Unraveling The Real Costs of HR Outsourcing 2024

January 11, 2024

HR outsourcing is increasingly popular as companies seek cost savings and enhanced capabilities. With the right provider, HR outsourcing can boost efficiency. But companies must unravel the real costs of HR outsourcing first for optimizing HR outsourcing costs to maximize value.

For many businesses, the allure of HR outsourcing promises a cost-effective solution for managing their workforce. While the potential benefits are undeniable, a deeper understanding of the cost of HR outsourcing reveals a more nuanced picture. Beyond the initial sticker price, hidden costs and potential challenges can significantly impact the overall financial and operational implications.

Comprehensive factors influencing HR outsourcing costs

Several key factors can significantly impact the cost of HR outsourcing:

Scope of Services: The specific HR functions outsourced play a major role in determining the cost. Outsourcing core functions like payroll and benefits will be more expensive than outsourcing non-core functions like training and development.
Company Size and HR Outsourcing Costs: Larger companies with complex HR needs will likely incur higher outsourcing costs compared to smaller companies. This is because larger companies require a wider range of HR services and often demand a higher level of expertise from the outsourcing partner.
Geographical Location of HR Outsourcing Partners: Outsourcing to countries with lower labor costs can lead to significant savings. However, it’s crucial to consider factors like time zone differences, cultural nuances, and potential language barriers, which can impact efficiency and communication.

4. Level of Expertise of HR Outsourcing Firms: Highly specialized firms with extensive experience in specific industries are likely to charge more than generalist firms. However, their expertise can lead to improved results and cost savings in the long run.

Unraveling the real costs of HR outsourcing

To unravel the true cost of HR outsourcing, it’s crucial to examine the specific HR services being outsourced and the associated price range. Here’s a breakdown:

1. Recruitment

Hiring new employees is undoubtedly a critical yet costly business process. While the upfront expenses may seem daunting, investing in human capital fuels business growth and performance. According to the Society for Human Resource Management, the average cost per hire was nearly $4,700. Considering the length and intricacies of the recruitment process, these substantial costs quickly add up, especially for companies doing high volumes of hiring. Therefore, the financial burden of recruitment should be a key consideration when evaluating HR outsourcing.

2. Training and development

According to the Association for Talent Development, on average, companies spend $1,280 per employee per year on training and development. This falls within the reported industry average and can further fluctuate based on the training program’s complexity and the number of employees involved.

3. Compliance management

Ensuring compliance with various regulations can be challenging and costly. According to the Competitive Enterprise Institute, large firms are now reporting the average cost to maintain compliance can total up to $10,000 per employee. It’s crucial to note that this serves as a general benchmark. Depending on specific regulations and industry complexities, this cost can vary significantly.

4. Payroll regulation

Managing payroll accurately and efficiently is crucial for employee satisfaction and compliance. A report by the National Small Business Association (NSBA) revealed that the average cost of compliance management stands at $12,000 per year. This cost can be influenced by the payroll system’s complexity and the number of employees.

5. Compensation and benefits

Providing competitive compensation and benefits packages is essential for attracting and retaining talent. According to the Bureau of Labor Statistics, the cost per employee for compensation and benefits typically is $10.88 per hour — around 30% of the total cost of hiring an employee. In simple terms, this means that an employee who is earning $100,000 per year could cost their company between $125,000 and $140,000 per year once benefits are included in the calculation. This varies based on the specific benefits offered and the number of employees enrolled.

6. Software as a Service (SaaS)

The rise of HR technology has led to increased reliance on SaaS solutions. According to Vertice, companies spend around $3,112 per employee each year on SaaS.

HR outsourcing vs. in-house HR cost

While HR outsourcing can be a valuable strategy for optimizing efficiency and reducing costs, it’s crucial to carefully assess the real cost of HR consulting services involved before making a decision. These salary costs alone are a lot more than what it would cost many businesses to outsource HR services. Businesses that outsource their HR functions usually save more than 50% off the cost of hiring a full-time in-house HR staff.

Expense Category	In-House HR Cost	HR Outsourcing Cost
Salaries and Wages	Higher costs for having full-time HR staff on payroll	No need to pay full-time salaries and benefits for HR staff
Overhead Expenses	Office space, equipment, HRIS system for in-house team	Shared overhead costs spread across multiple clients
Recruitment and Training Costs	Internal staff time and expenses	Outsourcing fees on per hire or project basis
Compliance and Legal Fees	Internal staff to manage changing regulations	Built into outsourcing contracts and spread across clients
Technology and Software Costs	In-house HRIS, ATS, and other systems	Included or discounted through outsourcing partnerships

Optimizing and managing HR outsourcing costs

While outsourcing can offer significant benefits, it’s vital to take steps to optimize and manage costs effectively:

Assess if outsourcing is needed: Before outsourcing any HR function, it’s crucial to conduct a thorough internal analysis to determine if it’s necessary and aligns with the company’s strategic goals.
Choose the right type of outsourcing: Different types of outsourcing arrangements exist, each with its own advantages and disadvantages. Companies can choose from full outsourcing, co-sourcing, or project-based outsourcing depending on their specific needs and budget.
Outsource only necessary services: It’s important to identify and prioritize the specific HR functions that are most suitable for outsourcing. Companies should avoid outsourcing non-core functions that can be efficiently handled internally.
Providers spread costs across clients, reducing costs: One of the significant benefits of outsourcing is that service providers spread their costs across a large client base. This can often lead to lower costs for individual companies compared to managing these functions internally.

In summary, understanding the full cost of HR outsourcing goes beyond simply comparing initial price quotes. It requires careful consideration of both direct and indirect expenses, potential challenges, and potential benefits. By taking a comprehensive and strategic approach to outsourcing, companies can make informed decisions that align with their unique needs and maximize the value of HR outsourcing they receive from this strategic business practice.