In or out?
Owners, experts weigh pros and cons of outsourcing HR
by Andrew Tellijohn Trying to prevent adhesions after endometriosis surgery? Contact Inlet Medical Inc. and someone at the company can probably help. Need to figure out how to treat uterine prolapse or retroversion? The medical device company specializes in minimally invasive laparoscopic products.
But if you’re looking for advice on the best way to pay employees or handle your Cobra insurance, you’ll probably have to go elsewhere.
Eden Prairie-based Inlet uses a professional employer organization (PEO), Doherty Employment Group, to manage each and every facet of its human resources department.
“It was looked at as a cost factor,” says Nancy Timm, controller and office manager for Inlet, whose 17 employees are even technically considered Doherty workers. The cost to do outsourcing “is the same as having an employee with experience in that area.”
While sources say the Inlet model is not the most typical, it is becoming increasingly common. So is the practice of outsourcing human resources functions individually, such as payroll, benefits management and staffing, especially for smaller companies. For expertise, cost and strategic reasons, more small businesses have passed the responsibility for managing such activities on to companies who focus on nothing else, sources say.
Prior to joining Inlet, Timm had never run across it. But she says she has been won over. Outsourcing costs the company about $45 per month per employee, and she says Inlet probably won’t change direction on the strategy anytime soon.
“If you want to know the truth, I really kind of like it,” she says. “It’s so organized.”
While the professional employer organization model is still largely being discovered, it is gaining in popularity, says Tim Doherty, CEO of Edina-based Doherty Employment. The company represents more than 12,000 employees in 50 states for its clients. While firms of all sizes outsource, the largest sector of Doherty’s clients range from 25 to 250 employees.
Partnering with a PEO allows those smaller firms to provide much richer benefit packages for workers than otherwise would be possible. “All of these services a large corporation would have are now made available to a company of 25 or 50,” Doherty says.
While the PEO doesn’t get involved in day-to-day operations with its clients’ businesses, the employees technically are employed by Doherty. “We’re there to assist the owners,” he says.
Outsourcing also allows smaller companies with limited resources to rest easily knowing that they aren’t going to violate the increasingly complex rules surrounding equal opportunity employment laws, taxes and other regulations.
The greatest testimony, Doherty says, is the retention rate. “Once a company gets involved in HR outsourcing it’s very, very rare for them to decide to take it back in house again.”
Piecemeal approach
While PEOs are growing in popularity, outsourcing individual human resources functions is still a more common approach. Accent Travel International Inc. has not gone to quite the same level as Inlet Medical with its human resources functions. But the Bloomington-based travel agency does outsource its payroll.
Using Wells Fargo to allow direct deposit, write payroll checks and especially file taxes reduces worry over missed deadlines and allows the company’s 10 employees to focus on servicing customers, the management believes.
“It’s nice to be sure all the taxes and stuff are properly done,” says Arnt Pederson, CEO.
“We’ve got enough administrative stuff to think about without doing that too. It’s not just the payroll — it’s the tax fillings, federal unemployment, FICA, all those different things. They take care of all the paperwork. It’s really just smart to outsource.
“We could do some of that, but we might end up making some mistakes.”
Pederson has been so happy with the success of his payroll outsourcing endeavor that he is now considering moving non-HR functions outside his company’s purview as well. Accent Travel is in the middle of a six-month trial period during which it will outsource most of its marketing and advertising activities. The experiment will at least temporarily allow him to avoid hiring someone to handle those functions internally.
It’s smart for a travel company to outsource its non-core functions “just like I think it’s smart for corporations to outsource their travel,” Pederson says.
And it’s not just the smallest of small businesses farming out this work. Medium-sized and larger small businesses are doing so, as well.
Minneapolis-based Creative Kidstuff has a half-dozen stores in the Twin Cities and another half-dozen at airports around the country. The retailer of children’s toys employs 130 full- and part-time workers and will add up to 70 more during the holiday rush.
While there might be a time when the 23-year-old retailer has enough resources to hire the internal staff necessary for managing human resources, it won’t be in the near future, says Roberta Bonoff, president and CEO.
“I only have two people in my accounting department,” she says. “We’re a small company and I can’t afford the administrative overhead. These companies make it very easy and affordable.”
The expertise and affordability provided by outsourcing companies are but two advantages clients get from the reduced internal workload, says Jeff Wagner, a consultant in the areas of organizational development and external and internal staffing.
They also give internal HR workers the opportunity to focus on more issues of strategic importance to their firms, such as succession planning, compensation and human capital.
“Today’s outsourced human resource applications are more the paperwork,” says Wagner, a partner with Savage-based Practical Leadership LLC, adding that by allowing such a shift, companies can do a better job of keeping employees happy.
“If a person is really connected to their job, the company generally does really well,” he says.
Outsourcing providers
There are many choices available for companies seeking to outsource any of their human resources functions, including specialized functions that in small firms may fall under the purview of general operations. The accountant, bookkeeper or office manager who does payroll, for example, may also be in charge of collections.
Pam Krank was a credit manager in 3M Co.’s San Francisco office when she realized few companies — even large ones with a multitude of resources — really managed their credit well.
“They would say ‘our sales are going well, but …,’ ” Krank says, adding that often all they would do to collect on the money they were owed was issue invoices and deposit checks. “That’s not enough. I realized companies just didn’t have the sophistication that we had at 3M. They really lacked the process and expertise to manage the asset.”
So, in 1992, Krank started The Credit Department Inc., which offers assistance to companies in setting up credit programs or manages such programs for them. The West St. Paul-based firm has expanded for several years, especially in serving “really large clients.” But Krank’s firm also has a thriving small-business clientele.
Most companies, Krank says, are realizing that accounts receivable “is an asset that needs to be actively managed. It needs to be managed like it is at risk … so you can ensure that it turns to cash.”
Payroll is the human resource function most frequently outsourced. Roseland, New Jersey-based Automatic Data Processing Inc. is the 800-pound gorilla. A close challenger nationally is Bloomington-based Ceridian Corp., which offers services from payroll processing to administration of retirement plans to compliance.
Outsourcing is being driven by increasingly complex regulations and the fear of hefty penalties for making mistakes, says Brian Regan, vice president of small-business solutions for Ceridian.
Potential clients will often contact Regan after they miss an upgrade or an adjustment to the tax code that creates a mistake, when a discrimination or audit request comes up and they realize they don’t have the required records, or when their payroll system fails the day before a big run of checks.
“The time it pulls him away from his core business is just too precious,” Regan says. “The value in terms of time returned is very apparent.”
Anecdotally, from conversations with Ceridian salespeople, Regan says clients also are using outsourcing firms more to help them recruit potential employees and narrow the interview field.
“The recruiting challenge has increased,” says Regan, adding that employers are bracing for another labor shortage.
Not for everyone
Outsourcing has become common practice, but that doesn’t mean every company has or will jump on board. Architectural Alliance, for example, internally uses software that ties accounting, billing, payroll and other human resources functions together.
While the Minneapolis-based architecture firm with 85 employees does use third-party vendors to manage its Cobra insurance and employee-assistance programs, company officials cite efficiencies and employee relationships as reasons the bulk of its human resources will stay within company walls.
Those officials see the benefits outsourcing can provide some companies, but they also think it’s more valuable to have issues-based discussions in-house with employees so they can gauge reactions and truly understand what their employees are thinking, and then react accordingly.
“We are a very hands-on type of organization with our employees,” says Cindy Ellsworth, treasurer. “I like to think we are pretty focused on understanding how important our employees are to our business.”
Not that other strategies can’t work, but Ellsworth says she’s heard from people that when human resource functions are outsourced, company officials often send them to the outsource company for answers to their questions.
“They basically say ‘just call so-and-so, and they’ll deal with you,’ ” she says.
Malinda Mehrhoff, human resources manager at Farmington-based Dakota Electric Association, agrees that sometimes outsourcing causes companies to lose human touch with their employees.
The non-profit electric utility does farm out its benefits pricing and will occasionally use consultants on other issues. But it prefers to keep in-house payroll, accounting, hiring, staffing and other issues that affect its 250-plus employees.
While acknowledging that rules and regulations frequently change, Mehrhoff says with the Internet, associations and other outlets, companies have plenty of access to up-to-date information.
Plus, handling the issues internally is a good sign for workers that the company cares. “We take care of our employees very well,” Mehrhoff says, and are “pretty sure that in-house is the way to go for us.”
[contact] Roberta Bonoff, Creative Kidstuff Inc.: 612.929.2431; www.creativekidstuff.com. Tim Doherty, Doherty Employment Group: 952.835.8888, tdoherty@dohertyhro.com; www.dohertyhro.com. Cindy Ellsworth/Eric Peterson, Architectural Alliance: 612.874.4102; epeterson@archalliance.com; www.archalliance.com. Pam Krank, The Credit Department Inc.: 651.451.0164; info@tcd.com; www.tcd.com. Malinda Mehrhoff, Dakota Electric Association: 651.463.6255; mmehrhoff@dakotaelectric.com; www.dakotaelectric.com. Arnt Pederson, Accent Travel International Inc.: 952.854.4440; arntp@accenttravelintl.com; www.accenttravelintl.com. Brian Regan, Ceridian Corp.: 800.937.2996; www.ceridiansmallbusiness.com. Nancy Timm, Inlet Medical Inc.: 952.942.5034; nancy.timm@inletmedical.com; www.inletmedical.com. Jeff Wagner, Practical Leadership LLC: 888.766.0050; jeff@practicalleadership.com; www.practicalleadership.com.
