HR By The Hour - Human Resources Outsourcing

Whether your business produces pizzas or party hats, you must honor all employer responsibilities to your staff. That includes providing human resources services.

The ever-increasing burden of government regulation on small businesses doesn't make compliance easy, especially when small-business owners spend 20% to 40% of their time performing "non-productive" obligations, according to the Small Business Administration. Many small and midsized businesses today simply can't afford managers dedicated strictly to human resources (HR).

The answer is to outsource these services. As with all vendor and consultant services today, there's a great range of options, expertise and fees for outsourcing HR needs.

But before going outside to hire for your HR services, do a "SWOT [Strengths, Weaknesses, Opportunities and Threats] analysis," advises Lynda Ford, a 19-year HR director who now runs The Ford Group in upstate New York. "Ask yourself, 'Where do you want to go? How does the HR outsource component help you get there?'"

The four most common mistakes made by owners when hiring for outside HR services, Ford says, are:

Not having goals or a strategy
Not doing a detailed analysis of the vendor
Not doing a good job of communicating the service to the staff
Not setting up standards to measure results once the service begins

After sorting out your needs, you can select from a menu of short-term services, such as hiring a recruiter for a week or two. You can bundle a few services. Or you can contract for all-inclusive packages that completely turn over HR services. Here's a rundown of what you may need.

Payroll is the simplest service to outsource, though it's considered an accounting function, not really HR. The provider files taxes, handles paperwork and cuts checks for cost-effective monthly fees, generally an annual few thousand or so. (For more info, see this story.)

Before signing, read the fine print and compare prices among national providers such as Automatic Data Processing (ADP), Advantage Payroll Services, Paychex and dozens more.

After that, let's assume nothing is in place. All decisions about hiring and firing, or policies regarding vacation, sick leave and the like, are made as they arise — or not made at all.

In that case, says consultant Arlene Vernon, who runs HRx in Eden Prairie, Minn., you need an HR audit. Business owners who call on Vernon's services tend to come in two categories. "Reactive clients who have had a problem with one employee or proactive clients who are feeling disorganized in managing people," she says.

After assessing the company's needs, says Vernon, "piece by piece, I develop a company handbook from a template that has been reviewed by an attorney. I then write job descriptions for each employee."

The handbook sets written, company policies for health and welfare issues (such as family leave or Flexible Spending Accounts) as well as for recruiting to separation. You also need policies that comply with anti-discrimination, safety and other government-mandated work practices.

Such a handbook runs $3,000 or so. And be prepared for the process of thinking through all your policies.

There also are temp agencies that offer specialized HR skills. The Ascher Group, for instance, based in Roseland, N.J., provides contract human resources professionals for $50 to $60 an hour to work on site. "Many are retired HR directors and very flexible," says chief executive Susan Ascher.

Before hiring project pros, Ascher advises, owners should have clear agendas or checklists of what they want accomplished. That way, goals are defined, costs are contained and you're not paying anyone to second-guess your preferences.

Veteran recruiter Tricia Nickel has been running Wolftec, a technology executive search firm based near Chicago, for 10 years. Smaller companies, she says, often wing the HR process in potentially damaging ways, risking lawsuits or scant resources.

"I was shocked to find a complete lack of process and methodology for hiring," she says. Nickel tells of a high-level business development candidate with the track record and contacts for a $2 million quota. He was set to accept a job with a startup.

"But there were five sentences in the offer letter that weren't worded correctly," Nickel says. The candidate walked.

That and similar experiences motivated Nickel to found another company, Padigent, which she's developed for the past two years. Now servicing its first few clients, Padigent has a patented methodology to recruit and retain employees for smaller firms.

"It's for a company that doesn't need a Rolls Royce when a bicycle gets you to the next block," Nickel says. "We have 93 electronic forms including offer letters, noncompete agreements, employer referral forms and more." The process and methodology runs about $50,000 to $60,000 and takes about three months.

Nickel's first client, a Chicago design and digital communications firm called Project 36, has four partners. During the discovery phase, Nickel asked the partners to provide answers to 42 questions that job candidates might ask during an interview. The partners responded with very different answers for more than 19 of them. "Virtually no one had any HR experience," says Project 36 president Eric Lord.

But the main persuasion to hire Padigent, according to Lord, was that he learned how HR could influence exit strategies. "A couple of companies that were sold had unbelievable valuations," Lord says. "They went out high because the HR component made them turnkey operations."

Last, you can totally turn over services and management of HR functions to a professional employer organization (PEO). "Such services saw a surge in the early '90s when complying with tax laws and complicated state and federal regulation became difficult," says Carlos Rodriguez, president of ADP TotalSource, a PEO based in Miami that's part of Automated Data Processing. In this climate, with insurance costs rising, profits lagging and leaner workforces, PEOs are especially attractive.

Once you sign a PEO contract, you agree to a co-employment relationship. There are now about 3 million Americans in PEO arrangements, according to the industry's national association, while each state has slightly different regulations. Generally, the PEO takes over substantial employer rights, responsibilities and risks, which include:

payroll
benefits
government compliance
employment administration
employee training and development

Choosing a PEO is a major commitment as well as a convenience. Carefully investigate the firm and check references before signing. Costs, says Rodriguez, run about 2% to 4% of payroll.

There are now dozens of HR services you can harness. Find the right fit and don't ignore the need. Says Lord: "I didn't see much value in human resources because I thought the most important thing was to bring new clients in the door." Now, he says, "Every $1 spend on HR, I know I'll get testimonials tenfold."