HR Outsourcing Affects SMBs

Outsourcing of human resources is a growing trend, impacting small businesses both positively and negatively.



According to Dataquest, HR business-process outsourcing (BPO) is expected to grow to a $58.5 billion industry in the U.S. by 2005 from $21.7 billion in 2000. Two intersecting trends are driving the acceleration in HR outsourcing: (1) the increasing complexity of the employment landscape, and (2) the globalization trend.



A recent article in Knowledge@Wharton states: "The reasons for the explosion in HR outsourcing are easy to fathom. In part, the reason is the growing complexity of HR regulation, which drives up the costs of compliance. Companies recognize that HR administrative functions don't generate revenues, but they can lower costs if outsourced. In addition, technology is now available that allows work to be done in low-wage countries, something that didn't exist in the past."



So how is HR outsourcing impacting the small and medium business market? Here are just two of the ways:

Small and medium HR providers are finding it harder to compete for a share of lucrative large-employer business. Historically, a high percentage of HR providers have been smaller enterprises. That's because the barriers to entry into fields such as recruiting, temporary services, training, and similar HR areas were low. It didn't require a huge investment in plant, equipment or technology to get started in these fields. As a result, each local market had its own local (small and midsize) providers. However, as the large HR players become more global, with the resources to set up offshore operations, smaller HR providers are finding it harder to compete at the same level. Industry consolidation and competition from larger providers are expected to intensify, taking a toll on smaller players.

More HR outsourcing solutions are coming on the market tailored specifically for the SMB market. As the employment landscape becomes more complex, smaller employers have more reason than ever to outsource HR functions. In the past it was hard for a small business to justify outsourcing. In many cases HR was a luxury smaller employers could not afford, except for "essential" functions like payroll. But today, employers are faced with so many regulations that skilled HR expertise is becoming a necessity in order to stay out of hot water. In turn, this has led to the birth of a whole segment of outsourced providers with solutions tailored for smaller employers, at price points they can afford. Many of those providers are themselves SMBs who are carving out a niche serving other small and midsize businesses.