SHRM Foundation Research
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SHRM Foundation Research


Outsourcing HR in Small and Mid-Sized Businesses: Value Creation through Strategic Win-Win-Wins

Funded: November 2006  Ended: December 2008

Stephen Gilliland, Ph.D., University of Arizona
Jerel Slaughter, Ph.D., University of Arizona 

Outsourcing has become increasingly popular in HR with some studies reporting as many as 85% of organizations outsourcing at least one component of their HR function.  A number of HR functions can be outsourced, from employee benefits and assistance counseling programs to staffing and training.  The large number of outsourcing options leads to questions about the changing nature of HR.  Of particular importance is whether employees and employers benefit from outsourced HR functions.  

Stephen Gilliland and Jerel Slaughter examined the potential benefits of outsourcing HR functions for small to mid-sized businesses, their employees, and the outsourcing firms that serve them.  Small to mid-size businesses represent the largest and fastest growing sources of jobs in the United States and HR outsourcing has the potential to impact a substantial amount of employees in these businesses.  Several benefits for HR outsourcing were found for all parties. 

A number of benefits for employees may be obtained by outsourcing.  These include:
●  Expanded array of retirement and health insurance benefits
●  Greater flexibility in benefits

Benefits identified for the business owner included:
 ●  Maintaining legal compliance more easily and inexpensively
 ●  Flexibility in choosing which benefits to offer employees
 ●  More flexibility in benefits, resulting in greater ability to attract and retain employees 

The outsourcing firm also benefits from serving small to mid-sized businesses.  As the number of small to mid-sized clients increased, the firm's costs in terms of servicing clients increased at a lesser rate, providing an increasingly attractive financial business model.  Specifically,
 ●  As the number of employees served increased from 20,000 to 40,000, the number of people required to service those clients did not double, nor did the cost of serving them.  The model became more profitable as the firm grew
 ●  As the number of clients served grew, the firm was able to negotiate increasingly attractive benefits and risk management options
 ●  When the firm grew to 50,000 clients, a large number of banks and insurance companies began competing for their business 

The primary drawback of HR outsourcing was the cost associated with the services.  Interestingly, unlike fixed HR costs, these costs are directly related to employee payroll expenses and decrease when employees are cut during an economic downturn.  This final observation suggests that HR outsourcing might represent an even greater value for small and mid-sized businesses during economic recessions.

As economic conditions were deteriorating, a series of in-depth interviews were conducted in 2008 with the owner/president and senior staff of an HR outsourcing firm.  In-depth interviews were also conducted with a mid-sized business in the process of evaluating the HR outsourcing option.

View the full list of SHRM Foundation funded research.