HRO Trends and their Effect in a Tight Economy

While there are indications that the tight economy may be starting to weaken, small businesses may feel the squeeze for some time to come. In an effort to offset rising operational costs and flat revenues, many small business are turning to Human Resources Outsourcing firms as a way reduce overhead, cut costs, and improve productivity. The HR Outsourcing trend continues to gain momentum even in a tight economy as other industries contract.

An Economic Slowdown

Despite some positive trends in the fourth quarter of 2007, such as an increase in consumer spending (up 2.0%), 280,000 new jobs, and an increase in exports (up 3.9%), many other trends impacting small business continued to remain flat, or on the decline:

* The Gross Domestic Product (GDP) only rose 0.6%

* A steady decline in investment in the residential sector

* A below 50 rating in the Supply Managements’ manufacturing composite index (the lowest since April 2003), indicating the manufacturing industry was contracting

* Unemployment rose to 5.0%, the highest level since April 2005

* The National Federation of Independent Business (NFIB) found the Small Business Optimism Index down 3%

Source: Small Business Administration, Office of Advocacy, March 2008

While large corporations feel the impact of the slow economy, these factors are magnified for the small business owner. Furthermore, according to the Office of Advocacy, the annual cost per employee for small businesses was 45 percent higher than the cost for larger businesses, with 500 or more employees. As the affects of the tight economy continue to impact small business, more employers are considering Human Resources Outsourcing for their business operations.

Identifying the Functions to Outsource

The first step in considering an HR Outsourcing relationship is to identify those tasks that take key staff away from their prime purpose within the company. In a tight economy, the most successful companies will be those that focus on the core business rather than spend money and use staff resources to managing unproductive tasks, such as benefits and retirement plans administration, managing HR compliance regulations, or processing payroll and taxes.

Although the same solution will not fit the needs of every company, HR outsourcing can certainly help to maintain profitability and reduce turnover by creating a more professional business environment. Companies can make significant savings by turning to HRO for many of these administrative functions. Hence the need to identify the tasks which would be better outsourced. Payroll administration, recruitment and benefits administration are prime examples of specific functions that can be outsourced. Other firms may find it more productive to outsource their entire human resources function, thereby utilizing the skills of their existing HR personnel and other staff in areas more directly connected to the core business.

Key Outsourcing Drivers

According to Hewitt Associations, a world-wide provider of HR consulting services and research data, the most common reason for engaging an HR Outsourcing firm is to reduce overhead. Other reasons to outsource include:

* Access to outside expertise

* Improving service quality

* Ability to focus on core expertise

Economies of scale are the primary method through which an HRO firm can reduce a business’ operational costs. By pooling hundreds, and even thousands of businesses, HRO firms aggregate health benefit plans, retirement plans, workers’ compensation insurance, and legal expertise. Additionally, they can manage routine HR tasks more efficiently as the infrastructure is already in place. As small businesses join the HRO firm’s programs, they simple access these existing systems at reduced rates and minimal time investment.

Studies indicate that once HR operations are outsourced, many companies show a strong return on investment. IDC, a global provider of market intelligence, conducted a survey of American executives in 2006 and reported that almost 85 percent of the respondents saved as much as they spent on outsourcing. Over a quarter reported a savings of twice as much. And the savings, according to nearly 95 percent of the respondents, went toward operational performance and innovation.

Beyond Savings

Beyond cost-savings, a professional HRO firm can also contribute to employee satisfaction, which allows companies in tight economic situations to retain their staff and hence indirectly save through the reduced need for recruitment and basic training. Employees in a human resources outsourcing relationship gain access to a wide range of benefits and perks typically reserved for larger corporations. These include a variety of health insurance options including HMO, PPO and HSAs (Health Savings Accounts), voluntary benefit plans, retirement plans, pre-tax Cafeteria plans, Credit Unions, and other employee discounts and perks.

As stated, there is a need to compare HRO companies available, and determine the model that best suits a company’s needs. Consider whether a specific processes within your business, or a fully integrated solution is required. There are many options available that should be considered before deciding on an HRO strategy.

HRO trends in a tight economy are therefore based on two principal strategies:

1. To save direct expenditure on personnel functions that do no directly contribute to the company wealth, such as payroll, reception and recruitment, and,

2. To focus directly employed staff on the core business, so that cash is generated through improved productivity, quality and product development.

Both of these can contribute to keeping profits steady. Many firms will come out at the end of the process a lot stronger than when they entered, in spite of the tight economy, by investing in HRO when and where it is really needed.

HRO trends are towards achieving this by businesses spending more time in evaluation of their human resources needs, and outsourcing where it is economically sound to do so. The direct HRO costs should be considered against the money earned through improved productivity and the increased market share that comes with a well run business in the tight economy.


Ari is the Director of Marketing at CPEhr, a leading Human Resources Outsourcing and Professional Employer Organization. CPEhr specializes in labor law in California, and provides a comprehensive HR service package for employers. This includes: HR compliance, tra...

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