While there is no question that the professional employer organization (PEO) model that started in the 1980s can provide efficiencies for smaller organizations, the latest movement appears to be toward tailored outsourcing driven by business strategy.

It’s not that HR outsourcing (HRO) is declining. The outsourcing trend clearly continues, as shown by the following references:

The most common reason for engaging an HR outsourcing firm, according to Hewitt Associates, is still to reduce overhead. However, outsourcing and insourcing choices are increasingly driven by strategy versus cost, as noted in the Aberdeen Group 2011 HR Outsourcing Survey: “HRO is providing more of a strategic support… while still providing line leaders with tools to improve day-to-day talent management. This stands in contrast to the older notion of HRO as simply a way to reduce the tactical burden on HR.

“These data points reinforce the idea that HRO will go… from outsourcing the entire process to more of an a la carte approach,” says Kevin Martin, Aberdeen SVP of research operations. “More companies are keeping the core strengths in-house and outsourcing where strength is needed or where the task is very tactical or burdensome.”

In outsourcing decisions going forward, HR must go beyond capturing obvious cost reductions to maximizing overall return on investment. For example, a company may be saving $10,000 a year by outsourcing an administrative function, but could be incurring $80,000 a year in “bad hire” and turnover costs by not outsourcing recruitment for key roles. It is critical to outline the potential risk and revenue of all HR processes, particularly around key business drivers, and to make tailored outsourcing decisions.

Given AAIM’s objective of building strong employers, we recommend an HR outsourcing approach that provides flexibility and allows the tailoring of solutions across the employee lifecycle for both small and large organizations. We believe this approach best allows employers to define and drive the right strategies and modify HR programs as their business—and the market—changes. iBi