You've heard the news about outsourcing Human Resources functions and have wondered if it's all just hype. While there is a certain amount of marketing hype in the messages about HR outsourcing (HRO), the numbers reveal that it is a market reality that is here to stay. A 2004 survey conducted by The Conference Board revealed that HR outsourcing was no longer a trend, but had become the normal way companies do business, according to the author of the study, David Dell (Tom Anderson, ?Outsorcery.? Employee Benefit News, June 2004). Consulting firm Nelson-Hall estimates that HRO revenue for just one segment of the market (midmarket firms?those with 2,500 to 10,000 employees) is projected to grow from $600 million in 2005, to $1.5 billion by 2010, a growth of more than 100 percent (Fay Hansen, ?Midsize employers in sweet spot for end-to-end HRO.? Workforce Management 2/12/07). A more recent study found that 2.5 million employees are currently supported by some form of HRO, with contract values exceeding $15 billion, with lots of market room for growth (EquaTerra ?Taking the Pulse of Today's Human Resources Outsourcing Market,? April 2007 PDF.)

If you are beginning to ask whether HRO is right for your company, you will soon discover that the more you learn, the more questions you have. This article gives general answers to many frequently asked questions. For answers tailored to your business's reality, contact Workforce Solutions, a full service PEO, for a free consultation, or a third party consultant specializing in PEOs, such as EquaTerra or HROplus.

What is HRO?

A common industry acronym, HRO stands for Human Resources outsourcing, and refers to the practice of contracting with a service provider to handle functions of an HR department that are currently handled in-house. HRO arrangements can be simple, involving single processes such as payroll, or complex end-to-end agreements that affect every aspect of human capital management.

What is a PEO?

A Professional Employer Organization (PEO) is an HR service provider with a very important difference: your employees are paid under the PEO's tax identification number, making the PEO the employer of record. This arrangement is sometimes referred to as co-employment because your employees? jobs, locations, and pay rates do not change, but for bookkeeping and tax purposes, the PEO is the employer. 2-3 million people in the U.S. are currently employed in a co-employment arrangement (http://napeo.org/peoindustry/faq.cfm).

Seems like a hassle; why bother with a PEO/co-employment?

The PEO model offers several advantages, the most significant being economies of scale. For example, because your employees become part of a larger pool of employees that include the PEO's other clients, your company can now negotiate lower group insurance rates for which you might not have qualified in the past. (If benefits administration is part of the agreement with the PEO, this negotiation is handled by the PEO.)

Do state and federal tax agencies recognize PEOs as the employer?

Yes. Some states regulate PEOs differently, but all states and the federal government recognize the PEO as the employer and as the entity that is rightfully withholding and paying taxes on behalf of your employees. Government agencies also recognize the PEO as the employer for Workers? Compensation insurance and claims purposes.

What is an ASO?

An Administrative Services Organization (ASO) is similar to a PEO, but employees are not paid under the ASO's tax ID number. ASOs ?offer access to their licensed or proprietary Human Resources Information System (HRIS), process payroll, manage workers? compensation and unemployment claims,? like a PEO.? ASOs are more effective, however, than PEOs at offering assistance and counseling in the ?soft? side of HR, such as ?conflict resolution, employee handbooks, strategic counseling, and new-hire policies.? (Kristian Svindland, ?HR Outsourcing Trends and Tribulations.? NH Business Magazine, May 2007).

What are shared services?

?Shared services? is yet another HRO model. Rather than outsourcing services to a vendor, that management and delivery of HR functions to various cost centers is standardized and consolidated.

What are the key drivers and advantages of HRO?

Saving money is the primary driver. Businesses are finding that third party service providers can handle the transactional elements of HR more efficiently than internal HR departments, and the economy of scale offered by PEOs brings additional savings. Moreover, employers can consolidate vendors. ?Instead of the need for a payroll provider, benefits administrator, COBRA administration, workers? compensation coverage, and risk management compliance, all of these functions can be outsourced to ASOs or PEOs.? (Kristian Svindland, ?HR Outsourcing Trends and Tribulations.? NH Business Magazine, May 2007). Companies that do so can refocus their energies on strategic initiatives and HR functions rather than processing paperwork and data entry. Organizations also turn to HRO to leverage the vendor's skill sets and specialized employees?talent they may not have in-house.

These are advantages for the employer. What about my employees?

Your employees benefit from a PEO arrangement as their job security increases with the decrease in your employment costs. PEOs can handle employee administration more efficiently, allowing you to funnel the saved money into salary increases, if desired. Employees also benefit from the very large purchasing power of the PEO, which can result in expanded benefits packages that may not have been an option without the PEO.

What are the risks of HRO?

Companies should be very aware of their tax status in every tax jurisdiction where they do business. Kris Svindland of HROplus cautions that not-for-profit entities that are not currently paying state unemployment taxes will have to pay these taxes under a PEO model (because the PEO is the employer of record).

As with any vendor relationship, there is a chance that the arrangement will not be satisfactory for any number of reasons. End-to-end HRO arrangements can be difficult to reverse if the PEO does not work out. Employers must protect themselves by performing due diligence on vendors.

The company culture might not be amenable to outsourcing, which could cause problems throughout the process. Employers should look at their track record of success with major change initiatives and should consider the level of HR control historically present in each department or division. If departments are accustomed to a great deal of control, they might perceive HRO as a threat to that autonomy. Employers should work with a consultant or with the PEO itself to mitigate such concerns.

Moreover, companies that have outsourced several HR services are struggling to realize the benefits they expected or were sold, according to a survey by EquaTerra, an HRO consulting firm. EquaTerra reports that the service providers and the market are still maturing, so ?there is some concern [?] that the value delivered is not enough given the cost and complexity inherent in larger HRO efforts.? Despite these struggles, however, EquaTerra concludes that HRO is still more successful at cutting employment administration costs than when cuts are attempted in house. (EquaTerra ?Taking the Pulse of Today's Human Resources Outsourcing Market,? April 2007 PDF.)

How should I evaluate and select a provider?

According to the National Association of Professional Employer Organizations (NAPEO), there are approximately 700 organizations providing HRO services as PEOs, a number not including ASOs and other vendors who do not provide services under the co-employment model. Having so many choices is good for the marketplace and for consumers of services, but it means that selecting just one vendor can be a daunting task. Here are some tips that should make that selection process easier:

?Bring in a third party. Specialized consultants and firms, such as HROplus in New Hampshire, can get to know your business and its culture and needs and help select a PEO that is the best fit. Kristian Svindland, vice president of HROplus, reports that his firm has contact with or has done business with more than 200 PEOs; such expertise can save you a lot of time when it comes to due diligence.

?Use a proposal process. Rather than simply checking online for PEOs in your area and then contacting them, generate and publicize a request for proposals (RFP) that spells out your needs and expectations. The range of quality displayed by the proposals you receive may surprise you.

?Check vendor references. Your RFP should ask vendors to submit a list of clients and contacts with their proposals. Spend the time to thoroughly check the references of the top proposals.

?Talk to colleagues at other organizations about their vendor search and HRO experiences.

?Ask difficult questions. The information you get is only as thorough as the questions you ask. One HR manager suggested you ask these questions:

oAsk about historical increases in cost

oAsk about implementation support and how they will convert existing contracts and historical data

oAsk references what they would have done differently and what were the big surprises

oWhat were the references? objectives in going to HRO, and have they been satisfied?

oWhat has been the references? experience in cost and service? (?How to Maximize?? HRFocus, April 2007)

If I work with a PEO, what will my HR department or employees do?

One of the primary benefits of HRO is the freedom it offers in how you utilize existing HR employees. Because you determine which services to outsource, you can make as many or as few changes to HR employees? roles as your business needs dictate. They can be reassigned to strategic HR initiatives, repurposed for other tasks, or can be let go to cut costs. Kristian Svindland, vice president of HROplus, a PEO consulting firm, recommends that businesses with 50 or more employees hire and train an HR specialist to manage the soft side of HR: conflict resolution, recruitment, hiring, training, and so on. With transactional functions outsourced, the HR manager will be able to focus on more strategic aspects of HR.

Moreover, outsourced services need oversight. Vendors can make mistakes, and some are even unscrupulous. HR's role can become one of training and supervising the vendor, maintaining a company presence in the relationship between the PEOs and employees, if desired. Indeed, the EquaTerra survey found that, when expected benefits of HRO were not achieved, companies spread the blame between their own HR departments and the outsourcing vendor. One respondent insisted, ?No matter who is doing the outsourced work, they need to be carefully managed. Unfortunately, over time, the individuals who have the knowledge of the now outsourced task will turn over and the knowledge needed to ensure that all tasks are carefully done will not be replaced? (EquaTerra ?Taking the Pulse of Today's Human Resources Outsourcing Market,? April 2007 PDF).

More Questions and Answers

These are just some of the most common questions that employers have as they begin to evaluate HRO. You should ask many questions at each stage of the process to ensure you make the best possible decisions before signing a contract and to maximize your investment after the ink is dry. You can find additional questions and answers at the sites listed below.