HR outsourcing from a CFO's perspective: cost structures, financial implications, PEO comparisons, and when the math actually works for you.
HR outsourcing from a CFO's perspective: cost structures, financial implications, PEO comparisons, and when the math actually works for you.
You're three weeks from a DOL audit, your controller is Googling "FMLA compliance," and your HR person just gave notice.
Yeah… You’re in a bit of a pickle.
Welcome to the million-dollar question:
Should you continue to keep HR In-house or Outsource?
Before you answer, you have to remember :
The person you see isn’t the only cost.
Behind that HR manager sits a stack of :
All of which quietly drains resources while appearing as "overhead" rather than a strategic investment.
The question is not whether HR matters or even if you need an HR department or role.
Obviously, it does, and you do.
The question is what makes the most financial and strategic sense for your business?
It's not about abandoning people management. It's about understanding unit economics, how risk is shared, and what HR administration really costs when you load it all up. When a company nails this, it frees up capital and executive time for work that truly builds value. When it misses, it drags along costly, non-scaling infrastructure for years.
So, let's look at HR outsourcing through the real lenses that matter, which are: financial impact, smoothness of operations, and strategic resourcing.
HR outsourcing is the practice of outsourcing some human resource activities to companies that specialize in those activities.
The company retains strategic control over its human resource activities, but the execution, compliance, and systems management of those activities are handled by companies that specialize in those activities.
The value proposition is obvious:
These companies can spread the fixed costs of these activities over hundreds of companies, leveraging the economies of scale, as well as the benefit of greater specialization than any company could afford on its own.
For companies with 20 to 200 employees, the cost advantages of HR outsourcing can be compelling.
Some of the common HR functions that companies may outsource include:
Payroll, for instance, can range from $4 to $8 per employee per month. Benefits administration would then be an additional $8 to $15 per employee per month.
Compliance support, of course, would depend on the level of complexity and the industry, but the real issue isn't that these functions are expensive; the real issue is whether you’re paying top dollar or are you spending double or triple what a specialized provider would charge you?
Let’s consider some of the real numbers that most executives gloss over.
The average salary of an HR generalist working in-house sits around $59,000 per year, according to Salary.com.
Tack on an additional 25% to 35% for benefits, taxes, and overhead.
This person can support 50 to 75 employees, and then you start having to hire more people.
This salary does not include :
The cost of your HRIS system can be around $8 to $20 per employee per month for midmarket solutions. The payroll system costs another $4 to $8 per employee per month. Then there are the costs of the employee benefits system, the applicant tracking system, performance management, and time management. The list goes on. For a 60-employee company, this can represent $15,000 to $25,000 per year just in system costs.
The cost of employment-related lawsuits averages $40,000 per case, even before litigation occurs. The cost of wage and hour, misclassification, FMLA administration, and many other risks is not just theoretical. It’s very real, and many providers have insurance policies to mitigate those risks. HR generalists, however, are left to fend for themselves.
When your HR person is not equipped to handle workers' compensation, FMLA, or other complex employee matters, who does the CEO turn to for answers? Outside legal counsel could be at $350 per hour. The cost of this consultation time adds up quickly, much more quickly than most CEOs realize.
The alternative model shows that the cost of HR outsourcing is about $50-$150 per employee per month for a full range of services. (Keep in mind these numbers vary across industries, platforms, and what solutions you need specifically)
For a 60-employee company, that's a yearly cost of around $65,000-$108,000.
It might seem similar or even higher in cost to hiring someone in-house, but the outsourced model provides systems, compliance, multi-state solutions, benefits brokerage, legal consultation, and, most importantly, redundancy.
When your in-house HR person goes on vacation or leaves the company, the HR function does not cease to exist.
Most of these systems are full-bodied as well, which means you're not paying a separate salary, and then separately for all of the tools. Think alacarte vs all-inclusive.
Ok, so you’ve decided you might want to go towards outsourcing, but now you’re seeing “PEO” services in many of your searches.
So, now you’re thinking, “ Do I need HRO or PEO services?”
Professional Employer Organizations, such as TriNet, Insperity, ADP TotalSource, Paychex PEO, and Justworks, essentially become a co-employer of your employees in a legal capacity, handling payroll and benefits and reporting as a separate entity with their own tax ID number.
What differentiates PEOs from HR outsourcing is that with a PEO, your employees are technically employees of the PEO, which provides access to enterprise-level benefits pricing, although it does require dependence on a third-party vendor.
With HR outsourcing, your company remains as the sole employer and simply outsources a part of your HR function, providing more flexibility but not access to enterprise-level benefits pricing.
The terminology gets muddy quickly, so here's the financial distinction that matters:\
There is a big difference between co-employment and traditional employment that is more than semantic in nature.
In a PEO, the employees are technically employed by the PEO, and the PEO leases the employees back to the company.
This provides a better pricing model for benefits, as the PEO aggregates the purchasing power of all of its clients, but it also puts the company in a position of dependency.
If the company wants to leave a PEO in the middle of a year, it requires re-enrolling all of the employees in new benefits, reinstituting workers' comp, and possibly disrupting payroll.
With HR Outsourcing, the company maintains its employer relationship with the employees, but the HRO provides the service work.
The financial calculation behind this is based on the fee structure of professional employer organizations (PEOs) and HR outsourcing.
PEOs typically charge between 2-8% of the total payroll, which translates to an expenditure of between $80,000 to $320,000, based on an annual payroll of $4 million.
HR outsourcing, on the other hand, has a fixed cost per employee per month, making it more predictable and not directly related to increases in salaries.
There is no single model that is superior to the others. It depends on your specific cost structure, growth strategy, and the level of control you need over your HR infrastructure.
HR administration is consuming too much executive time.
If your management team is expending more than 10 hours per month on HR matters that aren’t related to strategy or talent management, you’re misusing valuable resources.
As your organization expands across multiple states, new regulations come into play, and industry-specific regulations require consideration, the complexity is growing, and HR staff might not feel confident in handling it all.
If your organization is growing from 30 to 60 employees in 18 months, your HR infrastructure is probably being stretched beyond its capacity to adapt to the changing environment.
If your organization is adding headcount to the HR department simply to manage the administration, the cost savings of outsourcing likely outweigh the cost of investment in HR.
The truth is, this is not a project for a junior analyst who’s never had to perform make vs. buy analysis in any function. There’s modeling to perform on your current all-in costs, including the hidden executive time, as well as forecasting the growth curve and understanding where the business is headed.
Most companies face major inflection points in the business at employee counts of 25 (where founder-managed HR is no longer sufficient), 50 (where the complexity of compliance requires dedicated expertise), and 100+ (where the decision is between building out the full HR team or working with experienced professionals who offer the capability of the large HR firm at a fraction of the cost).
Cost structures vary significantly based on service scope and company profile, and depend on your choice between a PEO, HRO, or other fractional type of solution.
Per employee per month (PEPM) pricing is the most widely used model.
For basic services, which may include payroll, benefits, and compliance, the pricing is around $100 to $150 PEPM.
More comprehensive solutions, which may also include recruitment, performance management, and strategic consulting, may be priced around $150 to $200+ PEPM.
In a PEO relationship, the amount paid for the payroll-related services may be around 2 to 8% of the gross payroll, depending on workers' comp risk, benefit complexity, and headcount.
Fixed fees can be attractive for companies seeking a fixed-cost model.
The monthly fees for a full HR outsourcing solution can range from $8,000 to $12,000 for a company with approximately 75 employees. This amount doesn't fluctuate greatly with employee count.
The ROI analysis should include:
The lowest-cost vendor may be cutting corners on compliance, offering limited support availability, or using technology that won’t integrate with your existing infrastructure. It’s the false economy in its simplest, most obvious form.
A first-class approach to HR outsourcing will leave execution up to the vendor, while strategy and ownership remain in-house. Vendors who promise to “handle everything” will ultimately provide mediocrity in every area.
Your employees will know when their HR contact changes from Jane, who sits down the hall from their desk, to a 1-800 number. Change management is not an optional activity.
Your best relationship with an HR outsourcing vendor will involve regular strategic meetings, compliance updates, and joint problem resolution. If you only talk to your vendor when something is broken, then you’re not using the relationship correctly.
Beyond cost comparison, sophisticated financial leaders evaluate several strategic dimensions:
Your HR system should interface with your financial reports, working capital planning, and forecasting models. Ensure that your outsourcing vendor is capable of providing data export or system integration into your accounting system.
Be cautious of auto-renewal provisions, per-employee minimums, and termination penalties that could cause vendor lock-in. The best vendor relationships provide flexibility as your requirements change.
Reference companies similar to yours in stage, vendor financial condition, and depth of compliance capability are all important. Don’t select the low-cost vendor that causes employee relations problems.
HR system changes require time, often involve parallel processing, and require employee communications. Plan on 60 to 90 days to accomplish a clean implementation.
Think honestly for a second.
Most business executives simply do not have the time or resources to evaluate HR outsourcing properly while running the business.
This is precisely what seasoned financial leaders do with what appears to be a purchasing decision, converting it into a strategic capital allocation exercise.
Organizations that work with fractional CFOs do not just evaluate vendors; they model multiple scenarios, evaluate the cost of ownership over 3-5 year time periods, and tie HR infrastructure decisions into the overall financial strategy.
Let’s cut through all the technical stuff and talk about what really matters.
So, HR outsourcing is not about avoiding people management or offloading culture on someone else.
It’s about determining where your organization can develop some real competitive advantage and where you need specialized infrastructure.
You know HR administration is important.
You’re just not sure if it’s really cost-effective to develop in-house capabilities based on your growth rate, regulatory challenges, and the opportunity cost of executive time.
The reality is, many executives we work with are in the same situation.
They’re running organizations in the $5M to $50M revenue range.
They’ve outgrown founder-managed HR, but they haven’t reached the scale where they can afford a full HR department with deep-level specialists.
They’re in the expensive, sometimes messy middle, spending too much on patchwork solutions and lacking good capabilities.
The organizations we work with seem to be at three major decision points:
First, they recognize the true all-in cost of their current HR approach. Not just salaries—systems, consultant fees, executive time, compliance risk. When you map those costs honestly, the economics of specialist providers usually look substantially better than the status quo.
They also realize HR infrastructure decisions connect directly to growth capacity. Can you confidently expand into three new states next year? Hire 40 people in 24 months? The answer depends on whether your HR infrastructure scales efficiently or becomes a bottleneck.
Last, they understand that strategic HR decisions require financial modeling, not just operational preference. This is where experienced financial leadership transforms complexity into clarity.
Pondering the thought of fractional CFO assistance with ongoing strategy, interim CFO assistance during large change initiatives, or targeted assistance to enhance the analytics capabilities of your team?
The right financial guidance doesn’t make HR more complicated; it makes it clearer.
Financial leaders who are smart understand when to outsource the execution of a task to experts and when to own it within the company to remain competitive.
These are methods that have been utilized by financial leaders in various organizations, industries, and stages of growth.
Ready to transform HR from a cost center into a competitive advantage?
There is a large gap between being aware of the options available with HR outsourcing and effectively selecting and executing the right model.
It’s a matter of having financial acumen when you need it most.
HR outsourcing is when you hire professionals to help with HR activities like payroll, benefits, compliance, and HR technology. This way, the company can still make major decisions about its employees, but HR outsourcing firms will help with the details.
Well, the majority of people tend to outsource activities like payroll, tax services, benefits, HR compliance, onboarding, offboarding, and HR technology administration. You can choose the activities you need based on your capabilities and goals.
Well, it’s around $100 to $200 per month per employee, depending on the services you need. If you need more complex services, it’s going to cost more. PEOs charge 2 to 8 percent of the total payroll as their fee.
Yes, it’s definitely worth it, especially when the complexity of HR activities is too much to handle, when you need specialized compliance help, or when you need solid infrastructure to scale your business.
Well, HR outsourcing allows you to pick the services you need, but you remain the employer. You can still maintain a relationship with the vendor. On the other hand, a PEO is when the PEO is the employer of record, provides bundled services, and has access to better benefits pricing because of its size.
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