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Startups Outsourcing HR: When, Why, What If?
HR help for rapidly growing firms that aim for a casual, lean operation

By June D. Bell  8/22/2014
 

In just a year and a half, e-retailer Dot & Bo has grown from a handful of employees to more than 80. The San Francisco company, which sells retro-style furniture, hip knickknacks and chic home decor through its website, is booming.

As Dot & Bo grew, it needed help onboarding new hires. CEO and co-founder Anthony Soohoo turned to another fast-growing San Francisco startup, Zenefits. Less than 18 months old, Zenefits provides HR administrative services at a price even the most cash-strapped company can afford: absolutely free.

Zenefits is an insurance broker and receives referral fees and commissions from payroll companies and other service providers but does not pass those costs on to users, said founder Parker Conrad. His inspiration for Zenefits arose from handling HR matters for a 35-person startup he previously founded. “I had to deal with all the stuff myself and hated it,” he said.

Zenefits’ software integrates with businesses’ existing payroll and benefits systems. It can generate offer letters and employee agreements for new hires, collect bank deposit information and W-2 forms, provide mandated compliance information such as Affordable Care Act notices, enroll employees in health care benefits, and provide COBRA notifications and enrollment.

By automating administrative services typically handled by hiring a dedicated HR staffer, businesses can better deploy their human capital, Conrad said.

Soohoo signed on with Zenefits in December 2013, when Dot & Bo had just 35 employees. “We wanted, at the end of the day, to make sure there was a personality to our company and … streamlined and friendly interfaces,” Soohoo said. “That’s the service we provide to our customers,” he noted, adding that he wanted to give his employees HR services “consistent with our ethos.”

Influx of Money

Companies that automate HR tasks such as benefits administration have been flush with capital investments in the last few years, said Mark Stelzner, founder and managing principal of the San Francisco HR consulting firm IA HR. As the regulatory environment becomes increasingly complex, companies—especially those with operations in California—are rightly concerned about meeting rapidly changing compliance rules.

At the same time, HR departments remain “largely understaffed,” said Stelzner. “Quite frankly, it’s difficult to cost-justify [a full-time employee] on the human capital side of the house.”

Businesses that automate HR’s administrative functions can take advantage of economies of scale to keep abreast of legal and regulatory changes, freeing in-house HR professionals to concentrate on strategic matters and growth. “Outsourcing literally creates the white space, the room to allow people to focus more on what makes their business run,” Stelzner said. “It is a freeing mechanism.”

Dot & Bo’s CEO agrees. Outsourcing “takes HR to a more strategic role,” Soohoo said. “You feel confident you’re in compliance and [can focus] on improving your company versus making sure all your HR paperwork is filled out properly.”

In-House HR’s Role

As companies outsource functions traditionally handled by on-staff human resource professionals, they must decide which, if any, HR functions they’ll bring in-house and when to make that move. Finding that sweet spot has proven a challenge, particularly for rapidly growing startups that aim for a casual, lean operation.

“You can never outsource accountability,” Stelzner cautioned. “At the end of the day, you—the employer—are still accountable for performance.” Similarly, waiting too long to bring HR functions in-house to save money and keep a minimal C-level team can backfire, as Silicon Valley software startup GitHub recently learned.

Startup Under Fire

GitHub’s president and co-founder Tom Preston-Werner left his post several months ago in the wake of allegations that the 250-employee company was a “toxic” place to work. Employee Julie Ann Horvath, the company’s first full-time female designer and developer, claimed gender-based harassment and an inhospitable workplace, allegations she reiterated to The Wall Street Journal in July 2014.

Those claims dated to 2012, when Horvath, Preston-Werner and his wife, who isn’t an employee, had a conflict. At the time, GitHub, founded in 2008, employed a single HR professional who handled administrative matters but had no training in managing personnel issues and conflicts.

An outsider who conducted an investigation found no evidence of gender-based harassment or an inhospitable workplace for women, according to the newspaper. But she did identify “a poor division of personal and professional boundaries at the company that exacerbated a conflict between Ms. Horvath and Mr. Preston-Werner and left Ms. Horvath with no easy path to get help,” the Journal wrote.

Beyond Administrative Duties

Would this crisis have been averted if GitHub had employed a more senior-level HR professional as its source of HR expertise? Was the startup remiss in having provided only for administrative capabilities in its HR department?

There are no clear-cut answers as to when to add an in-house HR professional or how many people are needed in an HR department, but by the time companies hit about 50 employees, they need HR resources that extend beyond administrative duties, said Kim Silvers, president of Silvers HR LLC. Her Sacramento-area business provides consulting services, advice and training to companies with 50 to 100 employees.

At 50 employees, requirements under the Family and Medical Leave Act kick in, turnover increases, and human resource responsibilities can become more complex. The person saddled with HR duties—“an office manager reading a blog somewhere trying to stay up to date,” Silvers said—is likely starting to feel overwhelmed. The company doesn’t yet have to hire a full-time HR professional because it has outsourced its administrative functions, but it does need senior-level advice on performance issues, compensation plans and onsite management training.

That’s often when Silvers and her team are called in for guidance. When companies are small, she wears an HR generalist hat. As they grow, she integrates succession planning, management skills and training. “Our role has evolved over time to less tactical and more strategic,” she said.

Higher-Level Support

Similarly, the most valuable in-house HR professionals take on a strategic role, providing support that matches the company’s growth strategy. “Be explicitly aligned to the business strategy, to the detriment of almost anything else,” Stelzner advised. HR professionals should take the lead with finely tuned career and leadership development, plus a deep understanding of business analytics and dynamics.

Payroll and benefits are a company’s two largest cost centers, Stelzner said, noting that HR professionals should understand how to get the most value from human capital. Their role also includes ensuring that a company’s proclaimed business philosophy remains consistent with how workers are hired and treated.

GitHub learned that lesson. The company now counts a dozen people in its human resources group. One is a leader trained in conflict resolution.

Soohoo, Dot & Bo’s CEO, also knows that his business will eventually need an in-house HR professional to complement the administrative functions that Zenefits handles. Before Dot & Bo’s headcount hits 100, Soohoo said he plans to hire a dedicated HR manager.

June D. Bell is a San Francisco-based legal affairs reporter and regular contributor to SHRM. She can be reached at junebell@aol.com


Related Article:

Should Your Startup Offer Employee Benefits?, Forbes, August 2014 

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