Outsourcing of HR vs. Fractional HR Staffing: What’s the Difference?

Whether you’re a small business looking to streamline operations or a growing company navigating complex workforce needs, managing HR functions efficiently can be a challenge. That’s why many companies turn to external solutions like HR outsourcing or fractional HR staffing to help them manage these essential tasks. But which approach is right for your business?

What Is HR Outsourcing?

HR outsourcing is a practice where businesses transfer the responsibility for some or all of their HR tasks to a third-party provider. This external provider handles functions such as payroll, benefits administration, compliance management, and recruitment. Essentially, HR outsourcing allows companies to focus on their core activities while an outside firm takes over HR management.

The types of HR functions typically outsourced include:

• Payroll and tax filing: Making sure that employees are paid on time and that all payroll taxes are properly calculated and remitted.
• Benefits management: Handling health insurance, retirement plans, and other employee benefits.
• Recruitment and onboarding: Managing the hiring process, from sourcing candidates to onboarding new hires.
• Compliance: Keeping the organization in adherence with local, state, and federal labor laws and regulations.

HR outsourcing is particularly useful for smaller organizations, which may lack the resources to build an internal HR team. These businesses tend to be located in a single state, have straightforward workforce needs, and prefer the simplicity of offloading HR responsibilities. For instance, a 20-person startup might outsource its HR functions to focus on growing its customer base rather than dealing with payroll and compliance.

Professional Employer’s Organization (PEO)

A professional employer organization (PEO) is a type of HR outsourcing provider that works with businesses through a co-employment model. This means the PEO becomes the “employer of record” for tax and benefits purposes, while the business retains control over day-to-day employee management. PEOs handle payroll, benefits, compliance, and other HR functions, offering a more hands-off solution for small businesses looking to reduce costs while ensuring that HR is managed effectively.

PEOs are ideal for smaller businesses that want access to affordable benefits packages and streamlined HR processes but don’t require in-house HR staff. By working with a PEO, these companies can benefit from shared services, such as group health insurance rates, while still retaining control over the operations that matter most.

HR Managed Services Provider (HR MSP)

An HR managed service provider offers a more custom outsourced solution compared to a PEO. While PEOs focus on co-employment and core HR functions, MSPs deliver a wide array of services, from talent management to strategic HR planning. MSPs typically serve larger companies or those with more complex needs, such as managing a workforce spread across multiple states or countries.

MSPs act as external vendors, managing everything from recruitment and performance reviews to employee engagement and retention strategies. They offer flexibility, allowing companies to access a range of HR services without committing to the overhead costs of hiring a full-time HR department.

What Is Fractional HR Staffing?

Unlike HR outsourcing, fractional HR staffing involves hiring an HR professional or team on a part-time basis to work directly within your organization. These professionals are brought in to manage specific HR tasks or objectives for a limited number of hours per week or month. Fractional HR staffing allows businesses to access experienced HR professionals without the expense of hiring full-time staff.

Fractional HR staffing is ideal for growing companies that need HR expertise but don’t yet need (or can afford) that expertise in-house permanently. It’s a flexible solution that enables businesses to scale their HR operations in line with their current needs and budget while still maintaining control over their people operations.

Organizations that are expanding rapidly but don’t have the resources or need for a particular HR expertise in-house permanently HR are a great fit for fractional HR, as they may require assistance with compliance, recruitment, performance management, leadership coaching, succession planning, or more.

For example, a scaling tech startup might hire a fractional HR manager to oversee compliance, employee training, and performance reviews. This arrangement allows the business to benefit from professional HR expertise without the long-term commitment and cost of a full-time senior HR professional.

Medium-sized enterprise businesses can also benefit from specialized HR expertise, such as improving employee engagement or developing leadership training programs, without committing to a full-time hire.

Even large enterprise businesses can benefit from fractional HR staffing. They can augment their current HR functions during busy seasons, unexpected (or expected) leaves of absence, or special projects, without adding to their headcount or payroll expenses.

Key Differences Between HR Outsourcing and Fractional Staffing

While both HR outsourcing and fractional staffing offer external solutions to manage HR functions, they are distinct in several key areas.

Oversight

HR Outsourcing

In an outsourcing model, the external provider manages the day-to-day HR functions. This approach can be beneficial for companies that want to step back from HR management and focus on other aspects of the business. As an example, outsourcing payroll, benefits administration, and performance management to a PEO can free up significant time and resources.

Fractional HR Staffing

With fractional staffing, the HR professional works directly within the company and provides hands-on support for HR tasks. This allows for more in-house control, as the business retains oversight of HR functions while benefiting from the expertise of a part-time HR professional. Often, the fractional HR staff help the organization further build out their people operations, preparing them to hire in that role permanently once they hit that stage of their growth.

Cost

HR Outsourcing

Outsourcing HR functions to an external provider can be a cost-effective solution, especially for small businesses. PEOs and MSPs typically offer packaged services at a fixed price, which can help businesses manage their HR costs predictably.

Fractional HR Staffing

While fractional staffing offers flexibility, it can be more expensive on a per-hour basis compared to outsourcing. Businesses pay for the specialized expertise of an HR professional, which can add up depending on the number of hours worked and the complexity of the tasks. However, this is offset by the value of having HR staff integrated with your team and the ability to flex up and down their hours as needed.

Flexibility

HR Outsourcing

Outsourcing is a great solution for businesses that want to hand off their HR responsibilities. However, it may lack the flexibility needed to respond quickly to internal changes or growing workforce needs.

Fractional HR Staffing

Fractional staffing offers more flexibility, allowing businesses to scale their HR support and expertise up or down as needed. This is ideal for companies in growth phases, have seasonal fluctuations in HR needs, or are building out a new (or their first) HR function.

Expertise

HR Outsourcing

Outsourcing providers offer a broad range of services, but their solutions are often more standardized and one-size-fits-all, meaning the services they provide may not be as tailored to the needs of each company they work with.

Fractional HR Staffing

Fractional HR professionals offer more specialized, personalized expertise. Since they work directly within the company, they develop a deeper understanding of the organization’s culture, processes, and workforce, which can result in more customized solutions.

Which One Is Right for Your Business?

Determining whether HR outsourcing or fractional HR staffing is the right choice for your business depends on several factors.

• What are your current HR needs? If you’d prefer payroll, compliance, or employee benefits on auto-pilot, HR outsourcing may be the best solution. However, if you’re looking for more specialized expertise, fractional HR staffing may be the better option.
• Do you need broad or specialized HR support? If your business would prefer general HR functions to be managed by a third-party, outsourcing might make more sense. However, if you’re looking for an expert in specific HR functions like leadership development or employee engagement, fractional staffing may offer more tailored support.
• How important is control over your HR processes? If you prefer a hands-off approach, HR outsourcing can help you delegate many of your HR responsibilities. But if in-house control is important, fractional HR staffing provides more direct oversight and collaboration.
• What is your budget? HR outsourcing can be more affordable for small businesses, especially when using a PEO. However, for growing businesses with more complex needs, fractional staffing may offer more value despite the higher hourly cost.

Talk to the Fractional Staffing Experts

If you’re ready to take the next step in optimizing your HR processes, the team at HR Collaborative can help. Contact us today to schedule a consultation and learn how we can help your business grow while staying compliant and efficient.