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.

Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

4 Reactions
  1. Very insightful information here. You are right that HR outsourcing is no longer a luxury but is also a way to make a business more efficient, legally compliant and also offer betters access to employee benefits packages. A Professional Employer Organization – PEO can offer HR outsourcing solutions delivering payroll, insurance and HR expertise to businesses ranging in size from 5 – 1000 employees. PEOs deliver a full suite of services including payroll, regulatory compliance, work comp insurance, human resources support, health insurance and retirement plans for small and medium sized companies. For a complete review of PEO options available from companies in the USA visit

  2. P.M.L and its members have been serving the needs of small and medium-sized businesses in the human resource field since 1985.

    By outsourcing human resources for your current employees, business owners can reduce employee overhead and administrative paperwork. Our service removes the non-productive tasks from your business so that you can concentrate on growing your business. It’s like having your own personal staff of human resource experts to handle all of your employee hassles.

    You can visit PML Woldwide at or call 800-567-0235.

  3. I think it is very obvious that the benefit to outsource is more and more evident in today’s economic downturn. Using a PEO to keep cost down will help keep the company cost effective and focused on business.

  4. While this is necessarily true, there is a lot of things you have to know about HR Outsourcing for small to mid-sized businesses outside of those two points. In my experience on this subject I have found all PEO and small business information in one place that takes this into more detail, which is at PEOcompare. This site takes this conversation further into finding all the affects that HR Outsourcing has on SMBs, as well as the advantages and disadvantages.