From the August 1999 issue of Entrepreneur

Kim Dushinski had had enough. A partner in MarketAbility Inc., a Golden, Colorado, book publicity firm, she had spent too many hours struggling to fill out personnel forms for the company's four employees. "Human resources isn't what I want to do or know how to do, and it's not how we bring in revenues," she says.

Then she heard about outsourced human resources, where specialty consulting firms take over the HR duties of a business. So the 33-year-old entrepreneur contracted with an outside firm to handle MarketAbility's human resources needs--from payroll to administering a health insurance program and a 401K plan. The monthly fee Dushinski pays to have this company handle all the HR chores is less than $50 per employee. Although she'd initially hesitated to spend that money, nowadays Dushinski says, "I feel relieved of a burden and our business is doing great!"


Robert McGarvey writes on business, psychology and management topics for several national publications. To reach him online with your questions or comments, e-mail rjm@mcgarvey.net

On the Outside

What entrepreneur hasn't spent long nights calculating payroll or pondering the wording to use in a memo reprimanding an employee for slipshod performance? Now the question that needs asking is this: Should you be doing any of these things in the first place? None of it is fun, none of it augments your bottom line, and these reasons alone are why more businesses are outsourcing at least some of their HR functions, according to Ed Lawler, director of the Center for Organizations Effective at the University of Southern California (USC).

Why else are companies outsourcing their HR tasks? Two big drivers are propelling this trend: Number one, it's often cheaper to farm out HR to outsiders who already have smoothly functioning systems set up. Do it yourself, and there's the cost of your time. Hand it over as a part-time function to a current employee and there's the cost involved in wages and, quite frequently, this part-timer will take much longer to do HR tasks than a fully qualified outsider would.

The other driver: "It's a risk-aversion tactic for smaller businesses," says John McGlone, a principal with Buck Consultants, a global human resources consulting firm based in New York City. Outside consultants who specialize in this field will probably make fewer mistakes than insiders would--and when they do make errors, they may well be liable for making good on any losses you incur (due to employee lawsuits or negative IRS rulings on benefits plans, for example). That may be a comfort to entrepreneurs, especially since HR has become increasingly complex.

Even large corporations have climbed aboard this bandwagon. "Close to 100 percent of major companies are now outsourcing at least some HR functions," says McGlone.

Adds Tim Bourgeois, vice president of research at Kennedy Information, a Fitzwilliam, New Hampshire, firm that specializes in tracking consulting industry trends, "Companies are focusing on core competencies, and outsourcing other tasks to others who can do them better."

Give It Up

Do you surrender control over your employees when you outsource? That's a large worry of many entrepreneurs, but Dushinski says it doesn't have to be. "I haven't lost any control," she says. "The outsourcing firm only does what we instruct it to do."

More broadly, when outsourcing HR, "You want to retain control over the what; the how becomes the job of the consultants you hire," says Greg Hammill, COO of Morristown, New Jersey-based Talent Alliance, an organization that specializes in developing career-management solutions for employees of corporate clients. "For instance, many companies are now outsourcing all of the hiring process. Consultants are running ads, screening applicants and doing background checks, but the hiring decision is left to the employer."

"In deciding which functions to outsource and which to keep in-house, the key question is: Is this strategic to us?" says Hammill. "When the answer is yes, companies should keep doing the job themselves."

For a more precise view, USC's Lawler surveyed more than one hundred companies to find out just what HR activities they were outsourcing. His findings show 87 percent outsourced benefits administration and 63 percent outsourced training, while 2 percent left other HR concerns including the number of hires and program implementation to outsiders.

You have to make your own decisions about what should be outsourced. At MarketAbility, for instance, its outside firm handles compensation and benefits administration and some employment issues (including drafting an employee manual, creating offer letters for new hires, and offering guidance on interview dos and don'ts). Either way, entrepreneurs should retain control over functions that are critical to your relationship with your employees, says Lawler.

Few businesses would outsource decisions regarding merit pay increases for individual employees, for example, but other decisions may be best left to the pros. "An outsourcing consulting firm can provide useful data on salary trends for particular positions," says Bourgeois. "They have readily available information, whereas it's frequently impossible for an individual business to [easily] compile it."

Be Choosy

Sold on the idea of outsourcing at least some of your human resources functions? Choose your provider carefully, advises McGlone, who indicates that, as demand for outsourcing HR has grown, a number of companies have gotten into the field but gotten out just as fast. That's left clients scurrying to fill basic HR functions. The shrewdest way to avoid that mess is to closely scrutinize candidates, paying close heed both to each company's current client list and how many years it's been in business.

Where should you look for HR consulting firms? Local business Yellow Pages may be a help, but the fastest hunting is done on the Internet. A starting place: Yahoo!'s list of hundreds of firms that handle HR chores. Find it by logging on to: http://dir.yahoo.com/Business_and_Economy/Companies/Corporate_Services/Human_Resources/Consulting/ Prefer a more tightly edited list? Scan the entries at LookSmart, another search engine (http://www.looksmart.com). Between these two search engines, you can find links to sites for specialists located just about anywhere in the nation.

Surprisingly, price will probably not be a huge factor in your choice of a vendor. "There's less and less variation in bids," says McGlone. He explains that as the industry has matured, it's grown smarter about how to price its services, and most established firms will make bids that differ only marginally. But not all firms will deliver the same quality work. "Be alert to differences in how much your fee is buying," says McGlone.

That's key, because about half the respondents to Lawler's survey had a gripe about the quality of the work done by their HR outsourcing firm. "Services not as good as promised," said 53 percent. But, significantly, scarcely one-quarter reported "negative reaction from employees," meaning workers won't likely object to an outside HR provider. Indeed, sometimes employees actually welcome the switch if it means services are provided more consistently and professionally than they had been when HR was, at best, a secondary job duty for managers in their company.

"HR outsourcing is growing in popularity simply because it works for client companies and their employees," says McGlone.

Dushinski seconds that: "With HR outsourced, we have so much more time to really service our clients and grow the business. Outsourcing works for our employees, and it definitely works for my company."

Next Step

  • Outsourcing your HR tasks is a major decision that impacts both your costs and your employees. Do your research before making any decision. A good starting place: Outsourcing Human Resources Functions (Amacom), by HR executive Mary F. Cook. At $75, it's pricey, but it provides such helpful details as a 12-page outsourcing plan, tips on how to negotiate a contract and pointers on selecting a vendor.
  • Find out still more at The Outsourcing Center (http://www.outsourcing-center.com), a site that features plenty of links to consultants as well as articles, an outsourcing magazine (Outsourcing Journal), and links to a library filled with many more books on the topic.

Web Site

http://www.jsc.nasa.gov/bu2/inflation/eci/inflateECI.html

Think your employees are costing you more for wages and benefits than they did three years ago? You're right--and now you can know exactly how much with a quick visit to The Employee Cost Index Inflation Calculator. With a mouse click, you can scroll back, year by year, and see exactly how fast employee costs have risen. The grim news is that $100 paid out in 1981 equals $200.70 today, meaning that inflation has been almost exactly 100 percent over the past 18 years.

Contact Sources

Buck Consultants,http://www.buckconsultants.com

Kennedy Information,tbourgeois@ kennedyinfo.com, http://www.kennedyinfo.com

MarketAbility Inc., (888) 55-TWIST, http://www.marketability.com

Talent Alliance,info@talentalliance.org, http://www.talentalliance.com