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Control capital costs. Cost-cutting may not be the only reason to outsource, but it's certainly a major factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business, and allows you to avoid large expenditures in the early stages of your business. Outsourcing can also make your firm more attractive to investors, since you're able to pump more capital directly into revenue-producing activities.
Increase efficiency. Companies that do everything themselves have much higher research, development, marketing, and distribution expenses, all of which must be passed on to customers. An outside provider's cost structure and economy of scale can give your firm an important competitive advantage.
Reduce labor costs. Hiring and training staff for short-term or peripheral projects can be very expensive, and temporary employees don't always live up to your expectations. Outsourcing lets you focus your human resources where you need them most.
Start new projects quickly. A good outsourcing firm has the resources to start a project right away. Handling the same project in-house might involve taking weeks or months to hire the right people, train them, and provide the support they need. And if a project requires major capital investments (such as building a series of distribution centers), the startup process can be even more difficult.
Focus on your core business. Every business has limited resources, and every manager has limited time and attention. Outsourcing can help your business to shift its focus from peripheral activities toward work that serves the customer, and it can help managers set their priorities more clearly.
Level the playing field. Most small firms simply can't afford to match the in-house support services that larger companies maintain. Outsourcing can help small firms act "big" by giving them access to the same economies of scale, efficiency, and expertise that large companies enjoy.
Reduce risk. Every business investment carries a certain amount of risk. Markets, competition, government regulations, financial conditions, and technologies all change very quickly. Outsourcing providers assume and manage this risk for you, and they generally are much better at deciding how to avoid risk in their areas of expertise.
Professional Employer Organizations (PEO): How Can My Business Benefit?
So how do you manage all your human resources responsibilities? Even with someone on staff dedicated to HR, you'll probably need to outsource some aspects. There are a number of options for outsourcing various elements of HR but the professional employer organization is a sort of one-stop shop to which small and medium-size businesses are increasingly turning. PEO is a company that specializes in taking care of all the responsibilities that come with employing people. By hiring a PEO, you are "getting out of the business of being an employer,"
PEOs started in the 1980s and have grown quickly in the past few years as the number of state and federal regulations has increased. There are about 700 PEOs in the United States serving more than 100,000 businesses with approximately 2.5 million employees, according to the National Association of Professional Employer Organizations, the trade association for the PEO industry. The primary distinction from other HR service providers is that the PEO actually becomes the legal employer of your workers and thus takes on the accompanying legal liabilities.
For a fee typically ranging from 2.5 percent to 8 percent of your payroll, the PEO "co-employs" your workers. (The fee depends on a number of factors, including the number of employees and the average salary level of your employees.) Co-employment means that each party is solely responsible for some aspects of employment while sharing other aspects. PEOs can handle the whole gamut of HR responsibilities, including benefits, payroll, taxes, workers' compensation, and regulatory compliance.
Because they take over most of the headaches of being an employer, PEOs are ideal for small businesses. In fact, most PEOs target companies that have 150 or fewer employees; the average client has 17 employees. Frequently a PEO arrangement is the only way a small business can offer benefits such as health insurance, dental and vision care, life insurance, retirement savings plans such as 401(k), Section 125 cafeteria plans (flexible spending accounts for health care and child care), job counseling, adoption assistance, and educational benefits. Most small businesses could neither afford nor manage these benefits on their own.
PEOs can offer such benefits because they pool the employees of all their clients together. A typical PEO last year handled human resources for 185 companies, for a total of 2,770 employees. With more employees, PEOs get better benefits at better rates. A health insurer would obviously be more interested in selling a group plan for thousands of employees than for just 10. In addition to bringing your employees more benefits and managing these plans for you, PEOs offer expert guidance through the maze of state and federal regulations. Today there are more than 100 federal and state agencies that regulate businesses. "There are things that may have nothing to do with running your business but everything to do with being an employer."
And finally, many PEOs market themselves as strategic HR consultants. "You can go and find vendors that do all the functions we do, however PEO’s bring it all together." "Owners who use a PEO are trying to be strategic in their management decisions." Typically, the PEO takes legal responsibility for matters involving HR management and compliance with employment laws. But what counts with government and regulatory agencies is the "employer of record," and PEOs are accepted as the employer of record in most states, including Ohio.
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