• What location are services such as payroll and benefits being serviced from?
• What type of risk management services are offered?
• How deep is the human resource department and its expertise?
• What is the customer service standard for the company?
• Is the pricing clear with no hidden charges?
• Does the management philosophy of the human resource company seem to be a good fit for their firm?
“The biggest mistake smaller companies make is not knowing what options they have and not streamlining by finding a partner that can meet more than just one need—why go to different providers for training, payroll and benefit services if you can get all three under one roof with one invoice?” Rettig says. “There are several providers for HR services, so it’s best to do your homework and find one that best fits your group and your needs.”
And remember, the business owner maintains the management and oversight of the outsourced HR department, and should expect to continue to act as if this resource is his or own.
“The relationship, if it is intended to work effectively, should be one in which the HR provider reports directly to the person in charge of the organization and is a member of the management team and a true business partner,” Fristoe says. “In this way, all lines of communication are open, business plans as they relate to HR activities are discussed with HR, and the execution by HR of such plans is more likely to be successful.”
It’s important to keep in mind that this is a partnership in managing employee-related issues, and the company should be comfortable that they can work on an ongoing basis with the human resources firm and its staff. It’s also a good idea to talk with current clients of the firm for their firsthand experience.
“I have witnessed in numerous location the unwillingness of businesses owners to relinquish control of the payroll administration function,” Hetzel says. “I’ve seen owners sitting behind computers for hours on end each week running their own payroll and tax calculations, printing and signing checks one by one, while their time could be better spent elsewhere. The lost opportunity and cost of time spent administering payroll and other human resource tasks alone is often enough to justify the cost of outsourcing to professionals who specialize in those functions.”
Avoiding common HR outsourcing mistakes
Common mistakes occur in outsourcing of any services, not just HR, when the owner or operator assumes that the services are being provided correctly and fails to regularly monitor activities or results. Conversely, something can change in the workplace operation and the vendor is not advised. Daren Fristoe, president of the Fristoe Group, says this is one reason why such third-party providers should maintain direct accountability and communication with owners and management. Examples of common mistakes involving HR outsourcing would be the following:
Client determines that they need to add to the staff. HR provider identifies candidates, conducts interviews, makes the selection and hires the candidate, using predetermined and previously communicated parameters from previous hires. The mistake occurs when the offer is communicated at a salary level that is too high, the hire date is too soon, and the position is misclassified as “hourly” vs. “salaried.” Internally, those items were changed without communicating with the vendor, nor did the vendor ask before extending the offer. Offer was rescinded. The mistake is in miscommunication.
Outsourced provider doesn’t have enough knowledge of the client’s industry, business cycles, competition, acronyms, etc. This has been a challenge in the past because the client needs the provider to be empowered to work without micromanagement immediately, but within the confines of the business’s needs. The vendor may have a natural learning curve, but the client should not be paying for the vendor to learn the business “on my time.” Whenever possible, clients should vet vendors to determine if the vendor has some basic knowledge of the specific industry, to shorten or eliminate the learning curve. If the client is a coffee shop owner, the vendor should be familiar with the retail and customer service industries, compensation scales and benefit costs in that marketplace, any industry cycles, daily and weekly schedule needs for staffing, and any other areas of friction that exist or could develop from the HR standpoint.
Owner hires outsourced HR provider to “handle everything related to people.” HR provider expands beyond typical HR areas into operations, administration and finance. The HR provider has now become critically involved in business departments in such a manner that creates confusion with staff, distrust of fellow management, and is a threat to the business itself. “Who’s in charge?” is a common theme in this situation. The mistake is in the clear management of the vendor and guidelines for deliverables.