Running a small business is hard. You are faced with uncertainty and you pull all-nighters. You lack resources and you feel like you’re making it up as you go. Your direction seems to change every other day. With so many challenges, how can one argue that startups don’t need an HR department? Well here are some top reasons:
1. Startups are Inherently Goal-Oriented
Making the next quarter's numbers doesn’t get anyone out of bed. At large organizations, HR measures employee performance and trains high-potential employees, provides strategic thinking and support to leadership, and recruits employees to join the company. HR makes sure the team is aligned with the company’s goals. These are all unnecessary in “small business land.”
Early in a startup’s life, (before hitting 50 employees), these functions are done collectively. The office space is tight and you’re together 24/7.If someone isn’t pulling their weight everyone immediately notices. At a startup, everyone is a high potential employee and all strategic thinking is done on the product. Everyone recruits. But at a startup, HR doesn’t need to keep employees aligned with the company’s goals. By their very nature, startups are intensely goal-oriented. We build and join startups to change the world.
2. Professional Emplolyer Organizations Provide the Backbone
Of course the back-office HR functions are crucial. People have to be paid. Benefits be provided, and taxes withheld. Thus, professional employer organizations (PEOs) partner with everyone in startup land.
Instead of creating the HR infrastructure, we outsource it to a PEO. Companies like Paychex handle payroll, health insurance, and 401(k).
The PEO enters into a co-employer relationship with the startup by which it becomes the HR, payroll, and benefits employer of record, and assumes the legal employer responsibility for employment tax, benefit plans, and other human resource purposes. The startup still controls all other day-to-day aspects of their employees. In this way, we get “big company” benefits through these services. If we tried to get benefits on our own we would pay much more per employee. When you compare what we spend with what we would spend without a PEO, we end up saving quite a bit of money.
3. Why Employees Join (& Stick Around)
In my experience, employees join a company and stay at jobs for three reasons:
We all are aware small businesses and startups can fail if they don’t prepare for growth. By outsourcing
non-core HR processes, companies can make sure they are ready to accommodate expansion when it occurs. Recent advances in Internet and communications technology allow startups to scale up faster than ever before. While exciting, this also poses dangers. Three-quarters of tech startups that fail do so because they scale without adequate preparation. One powerful approach to prepare for rapid growth is to engage a third party to handle human resources functions, such as recruiting, payroll, benefits and workers’ compensation. Outsourcing models range from services that handle a single process to “co-employer” approaches in which the vendor provides an array of services and becomes the employer of record for the company’s staff.
How Outsourced HR Drives Growth
Here are five ways HR outsourcing can help your company scale quickly and safely:
1. Devote resources to expansion. By containing costs and reducing HR risks and liabilities, outsourcing can give you more time to focus on critical business operations. Research shows that HR outsourcing can reduce the cost of the offloaded function by 20% to 30%.2
2. Access sophisticated IT. The best HR outsourcing firms employ cloud-based technology that can accommodate any rate of growth. By outsourcing, small businesses and startups are able to eliminate the need to buy new servers and upgrade software to support scaling.
3. Improve your talent pool. Finding and retaining good employees is one of the top concerns of small businesses. HR outsourcing can help you tap stronger talent by providing the HR infrastructure and benefits packages to become a best-in-class employer. You are also more likely to attract remote workers in areas where you want to expand your business.
4. Gain cross-border capabilities. Fast-growing companies may find themselves operating nationally and even globally before they are ready for it. For example, if you needed to hire an engineer to work remotely from another state or country, are you prepared to meet the applicable laws and tax rules? HR outsourcing can provide that support system.
5. Focus on what matters. Entrepreneurs can spend up to 40% of their time on nonrevenue-generating activities, such as payroll and human resource management. The need to concentrate on core business competencies is executives’ second biggest reason for outsourcing HR, after cost.
What to Look for in an HR Outsourcer
When evaluating HR outsourcers, look for ones that meet these criteria:
• Strong track record. The outsourcer needs to have solid client references, audited financial statements and a team of licensed HR personnel. It also should be experienced in the entire range of HR functions, including recruiting, training, benefits management and employee communications and problem resolution.
• Personal service. Many HR outsourcers serve clients primarily over the Internet. Look for one that also has staff members who can visit your company regularly, whether for open enrollment, employee relations, training programs or claims investigations.
• Ability to meet your needs. HR outsourcers often focus on niches based on industry or employee type. Look for one with strong experience assisting companies like yours. Also make sure the firm serves clients in various geographic locations, including the state where your business is located.
Other Types of Outsourcing
As you prepare your company for growth, you may want to review other opportunities to outsource beyond HR. Examples include:
• Accounting. Many small businesses outsource this back-office process, including audit and tax preparation.
• Marketing. Outsourcing options range from simple lead generation projects to managing entire campaigns across multiple channels.
• Supply chain management. Outsourcing can help relieve this burden while improving the speed and cost-effectiveness of sourcing.
• Customer relations. Some startups need assistance, especially if their core mission involves technical development and deployment.
Startups need to concentrate hard on business-critical issues to scale at a fast but safe pace. HR outsourcing offers an easy and highly effective way to achieve this. Ultimately, this type of outsourcing not only helps promote and safeguard your company’s growth but improves its ability to focus on its unique value proposition.