How Does HR Outsourcing Reduce Costs?

Posted by Questco on July 27, 2020 at 8:55 AM

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There is a lot of controversy around how much can be saved through HR outsourcing. Some company leaders feel that there are some minimal savings that can be gained, while others firmly believe that HR outsourcing, when done properly, yields significant cost reductions.

One of the major reasons why no consensus on the subject has been reached is because cost savings varies based on the type of outsourcing. 

Cost Savings from Payroll Processors

Companies specializing in payroll processing can save their clients some money. For instance, these payroll processors often help their clients avoid the trap of misclassifying employees. This is a serious matter: the misclassification of statutory employees as independent contractors could lead to severe financial penalties. In fact, one aeronautics company was forced to pay almost $1 million to its employees due to a misclassification error.

By assisting clients in steering clear of misclassification errors and other payroll-related pitfalls, these processing companies can indisputably help their clients save on preventable costs. However, when it comes to HR outsourcing, this is only the tip of the proverbial iceberg.

Cost Savings from PEOs

A Professional Employer Organization (PEO) that offers end-to-end HR outsourcing services to its clients can provide even more significant cost savings than simple payroll processors. In fact, a study from the National Association of Professional Employer Organizations (NAPEO) found that the annual ROI from partnering with a PEO comes out to 27.2% in cost savings alone. That study broke down those cost savings into four key areas (calculated on a per-employee basis):

  • Cost savings of 54% from internal HR salaries/benefits
  • Savings of 37% from health benefit costs
  • Savings of 5% from other external HR expenditures
  • Savings of 4% from workers' compensation costs

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These statistics demonstrate that companies can accrue significant savings by investing in a PEO partnership, not only in terms of payroll, but also in regard to benefits, personnel costs, workers comp costs, and other key HR areas.

There are other ways PEOs save money, such as reducing turnover and increasing engagement.

Reduced Turnover Rate

Employees may leave a company for any number of reasons: a poor benefits package, a perceived lack of appreciation, minimal managerial/administrative support, etc. Studies have found that partnering with a PEO reduces turnover from 10-14% compared to businesses without a PEO.

Increased employee retention means cost savings all around. Research indicates that the average cost of hiring a new employee (in terms of salary) is anywhere from 1.25 to 1.4 times the new hire's base salary. In other words, for each new $30,000/yr employee, you could be paying $42,000 when all is said and done. Companies that avoid unnecessary costs around hiring new employees will fare better in terms of profitability and growth. This is one reason small businesses that partner with PEOs grow 7-9% faster compared to businesses without a PEO.

Increased Employee Engagement

PEO clients are also much more likely to report higher scores from their employees on metrics related to engagement and satisfaction. For instance, a NAPEO study found that the level of employee engagement tends to be 5% higher among PEO clients than other companies. Similarly, the trust level in a company's support for employees (especially in delivering excellent customer service) is 7% higher.

There are several reasons why this is the case. For example, experienced PEOs can greatly reduce an HR department's administrative burden, thus freeing up the in-house HR professionals to provide better support for company employees. Of course, better benefits at a reduced cost also serve to strengthen employee morale.

Highly engaged employees tend to provide their company with a 21% higher level of profitability, whereas disengaged employees cost their companies between $450 - $550 billion every year. By partnering with a reputable PEO, you are also bolstering your employees' engagement and satisfaction levels, thus leading to increased revenues and reduced costs.

Other Savings from PEOs

Besides the points outlined above, there are several other potential cost reductions that HR outsourcing can provide. For example, think about the cost in time and resources that occurs when in-house HR professionals spend the majority of their time on complicated administrative tasks — "paper-pushing," if you will. 

Instead of focusing on strategy or key revenue-generating tasks, these workers have to fight through a daily maze of insurance issues, compliance regulations, and data related to payroll and benefits administration. How much better it is when your HR professionals are able to focus on the most important asset your company has: its human resources!

Clearly, the advantages of HR outsourcing go far beyond mere cost savings. If you'd like to learn more about these benefits, download our eBook: "How the Right HR Outsourcing Partner Brings You Closer to Your Dreams."

The No B.S. Guide to Human Resources Strategy for Business Performance

Topics: Outsourcing HR / PEO

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Here, you'll find educational resources, best practices, and business tips created for business owners and leaders. We cover topics including human resources management, PEO, compliance, risk management, staffing, and more. Learn more about Questco here.

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