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A Case for HR Outsourcing: 5 Reasons Early- and Growth-Stage Companies Should Consider Working with a PEO

Startups and small businesses outsource a number of things: server space, legal services, and accounting are common examples, generally recognized as outside of the business’s core expertise. But when it comes to human resources (HR) management and operations (outside of payroll, of course), founders and business leaders have a tough time wrapping their heads around how outsourcing can help their business succeed. In this guest post, Bob Cerone, CEO of Cognos HR, shares his insight on the hidden opportunities and benefits that HR outsourcing can have for your business as it grows.

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Guest Author: Bob CeroneCEO, Cognos HR

As someone who has founded and run two HR outsourcing businesses, I acknowledge my bias on this topic, but after working with hundreds of small and growing businesses over the last 25 years, I’ve seen how good management of HR operations can be a significant competitive advantage for growing businesses. When handled correctly from an early stage, effective HR operations set the stage for efficient growth and a high-functioning workplace.

If you are a leader at an early-stage company looking to raise capital and grow rapidly, this article is for you.

Understanding HR

There are several reasons founders and business owners misunderstand HR. One is that HR is rarely a founder’s area of expertise, so the role it plays in their organization is less familiar to them. As the old adage goes, “you only know what you know.”

Another is that HR is harder to quantify and measure than other areas of the business. HR encompasses regular administrative functions like payroll, compliance, and benefits administration, but it also touches areas like company policy, hiring processes, risk management, employee satisfaction, retention, and career progression. These areas tend to operate in the background and go relatively unnoticed until a problem arises. When it does, it’s often very disruptive to the workplace and leadership’s time and attention, as they are then forced to step in and resolve things.

On this note, here are five advantages outsourcing HR can give your business as it grows.  

  • The Infrastructure to Scale 

Figuring out how to scale areas of your business as it grows can be challenging – it takes time, energy, and money. As your company grows, needs change – often faster than you expect. Why spend the time searching for service providers or building infrastructure from scratch?  

Working with a one-stop HR service provider like a PEO (professional employer organization, a type of HR outsourcing provider) allows you to plug directly into an existing system of payroll, group benefits, HR processes, and software systems that will accommodate your needs as you hire and grow. The tools are there when you need them, and when work needs to be done, you have a provider to turn to.

One of our clients, Brian Cody, CEO of academic journal management software company Scholastica, noted, “There are always things you know you need to do, but can technically wait another day. There are a lot of important but not strategic things that have to get done in a business. But as the founder, if you want to grow, you have to focus on what’s important and strategic.”

That’s exactly what outsourcing HR enables founders to do: it ensures that important tasks get done the right way the first time, which in turn creates more time to focus on the tasks that are important and strategic.

  • Group Benefits and the Ability to Attract and Retain Talent

Benefits are always important, but with unemployment as low as it is, prospective employees are being very selective. The good ones will interview you as much you interview them. If you want to attract the best, everything from the job description to the initial interview and onboarding process should be organized and well run.

When it comes to employee benefits, the PEO relationship offers a strong competitive advantage to its clients: group buying power and access to a full range of employee benefits programs normally reserved for larger organizations. This is particularly helpful for businesses under 50 full-time employees, who are subject to small-group rating on their group healthcare plans.

If you’re a 30-person company looking to hire people away from Fortune 500 organizations, the PEO relationship levels the playing field and allows you to compete. Additionally, your benefits administration, onboarding, and open enrollment processes will be handled by experienced HR professionals to ensure that your employee experience is top-notch.

  • Risk Management

Remember the Cubs’ 2016 "Try not to suck” motto? It wasn't the most inspirational, but it helped the team maintain perspective during tough moments and ultimately make history by winning the World Series. If your company is laser focused on product and growth, it’s easy to let your HR-related responsibilities fall by the wayside. The result is a less-than-desirable experience for your employees and some potentially expensive fines from the state or federal government. Outsourcing HR operations, support, and administration will help you avoid common HR management and employment-related mistakes.

If you’ve raised outside capital, you have the additional responsibility to your investors to make sure you’re doing everything you can to facilitate efficient growth. To this end, your HR provider will free up your time by handling essential but non-core activities like payroll reporting, unemployment, hiring and termination advising, state-by-state legal compliance, workplace compliance, developing an employee handbook, creating policies, and making sure you have necessary insurance (like workers’ comp).

Finally, a PEO offers another advantage: the unique nature of its service agreement allows you to further mitigate risk as the PEO shares in the liability related to all matters of employment. And when it comes to due diligence for future investments, mergers, or acquisitions, all your HR-related paperwork and record keeping will be nice and tidy.

As a result, investors often recommend that their portfolio companies consider working with a trusted PEO for their HR needs.

Pete Wilkins, Managing Director of Hyde Park Angels, the most active early-stage investor group in the Midwest share his thoughts, “Startups are inherently unpredictable, and the people who work at them are often faced with change and unexpected challenges. Having a trusted PEO who manages a startup's HR infrastructure is a really simple way for leaders to ensure that employees' fundamental needs are met reliably and scalably. It not only provides stability in a key area of the business, but it allows employees to focus their energy on the task that they're most equipped to handle: building a valuable company.”

  • A Trusted Go-To Expert

The value of the relationship with your HR expert manifests itself in several ways. For founders, your HR partner is someone you can turn to any time you have a concern or question around a new law, compliance issue, or change that may occur in your organization. Thinking about the best way to navigate an issue in the workplace or part ways with a long-time employee can take a toll on your mental and emotional state. Having a trusted HR expert to go to during those moments saves you more than just time and money.

For your employees, a dedicated HR professional is more than just a nice-to-have. it shows your team that you care about their needs being met. Ujjwal Gupta, co-founder and COO of BenchPrep, agrees. “The ability to talk to an expert is big,” he said. “And our employees really value that as well.”

Your employees work hard for your company, so having someone they can turn to with questions related to pay, benefits, or even a sensitive personal matter signals that you think they’re worth investing in. You might not be able to hire in-house HR staff, but you can outsource to the right HR partner, and still enjoy all the benefits of having an expert in your corner.

  • Stability in a Rapidly Changing Environment

As with most growing companies, there can be a lot of iterating along the way: product updates, priority shifts, opportunities that require fast action. These things are all part of the thrill and challenge of working in a startup.

But too much change will wear on your employees. Making sure payroll is run well, benefits are administered properly, employment documents are organized, and your PTO policy is clear goes a long way toward helping balance the fluctuations that happen. Think of it as a ballast to help balances your organization’s growth.

Outsourcing HR may not be for everyone, but we firmly believe it’s something every company should be aware of and consider. Eventually, if things go well and your business grows in size, your needs will change and so will the nature of the outsourcing partnership that helped you grow from a few to few hundred employees.

In these cases, you can restructure the nature of your partnership with your HR partner or look at bringing HR operations in house. Some of the more well known CognosHR alumni include companies like Sprout Social, Tempus, and Uptake.

If you have questions about how to offer benefits, when to outsource, who to outsource to – or if you just have a tricky HR-related issue you’re dealing with, feel free to reach out!

The opinions expressed here by 1871 guest writers are their own, not those of 1871. To learn more about Cognos HR, follow this link.

Topics: Insights

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