A large majority of small to middle market businesses have Human Resource related challenges that can have a potentially adverse impact on the company. These include Non-Compliance with State and Federal Labor Laws, Employee Benefit and Retirement Plans, and associated worksite management practices along with a myriad of general employment related regulations. Many employers are recognizing that their current levels of HR staffing are not sufficient to effectively manage these complexities and risks going forward. In addition, many employers have also recognized that their current Human Resource Information Systems (HRIS), or lack thereof, are creating additional inefficiencies and ultimately increasing operating expenses. The purpose of this blog post is to identify the financial impact of additional HR staffing vs. HR outsourcing options that are now available in the marketplace.
HR Staffing and Operating Costs
The costs associated with having an in-house HR Department go well beyond the staffing expenses. As Employers and HR Departments are evaluating additional staffing needs to address these challenges, it is important to identify total operating costs per HR staff member. Recent studies have calculated the median cost at $100,000, with an upper and lower quartile range of $132,275 and $73,100 respectively. Large company HR (1,000 employees +) cost less ($ 86,428) than small (1-249 employees) ($ 111,110) and mid-sized (250-999) ($ 95,909) with the following breakdowns by industry type;
Service Industries: $ 83,155
Manufacturing / Distribution: $ 132,160
Public: $ 120,000
These costs include HR activities consisting of Recruiting, Training, Management, and Turnover related expenses with a median of $1,250 per employee. The middle 50% of organizations have additional activities budgets of between $416 and $2,970 per employee.
HR Staffing Ratios
The overall median ratio is one HR practitioner to every 100 employees with the middle 50% of organizations have ratios of 1:60 and 1:140
Service Industries: 1:90
Manufacturing / Distribution: 1:98
Public: 1:125
Accounting Related HR Costs
Most Employers with over 75 employees incur additional HR related expenses in the Accounting area. This is primarily due to the administration of Payroll, Benefits Billing Reconciliations, 401(k) Plans, and other related functions being managed outside of the HR Department. Studies have indicated that this burden may increase overall HR expense by as much as 20% as these functions are being spread over multiple staff members. This does not include additional direct Accounting related expenses for 401(k) and Employee Benefit Plan Audits performed by outside service firms which average $15 - $20,000 annually for companies with over 100 employees.
Strategies for Reducing HR Staffing Expenses
Employers can reduce current and future staffing expenses by consolidating non-core HR functions through a combination of technology platforms and expanded service offerings from current or alternative vendors and service providers. The traditional HR structure may include multiple vendor relationships with Payroll Service Bureaus, Employee Benefits Brokers, Third Party Administrators, 401(k) Providers, Recruiting Firms, and numerous other service and HRIS providers. As each provider issues a separate monthly invoice this adds to the Accounting related costs described above. In addition, each provider has their own web portal and reporting formats which is very inefficient. As a result, many HR Departments feel the need to increase staffing levels to manage these multiple administrative requirements so that HR Generalists / Management can focus on the more strategic Human Capital initiatives.
There are numerous service providers today that offer a fully integrated HR platform that can consolidate these functions into a single source service delivery. Some providers include their own HR staff at the worksite as needed, especially during peak periods such as Open Enrollment, or on a regularly scheduled basis to alleviate additional staffing needs.
The HR Staffing Challenge - Getting Everything You Need From One Person is Difficult
Employers that maintain an in-house HR Department and fall within the staffing ratios described above are challenged to maintain these ratios for the following reasons. HR Professionals have in many ways developed into specialists with a focus in certain areas such as Consulting, Recruiting, Training, Employee Relations, or Administration. It is very difficult to get the skill sets needed to effectively cross all of these areas from a single HR staff member. Today’s HR Generalists may have excellent skill sets in 2 or 3 of these practice areas but the overriding theme is that an HR Professional is either strategic or tactically minded. Hiring a more strategic / consultative person will likely leave a company with additional needs to fill in the administrative areas related to payroll, benefits, retirement plans, labor reporting, and maintenance processing of employee records and changes.
Why Outsourcing HR Functions can Make Good Business Sense
Many Employers have the need for a full time HR Director or Manager based on various business dynamics. Other Employers may need an HR presence at times but not necessarily on a full-time basis. In both cases Employers can reduce overall HR related expenses and minimize or eliminate additional staffing needs by outsourcing numerous HR functions to Human Resource Outsourcing (HRO) or Administrative Services Outsourcing (ASO) firms. Utilizing a fully integrated HRIS technology platform that is included in the fee structure of the HRO/ASO provider eliminates any investment in having this technology in-house. In addition, most providers have HR specialists available with expertise in the Consulting, Recruiting, Training, Employee Relations, and Administrative areas referenced above that can be utilized as these needs arise. Employers and employees can access all HR related data from a single data portal as opposed to multiple web log ins for Payroll, Employee Benefits, 401(k), HR information and more. In many cases these HRO/ASO providers are also Employee Benefits Brokers and Consultants which enable them to interface directly with in-force Insurance Carriers. The revenues or commissions generated from managing the employee benefits may also allow the HRO/ASO provider to deliver these services in a more cost effective manner which comes at no additional expense to the Employer. Some firms will provide the Employer with on-site HR Support in where designated HR Professionals visit the worksite on a weekly or as needed basis to interact with management and employees. Finally, the accounting simplicity that results from a fully integrated service delivery allows for all HR and employment related expenses to be consolidated into one single invoice per pay period which can be processed electronically via ACH and then downloaded directly into the G/L accounts.
The services that most HRO / ASO providers manage for their clients include the following:
- Payroll Processing, Tax Filing, and Reporting
- HRIS technology platform with Employee Self-Service functionality
- Automated Time and Attendance and PTO Tracking
- Unemployment Case Management
- Electronic Employee Recordkeeping and Reporting
- Employee Benefits Brokerage and Consulting
- Employee Benefits Administration including processing of all changes with Insurance Carriers
- COBRA, Flexible Spending Accounts, and Eligibility Tracking
- Open Enrollment Management and processing of all plan and deduction changes
- Insurance Carrier Invoice Reconciliation and Payment Processing
- HR Compliance Management, Postings, and Communications
- FMLA and Leave Management
- HR Management Services, Policy Manuals, Job Descriptions
- Workers’ Compensation Claims Management
- Recruiting Support and Automated Applicant Tracking Systems
- New Employee Orientations and Onboarding / Termination Processing
- 401(k) Plan Management with Transfer of Fiduciary and Trustee liabilities
- 5500 Report Preparation and Filings
Financial Impact
Depending on the level of HR services requested from the HRO/ASO provider, the Administrative Fees associated with this type of service delivery generally ranges from $50.00 to $90.00 Per Employee Per Month (PEPM). If a high level of on-site HR Support is included this fee structure may increase by $20.00 to $60.00 PEPM based upon company size, number of locations, and other variables. As current Vendor Fees for HRIS and Payroll, Benefits Administration (COBRA, FSA), and 401(k) Management can be eliminated under this model, the financial comparison then comes down to the PEPM Administration Fees vs. the current Vendor / Administrative expenses plus in house HR Personnel as illustrated below.
Total HR Expense vs. HRO/ASO
The median average Annual Expense Per Employee associated with total HR Staffing, Operating, and Vendor / Administrative costs for the majority of Employers then breaks down as follows;
HR Personnel and Operating expense $ 1,250.00
Payroll Processing / Tax Management $ 180.00
HRIS expense (Software As A Service) $ 180.00
Benefits Administration $ 96.00
401(k) Plan Expense and Audit Fees $ 96.00
HR related Accounting Expense $ 48.00
TOTAL ANNUAL EXPENSE PER EMPLOYEE $ 1,850.00
MEDIAN HRO / ASO PROVIDER EXPENSE $ 1,200.00
Employers of most sizes can expect to realize a net cost reduction in this range per employee annually in addition to receiving a more efficient and streamlined HR service delivery. There are also numerous other indirect expenses and “soft costs” that are absorbed by an HRO / ASO Provider which can add to this amount including postage and distribution of regulatory notices, payroll tax set ups and reconciliations, IT infrastructure and licensing, software updates, training, and internal turnover.
Summary
As the vast majority of businesses are searching for ways to increase their EBIDTA % points, many find the only effective strategy that will lead to results is through increasing internal efficiencies and reducing internal operating expenses. Future internal operating structures may no longer allow for departmental segmentation in areas such as Accounting, Human Resources, and Management of Administration for many businesses. Positive financial improvements can be achieved by utilizing available automation technologies and outsourcing non-core business functions in these business areas.
