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Reducing the Hidden Costs of HR

Outsourcing HR duties to professional consultants is one way to keep a mid-market business focused on its core goals. Here’s a way to further reduce the costs.

Small to mid-sized businesses are where the jobs are. Mid-market firms with between 100 and 1000 employees represent some 200,000 businesses. That sector is continuing to lead hiring this year, according to the National Center for the Middle Market. Adding staff has been partly funded by growing revenues in the last year to the tune of 5 percent, five times higher than the S&P 500 and more than double the growth of the economy.

Higher revenues (ideally) portend higher profits and with that the likelihood of outsourcing services such as 401K and benefits administration as well as human resources. Research from IBISWorld bears this out, finding that corporate profit is the primary factor driving this trend, having risen an estimated 5.7 percent per year on average from 2011 to 2014 and staff growing at a rate of 1.9 percent. Profits are expected to continue growing at an annual rate of of 4.2 percent through 2017.

Here’s the thing: despite rising profits, mid-market businesses are chronically under pressure to trim costs, especially in areas that don’t require full-time oversight, such as human resources. Though hiring is up, interviewing and onboarding aren’t daily occurrences, so the temptation is to skip having a staff person and outsource. Unfortunately, a recent Slate report found that smaller companies, in particular, make more mistakes with federal compliance and aren’t always prepared to face the consequences.

Mid-market companies that are reluctant to invest in a full-time person or team but understand the need to comply with the latest workplace regulations may lean to outsourcing. It isn’t free, but hiring professional service providers on an ad-hoc basis can certainly help keep the budget on track and allow the business to focus on its core objectives. That is, of course, provided that the company doesn’t fall prey to hidden costs. IBISWorld’s business research analyst Kaley Freshman-Caffrey says it’s important to watch for three things:

  • business disruptions
  • service applications
  • scope creep

The first two, Freshman-Caffrey says, can be addressed by careful planning and paying close attention to what ancillary products or fees are needed to get the full benefit of the outsourced services.

IBISWorld found that the cost per hour for HR consulting services hasn’t been marked by sharp increases over the last three years, and has risen about 0.6 percent through 2014. A clear and thorough contract goes a long way to eliminating hidden costs for buyers of HR consulting services. The firm did find that the price can ratchet up if there is a change in the scope of a project. This so-called “scope creep” can be as simple as hiring a consultant to review executive benefits and then extending it to review for the rest of the staff. The additional time spent going over more employees’ packages bumps up the total cost of the consultant’s fee.

Some human resources consulting firms can also pick up compensation and benefits planning services –which could potentially spell scope creep. Though fees for these services have held comparably steady as they have for recruiting and hiring, companies need to be aware that creating benefits packages for an existing group of employees isn’t necessarily a one-time expenditure. Freshman-Caffrey writes that adding another group or insurance package means a bump in the consultant’s fee as well as an increase in the cost of the extended benefits.

“Scope creep not only raises financial costs for a project, but also delays the project’s fulfillment and may threaten service quality if the service provider is not given sufficient time and resources to make adjustments,” she writes.

To avoid the impinging costs, Freshman-Caffrey suggests designating a point person within the company to oversee the project. In this way, the company is buying a bit of insurance that new services aren’t making existing staff unhappy. “Buyers must also be wary of culture shifts in their organizations that result from procuring third-party professional services,” Freshman-Caffrey points out. “If a buyer outsources to a service provider that charges employees fees previously covered by the employer, staff may become disgruntled and morale could take a hit,” she observes. “Falling morale could then lead to reduced productivity and even higher turnover in the long term.”

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