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Outsourcing Trends and Their Impact in a Tight Economy
While there are indications that the tight economy may be starting to turn around, small businesses may feel the squeeze for some time to come. The government has instituted certain economic incentives, but small business must also take matters into their own hands to offset rising operational costs and flat revenues. Many have done so by turning to Human Resources Outsourcing firms as a way reduce overhead and improve productivity. While some employers may select to outsource specific functions, others have opted for a complete outsourcing solution. Despite the sluggish economy, HR Outsourcing continues to gain momentum.
An Economic Slowdown
Despite some positive trends in the fourth quarter of 2007, such as an increase in consumer spending (up 2.0%), 280,000 new jobs, and an increase in exports (up 3.9%), many other trends impacting small business continued to remain flat, or on the decline:
- A 0.6% rise in the Gross Domestic Product (GDP)
- A steady decline in investment in the residential sector
- Corporate profits fell a total of $52.9 billion
- Exports slowed to an increase of only 2.8%, down from 6.5%
- A below 50 rating in the Supply Managements' manufacturing composite index (the lowest since April 2003), indicating the manufacturing industry was contracting
- Unemployment rose to 5.0%, the highest level since April 2005
- The National Federation of Independent Business (NFIB) found the Small Business Optimism Index down 3%
Source: Small Business Administration, Office of Advocacy, March 2008
2008 Economic Stimulus Act
In an effort to boost the economy, the government passed the Economic Stimulus Act of 2008 to provide tax incentives and rebates to businesses, in addition to providing rebates to individuals.
These incentives include a special 50-percent depreciation allowance for 2008 purchases and an increase in the small business expense limitation for tax years beginning in 2008.
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over several years. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property. Under the new law, a taxpayer is entitled to depreciate 50 percent of the adjusted basis of certain qualified property during the year that the property is placed in service.
In general, a qualifying taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. Under the new law, a qualifying business can expense up to $250,000 of property purchased by the taxpayer in a tax year beginning in 2008, replacing the previous limit of $128,000.
Early reports from the first half of 2008 indicate that the Economic Stimulus Act may have assisted corporations to slightly increase profitability and revenues.
- Corporate profits increased $5.2 billion, or 0.3 percent at a quarterly rate, in the first quarter, following a decrease of $52.9 billion in the fourth quarter.
- Domestic profits of financial corporations decreased $3.0 billion, or 0.7 percent, after decreasing $74.4 billion.
- Domestic profits of non-financial corporations increased $3.2 billion, or 0.4 percent, following a decrease of $34.3 billion.
Source: US Department of Commerce, Bureau of Economic Analysis, Q1 2008
While large corporations feel the impact of the tight economy, these factors are magnified for the small business owner and their recovery time is significantly longer. Furthermore, according to the Office of Advocacy, the annual cost per employee for small businesses was 45 percent higher than the cost for larger businesses, with 500 or more employees. As the affects of the tight economy continue to impact small business, more employers are beginning to pursue alternative solutions to alleviate their financial stress. Many are considering Human Resources Outsourcing for their business operations.
Key Outsourcing Drivers
- Access to outside expertise
- Improving service quality
- Ability to focus on core expertise
- High cost of remaining up-to-date with rapidly changing environments
- Eliminate high volume of low-value transactional activities
- Reduce Management distractions away from core business
- Leverage existing staff to focus on key competencies
- Reduce transaction costs
Economies of scale are the primary method through which an HRO firm can reduce a business' operational costs. By pooling hundreds, and even thousands of businesses, HRO firms aggregate health benefit plans, retirement plans, workers' compensation insurance, and legal expertise. Additionally, they can manage routine HR tasks more efficiently as the talent and infrastructure is already in place. When a small business joins the HRO firm, they simple access these existing programs at reduced rates and a minimal time investment.
Studies indicate that once HR operations are outsourced, many companies show a strong return on investment. IDC, a global provider of market intelligence, conducted a survey of American executives in 2006 and reported that almost 85 percent of the respondents saved as much as they spent on outsourcing. Over a quarter reported a savings of twice as much. And the savings, according to nearly 95 percent of the respondents, went toward operational performance and innovation
Beyond cost-savings, a professional HRO firm can also contribute to improving employee satisfaction. This allows companies in tight economic situations to retain their staff and saves the expense of recruitment and basic training. Employees in a human resources outsourcing relationship gain access to a wide range of benefits and perks typically only offered by larger corporations. In turn, improved morale, loyalty and commitment to their employer encourage greater productivity and longevity. These plans include a variety of employee benefit options, including but not limited to:
- Health insurance options including HMO, PPO and HSAs (Health Savings Accounts)
- Dental, Vision, and Health Insurance plans
- 401 (k) and Retirement plans
- Pre-tax Cafeteria plans, including Flexible Spending Accounts and Dependent Care deductions
- Credit Unions
- Voluntary benefits, such as Cancer, Travel, and Long-Term Disability plans
- Employee group discounts and perks.
The HRO firm's staff is generally responsible for the administration of the plans, from procuring benefits, conducting open-enrollment, answering employee questions, setting up employee deductions, and other communication activities.
Identifying the Functions to Outsource
The first step in considering an HR Outsourcing relationship is to identify those tasks that take key staff away from their prime purpose within the company. The most successful companies will be those that focus on the core business rather than spend money and use staff resources to managing unproductive tasks, such as benefits and retirement plans administration, managing HR compliance regulations, or processing payroll and taxes.
Although the same solution will not fit the needs of every company, a flexible HR outsourcing alternative can certainly help a company maximize profitability and reduce turnover. Payroll administration, recruitment and benefits administration are prime examples of specific functions that can be outsourced. Other firms may find it more productive to outsource their entire human resources function, thereby utilizing the skills of their existing HR personnel and other staff in areas more directly connected to the core business.
As stated, there is a need to compare HRO companies available, and determine the model that best suits your company's needs. Consider whether a specific processes within your business, or a fully integrated solution is required. There are many options available that should be considered before deciding on an HRO strategy.
A Surging Industry
According to IDC, the HR Outsourcing industry grew close to 70 percent over the past 5 years, with companies worldwide spending more than $103.3 billion in 2007, up significantly from the $61.2 billion spent in 2002. In the U.S., Everest Research Institute, an independent research and analysis organization, calculates that North American HR outsourcing transactions came to $21.2 billion in 2006 and reached $25.4 billion by the end of 2007. With an increase of 19 percent over that time period, outsourcing HR services has become the fastest growing segment of the broader business process outsourcing (BPO) industry.
Source: Everest Research Institute, Human Resources Outsourcing (HRO) Annual Report: November 2007
Despite the sluggish economy, the trend of Human Resources Outsourcing continues to grow and is based on two principal strategies:
- To save direct expenditure on administrative functions which do not directly contribute to the company wealth, such as payroll, reception and recruitment.
- To focus directly employed staff on the core business, so that cash is generated through improved productivity, quality and product development.
Both of these can contribute to stabilizing profits. Many firms will find that their business is a lot stronger than they were prior to outsourcing, even during this tight economy.
Companies should evaluate their human resources needs, and consider outsourcing where it is economically sound to do so. HRO costs should be considered against the money saved and earned through improved productivity and the increased market share that comes with a well run business in the tight economy.
Headquartered in Los Angeles, CPEhr is one of California's leading Human Resources Outsourcing firms. Founded in 1982, CPEhr has assisted hundreds of clients understand and comply with California's complex regulatory and insurance systems.
CPEhr began as a small payroll and HR provider, with 10 corporate employees. Over the past two-and-a-half decades, CPEhr has grown to employ close to 90 corporate professionals in the areas of Employment Administration, Labor Law Compliance, Management Training, Safety and Risk Management, Employee Benefits, Retirement Planning, Payroll and Accounting. CPEhr services 15,000 employees at over 300 client locations in 36 states.
CPEhr offers a flexible HR Outsourcing solution, wherein you can select from three programs, based on your company's needs:
- A PEO Solution offers the ultimate in employer service and protection. CPEhr creates a “Co-Employment” relationship in which they share the employment liability and administration with you.
- An HRP Solution offers the complete range of services offered under the PEO, without creating a Co-Employment relationship.
- The HRO Solution enables you to pick-and-chose the exact services needed, in a completely customized relationship.
We encourage you to contact us and schedule a complimentary HR Analysis of your California operation. In this no-obligation consultation a senior consultant will analyze your current human resources practices and offer a customized HR solution to meet your needs. Call us at 800-850-7133 or visit us on the web at www.cpehr.com.