The True Cost of Human Resources

Dave Reid

As a Business Development Consultant in the field of Human Resource Outsourcing, I am tasked with showing C-suite executives the true cost of their HR operations. Many times, in the minds of leadership, the barometer of this metric is housed purely on the Profit and Loss (P&L) statement of the corporation.  So, they simply go line by line down the P&L, adding up the totals, calculating the hard costs. When considering HR related costs, managers and owners often include the cost of outsourcing the payroll, the cost of a labor attorney, the cost of workers’ compensation insurance, and what they pay in benefits and unemployment taxes. Those are the typical costs associated with employment.

However, are these the true all-in costs of HR? Are there hidden costs that don’t appear on the P&L?

There are indeed a few overlooked, albeit very material, costs that are often left out of the equation.  Let’s explore what those are below:

Who Is Doing the HR?

In a traditional organization, a company has a head of HR, and sometimes, support staff under that person. If this is the case, all these salaries need to be included in the HR cost calculation (quite often they are not). That is an easy scenario to understand. Where it becomes more complex is when, for example, the CFO wears multiple hats and not only deals with the company financial tasks, but HR related matters as well.  This scenario happens a lot in the non-traditional business structures of small to mid-size companies, and, it is in this is where a proven PEO really delivers.

Calculating The Hidden HR Costs

In this scenario, one would ask, how many hours per week does the CFO spend on transactional HR related matters? Often, upward of 50% of a CFO’s time can be attributed to handling HR related functions.  If the CFO earns $100,000 per year, $50,000 can be assigned as a true HR cost calculation.

There are more hidden costs to consider as well.  For example, the soft costs like the time lost dealing with a non-revenue generating process at the expense of strategic thinking about revenue producing processes. Now I’ll admit, that is hard to put a number on, but it creates a lack of efficiency at best, and at worst, a loss of revenue. These types of distracting activities can truly restrict the growth of a company and are rarely factored into the true cost of a company’s HR.

What About Expertise?

You can hire the most experienced HR professional but due to the enormity of the human resource realm, they can quickly drown in a sea of transactional items and regulation changes that need to be tended to daily.  Ultimately, it’s still just one person managing not only employees, but also dealing with multiple vendors.

Human resource directors manage relationships with labor attorneys, brokers for healthcare insurance, payroll vendors, brokers for workers’ compensation insurance, all while attempting to stay compliant with the oft changing regulation of governmental compliance (oh, and don’t forget, reporting to the C suite executives!) When one talks about expertise, it is usually about one person who is overworked trying to keep up in multi-faceted areas of human resources. Either way utilizing a PEO is, without question, is the superior solution. A true PEO has an expert in every field of HR providing material depth and breadth to your HR department and is vital to the overall security of your business.

If the company lacks a traditional HR department, a relationship with a PEO is the perfect fit because it offers a turnkey solution to installing an HR department that is on level with most Fortune 500 companies at a fraction of the cost.  If the company has an HR Director, a PEO would fall in underneath them and then would become the arms and legs of the HR Director, carrying out all the needed tasks. This type of synergy offers an exponential gain in efficiency either way.  Think of the PEO as one group of experts, under one roof who are at the beckon call of the company. Now those strategic thinkers who previously were toiling with HR tasks and decisions can all be free to do revenue-producing activities.

A Final, Important Point

One only needs to look at the recent job cuts at General Motors Corporation to understand that there is a new way of doing business. Lean and efficient is the new organizational model and outsourcing is now the common business practice.  Why deal with things you can outsource to experts at a reduced cost?

When you look on paper at a PEO vs in-house HR Departments, it will become glaringly obvious that the PEO is the fiscal and operationally superior choice—one group of experts under one roof who does it faster, more efficiently, and at a lower cost. If you’re looking to stay competitive and ahead of your competitors, you should seriously consider working with a PEO like America’s Back Office.

To learn more about having us help you with your human resources outsourcing please call (586) 997-3377 or contact us today.

For more details on worker compensations, see our article, “The Definitive Guide to Workers Compensation”.