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Professional discussing costs of HR

Soft vs. Hard Costs Of Outsourcing HR

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Many decisions and conversations go into the process of bringing on an outsourcing HR partner. One of the vital conversation points is the costs to get that extra support. Questions like, will it cost more? How much will I save? How can I use those savings in other areas? This is a classic “will they or won’t they situation” we’ve seen countless times.

Standard functions for outsourcing include but are not limited to:

  • Talent acquisition strategy
  • Training and development
  • Compensation strategies
  • Compliance assessments
  • Technology solutions

Now the question is, how much would you need to pay? While the actual prices vary, there are widely accepted payment arrangements:

Fixed fee basis — where you make payments based on every employee managed. This can be a good arrangement if your full-time employee (FTE) number is not going to expanding

Percentage basis — where you pay a percentage typically within a range of every employee’s yearly salary.
A flat fee (pay-as-you-go) – This can offer you and your team a lot of flexibility based on the immediate needs you have

Hourly — If you only need a few hours of support per month, your HR outsourcing specialist can put work on various projects or tasks
By pay period, Monthly or Annually

Soft And Hard Costs Broken Down

A hard cost is paid directly to an outsourcing firm for services provided based on specific tasks. Hard costs typically include monthly vendor fees determined by how many employees you have and how many services your organization needs. For instance, your organization could be charged for a combination of employee screenings, manual auditing, and regulatory compliance efforts one particular month. In contrast, the next month, you might be charged for executive management training solely as this is the only service rendered.

Soft costs, on the other hand, are generally not attributed to the service provider. They are contributed to carrying out the outsourced HR functions leading to the proposed outcome. This can include training to learn specific processes, managing technology, software updates, licenses, research, administrative time to rectify lost productivity, and many others. These costs tend to involve what the service provider has to do in-house.

Factors That Affect Hard And Soft HR Costs

A combination of internal and external factors affects the costs of HR outsourcing. However, significant consideration will be the size. The greater your staff strength, the higher the volume of HR functions.

It is also essential to understand the HR functions you would need support by gauging your company’s situation. For example, if you have a fixed fee payroll structure being managed well by internal HR support, the change to outsourcing may not be significant to have any impact. The complexity of your HR concern is another consideration to note. It would not take too much input to develop job descriptions while providing strategic guidance on your workforce plan; however, on the other hand, analyzing a harassment lawsuit would require more intensity and expertise.

It would be a beneficial practice to compare costs and calculate the expenses of maintaining a separate infrastructure for your in-house HR employees. At the end of the day, it’s all about being able to keep your costs low. If outsourcing brings more benefits, you shouldn’t invest too much in having in-house infrastructure.

Managing Hard And Soft Costs Effectively

Soft and hard costs of outsourcing HR really depend on the level of support needed. Fortunately, outsourcing arrangements are flexible so that finance can control the service costs. You can effectively manage costs by noting:

  • Month-to-month arrangement. Services can be added or removed based on your business needs and what your budget allows.
  • Begin with a more extensive project like a general compliance assessment, then reduce the level of support you need based on the outcome. This will prevent paying for services that are not required.
  • You can consider outsourcing temporarily for some high-level support to strengthen your team’s competencies for that period if some in-house employees handle HR activities.

The Unobvious Soft Costs

As you think about outsourcing your HR function, here are as equally important but not so obvious costs to consider when making this decision:

The gift of time — One question we rarely, if ever, ask ourselves is “what is our time worth?” If we really had to put a cost to it, what number would it be? Your time is valuable with operating a business because your time needs to be focused on high output and driving results. With outsourcing now in place, this leaves you being able to have up to 15% more time back in your day to manage more strategically important projects and business objectives. With time like this, you can really focus on the decisions that drive the company forward. Boom! Mic drop.

Peace of mind — Carrying the weight of a successful business on your shoulders is no easy feat. However, when you have the right team whose expertise aligns with the more complex areas’ needs, there is definitely a sense of relief that comes flooding in as you can rest assured you now have a “fixer” in your corner. With outsourcing HR, you can be at ease as any conflicts or day-to-day challenges will be managed professionally, with empathy and care for your number one asset, your people.

Clarity — Mental clarity and focus are definitely luxuries these days. With business operations moving at the speed of light, it feels that you make one decision to the next without taking a step back to look at the fuller picture. This can especially feel overwhelming when dealing with the day-to-day HR operations, employee relations, payroll, benefits, and compliance issues that always come at the worst times. Imagine what you can accomplish with the additional headspace to strategize and create a high-performing employee culture.

As with any critical decision, understanding the costs, advantages, and considerations the action can have is very vital. Identifying the following areas that could also benefit from this change will give you a future-looking vantage point that will be essential to the success of the decision for your business today and for tomorrow.