How Much Does It Cost to Outsource HR?

Pricing guidelines, questions to ask, and some good news: Fully managed HR might be in reach after all.

Small- and mid-sized businesses are constantly weighing the value of outsourced HR against cost – a challenging exercise for several reasons: 

For starters, outsourced HR providers vary widely by specialty and offering. Except for fully outsourced HR, none will handle your HR in its entirety. The outsourced options can be tough to grasp and organize, complicating price shopping and decision-making.

Then there’s HR’s perceived value versus actual value. As McKinsey asserted in 2021, a company’s future-readiness and its HR go hand-in-hand. In other words, HR is not the place to nickel and dime. While businesses of course need to watch spending, this frames HR shopping in a new light. 

Follow along as we break down HR price shopping into a few key steps that will ensure right-fit HR decisions and spending for your business:

Step 1: Know what you need

Outsourced HR is a wildly modular space. Navigating its cost starts by understanding its parts. HR functions can be broken down into the following categories: 

• Compliance – This function ensures your business is abiding by regulations governing hiring, pay, benefits, and procedures; it is critical to safeguarding against liabilities and potential lawsuits.
• Management Counsel – Personalized leadership support for daily challenges and strategic decisions, helping ensure leaders and their teams thrive.
• Employee Relations – This function helps employees navigate personal and interpersonal hurdles, resulting in a vibrant, cohesive team and an uplifted workspace.
• Performance management – This aspect of HR supports employees and managers who oversee individual employees’ contributions and job performance – and related challenges.
• Hiring – Writing job descriptions and ads, screening resumes, conducting interviews, and executing background and reference checks are just a few aspects of this key function. Hiring must be aligned with a larger hiring strategy, also helmed by HR.
• Onboarding/offboarding – Onboarding manages all aspects of getting a new employee up and running. Offboarding separates an employee from your business when they leave or are terminated.
• Payroll administration – This is employee compensation and all things related, from calculations and cutting checks to deductions and PTO oversight.
• Benefits administration – Benefits administration works with various brokers across health insurance, retirement, disability, and other employee benefits, and runs related interference with employees.
• Career pathing/events planning/employee morale – Career pathing supports employees’ growth and satisfaction, with an eye on their career as a whole. Events create bonding opportunities. Combined, they advance employee morale. This is very important today as companies struggle to retain quality employees and hire new ones.   
• Compensation management – This function oversees paygrades and determines a company’s marketplace positioning related to pay. Also responsible for pay equality – an increasing relevant and regulated matter.

Step 2: Know your HR outsourcing options

Once you understand HR’s components you can start considering which to outsource and which (if any) to handle in-house – a matter intrinsically tied to cost.

Below are outsourced HR options and a loose sense of what and how they charge. Understand and probe the differences from one to the next. Too often we hear about companies that expected all pieces of HR to be handled when they outsourced, only to discover that – unless they hire a fully managed HR firm – that is never the case:

• Consultant or consulting firm – This is typically one person who handles HR work. Anywhere from $100-$400 per hour.
• PEO – PEOs handle a portion of HR but still require an in-house representative at your business for many tasks. They act as your payroll processing company, supplying paychecks and serving as your benefits broker. PEOs will not, however, handle compliance, performance management, or hiring, nor some portions of payroll, benefits, career pathing and compensation management. Of note: PEOs charge a percentage of payroll and, in a unique move, put your people on their payroll and lease them back to you.
• Staffing service/recruiter – These partners handle hiring only. For a temp to perm employee, they typically charge a markup on the payrate for 4 to 6 months (at which point you can hire the talent outright). For direct hires, you pay a percentage of the position’s total annual compensation – generally 20% to 30% (higher for hard-to-fill positions).
• Payroll/benefits company – Increasingly these are offered as software or HR hotlines, and are often exceptional tools. The pitfall: many claim they offer HR, when the actual offering is software to house your HR processes and documents. Do your homework and know precisely what you’re buying. Prices vary.
• Full-service HR outsourcing – These partners do it all.  Many have annual minimums. Some companies are concerned the price may take fully outsourced HR off the table. “At that cost, we should just hire our own an in-house HR,” is a common response. This conclusion accepts two assumptions: 1) that the cost of fully outsourced HR can be taken at face value, and 2) that one in-house HR representative is superior to fully outsourced HR.

We know that price related to HR cannot be taken at face value – that HR is, in fact, closely tied to businesses’ returns. Top-tier fully outsourced firms like myHR Partner operate accordingly. All myHR Partner employees, for example, are formally HR educated. We also structure our business for optimal client returns. Every myHR Partner client gets their own full HR department – three professionals (HR Director, HR Manager, HR Generalist) who step in and out as needed. This expertise and flexibility is far superior to what one in-house HR representative can ever provide. Learn more about how we approach pricing here. 

One last point: Businesses that see in-house HR as a savings opportunity are often overlooking its actual costs. Hire an in-house HR representative, and you’re on the hook for healthcare and insurance benefits, employee taxes, and other costs (the expense of a laptop and other equipment, for example) – expenses that quickly undo initial perceived savings.

Step 3: Know what to ask

Now it’s time to formulate the right questions to get a price from prospective outsourced HR providers and make informed decisions. A few we suggest asking: 

• What functions will be handled by the outsourced provider versus your business?
• Building on the previous question, what involvement does the outsourced provider need and expect from your company – and what is the expected time commitment? Can they describe the workflow in detail?  
• Inquire about staff education. Is staff formally educated in their function? This is a non-negotiable. Absence of formal educations puts your company at risk.
• What does their rate cover? What doesn’t it cover? How often do clients encounter overages, and why? If they charge hourly, how is that controlled? Ask about pay misconceptions and complications they’ve encountered with past clients to ensure you don’t repeat them.

In sum, approach outsourced HR decisions diligently, with a close eye on actual value and quality – not just face-value costs.

Not up for the task, or just want to rest easy knowing your HR is in the hands of pros? Reach out to myHR Partner.  

To learn more about outsourcing HR, check out our Indispensable HR Outsourcing Buyer’s Guide.