October 10th, 2023

How Can HR Outsourcing Support Small Businesses?

What comes to mind when you think of human resources? If it’s Toby from The Office, you’re not the only one. HR gets a bad reputation for being the party poopers of an organization. But without HR support, businesses struggle to grow.

In this article, we’ll talk about the role HR plays in small business, why small business HR is important, and how HR outsourcing services for small business can make your HR functions more strategic, revolutionize your HR team, and improve productivity, employee retention, and company growth.

Why HR Support For Small Businesses is Important

HR isn’t glamorous, but it’s responsible for a lot. Human resources are the foundation of every organization. Because HR is all about people, and at its core, so is business. Until you have more than a couple of people working in your company, you might not recognize the need for HR support. But as you start to grow, HR services become necessary to coordinate your people, processes, and policies.

More specifically, HR services manage the lifecycle of employees – from hiring to training to when it’s time to move on. Outside of direct employee management, HR is also responsible for the structure of your organization, culture, and crafting and communicating policies and procedures that maintain business operations and legal compliance.

What Happens When HR Support for Small Businesses is Lacking?

Signs of an ineffective HR program are high employee turnover, low employee morale, compliance issues, or management having to handle everything. To avoid poor HR practices and improve the efficacy of your HR functions, consider HR outsourcing services to support your small business.

To Better Support Small Businesses, HR Must Be Strategic 

For HR to successfully support your small business, it must be a strategic function of your business. While HR is essential, it can be a strategic advantage too. Think beyond simply interviewing job candidates and handling employee benefits administration. When used strategically, HR functions as a productivity multiplier.

For example, some would consider Google the top employer in the world. A big part of this is down to their strategic use of HR services. Their HR uses employee data, or people analytics, to identify failures, prevent problems, and translate successes into codefied HR practices. While most organizations don’t have the means to provide their employees with everything that Google does, many can achieve similar results by improving their HR support.

Outsourcing HR functions can help small businesses come closer to implementing a Google-like approach and achieving similar results.

Proactive vs Reactive HR Support

What Google uses are proactive HR solutions rather than reactive HR solutions. Proactive HR solutions are data-driven and implemented ahead of time, rather than driven by necessity after the fact.

A proactive HR approach studies the business and its goals to identify potential problems and create practices to prevent or address them before they occur. Often data and workforce planning are used to create a successful proactive HR strategy.

Unfortunately, many organizations still use a reactive HR approach, where HR or business leaders only make HR decisions as they’re needed or based on prior experience.

How to Make HR Strategic

To make your HR strategy more proactive, start with a strategic planning process.

An HR strategy aligns HR’s long-term practices with business goals. Any good business strategy usually starts with an assessment of your organization’s current situation. When it comes to your employees, observe what is happening and why. Conduct a SWOT analysis of your HR efforts to understand where gaps exist.

Think about what the future should look like in your organization and how HR will help you get there. Map your business goals back to the practices and activities HR needs to complete to support them. Then, determine how you’ll evaluate your performance (e.g. employee turnover, employee satisfaction, etc.)

Evaluating gaps, determining a strategy to fill those gaps, and establishing metrics to measure the success of your efforts is the best way to improve your HR strategy.

How HR Outsourcing Services Can Help

Many small businesses struggle to find the time needed to dedicate to these planning sessions and strategy meetings. Many may not even have a dedicated HR person. Small businesses that do have dedicated HR may lack HR support and find that their HR professionals are constantly swamped with HR administration tasks.

For Human Resources to be strategic and proactive, you have to give up administrative tasks. 

According to research by Deloitte, 41% of HR’s time is spent on tactical responsibilities, which equates to two full days a week. Think of what your organization could accomplish with two extra days a week!

In other words, when time is spent on administrative tasks, HR doesn’t have the means to engage in proactive HR strategy and practices.

When time is spent on administrative human resources functions, other important HR services can get overlooked. Recruiting and retaining top talent, providing competitive benefits, training employees, and fostering your company culture are all areas that, if neglected, lead to increased turnover and potentially costly compliance issues.

Enter HR Outsourcing Services

HR outsourcing services take administrative tasks off your human resources professionals’ plates so that they can dedicate more time to strategic HR planning. Some HR outsourcing services for small business can even take the lead on this strategic planning, guiding small business owners in crafting effective small business HR strategies for retaining employees and growing the business.

Outsourcing HR services may appear to cost more up front, but in the long run it saves time and money. There are many areas of human resources that can be outsourced, and you may choose to outsource some or all of them depending on your needs.

Some of the most commonly outsourced HR functions include:

  • payroll processing / payroll administration
  • employee benefits administration
  • employment laws and regulations / regulatory compliance
  • employee training
  • employee relations
  • talent management and acquisition
  • performance management
  • risk management
  • drug testing
  • health insurance

Types of HR Outsourcing Services

There are two main types of HR outsourcing services: PEO services and HRO services.

PEO Services

PEO (Professional Employer Organization) services use a co-employment structure, meaning your employees appear on the HR outsourcing company books. You retain control over what your employees do, whether they can be fired, promoted, etc. but the PEO manages all your HR tasks and is responsible for your company’s employment practices. A PEO also does a lot of the heavy lifting in terms of strategic, proactive planning. They provide a holistic approach to HR, so you’re guaranteed guidance and advice for every aspect of HR.

HRO Services

HROs do not use the co-employment structure, and are more flexible. You can more easily pick and choose which HR tasks you want them to manage, and they do not bear any financial or legal responsibility for your business practices. That being said, they are more hands-off with the strategic aspect of HR and can’t offer volume pricing discounts since they aren’t involved with choosing benefits packages.

How to Choose the Best HR Outsourcing Services for Small Business

So how do you decide which HR outsourcing company is right for you? Ultimately, that’s a decision that will be based on your specific needs, goals, and budget. There are many HR outsourcing services available, and deciding which HR outsourcing provider is best will require an analysis of your business plan.

Here are some questions you can ask to a potential HR outsourcing provider to determine whether outsourcing HR to them will be a good match:

  • What type of HR outsourcing company is it? PEO or HRO? Which type makes most sense for your business?
  • How user-friendly is the company’s HR outsourcing service software?
  • What tools will your employees be provided with?
  • How responsive is customer support?
  • Can more HR outsourcing functions be added later?
  • What do internet reviews and other employers in your field say about this company?
  • Is it within your budget?
  • Do they have experience with small business HR?

When Small Businesses Outsource HR, Everyone Wins

A strategic HR solution is crucial for the growth of any business. While HR functions can be handled in a reactive manner, implementing proactive HR solutions allows you to establish a path toward success. HR outsourcing can be a critical pillar in creating your company’s proactive HR strategy.

Although HR outsourcing may feel like a big investment up front, particularly for new business owners, the time and money it will save you in the long run more than make up for the initial cost. Partnering with the right HR outsourcing service can free up resources to be applied elsewhere – in strategizing, employee retention, and company culture.

There is no single way to determine which HR outsourcing company is right for your small business. HR outsourcing is a complex area that requires thoughtful evaluation of business needs on the part of small business owners, and one-on-one consultation with an HR outsourcing provider.

Download Our eGuide: 7 HR Activities to Let Go of

Considering HR outsourcing but not ready to take the leap into outsourcing HR services yet? Download our free guide to learn 7 HR functions to let go of to reclaim time while ensuring your business runs smoothly.

In this guide, we deep dive into 7 specific HR functions that that can be effectively handled by an HR outsourcing company, and how outsourcing HR services like these can improve your company’s productivity and bottom line.

Download Our eGuide: 7 HR Activities to Let Go of

Learn 7 HR activities to let go of to reclaim time while ensuring your business runs smoothly.

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Get More HR Support

How do you let go of administrative HR tasks? Look to an HR Partner. Obsidian HR can function as your HR team — or an extension of your existing HR staff — freeing them up to focus on HR strategy. We’re here to relieve the administrative burden of HR so you have more time to focus on achieving your business goals. And we do it for a third of the cost of a fully staffed HR team. 

An HR partner can take care of your tactical HR needs such as securing and offering employee benefits, handling payroll and compliance, and managing HR operations. With better HR support, you’ll be able to focus on HR strategy and ultimately grow your business.