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Does outsourcing HR make sense?

In today’s complicated world, access to HR expertise is necessary—even on a limited scale

The trend of outsourcing manufacturing is alive and well. Shops in Asia, Mexico, and the U.S. have benefited from this strategy when their customers choose to become simply final assemblers or marketers of a finished product and not a component manufacturer.

The belief is that these companies that eschew manufacturing of parts and subassemblies can focus on the core activities in which they have real expertise. Let the metal manufacturers do what they do best: fabricate metal parts.

At the supplier level, job shops probably are engaged in some level of outsourcing as well. Whether machining, painting, or plating, these shops likely rely on a subcontractor to provide a service that the fabricator simply isn’t in a position to tackle.

With outsourcing such an ingrained philosophy in manufacturing, doesn’t it make sense that it could be applied to the front office as well as the shop floor? After all, a core competency for a metal fabricator is making metal parts. That’s what customers are paying for, not processing orders, scheduling jobs, and the other administrative duties needed to ensure that people, materials, and equipment are ready to go so that parts can be delivered as promised.

For some fabricating operations, human resources (HR) is a prime candidate for outsourcing. HR expertise is needed for several functions, such as refining compensation programs and handling benefis, but the reality is that many of these fabricators simply don’t have enough employees or enough turnover to warrant a full-time HR manager.

The FABRICATOR chatted with HR consultant Arlene Vernon to find out when HR outsourcing is feasible for a metal fabricator and how these companies might approach it if they aren’t doing it already.

The FABRICATOR: When a manufacturer approaches you about outsourcing some HR activities, is it looking to outsource the entire HR function or address it on a task-by-task basis?

Arlene Vernon: It’s expensive to outsource the whole piece. So it really depends on a variety of things. First, what are the company’s unique needs? From a filing and administrative perspective, usually the company is going to give it to an administrative assistant or the accounting department.

Most of my clients don’t have a dedicated HR person. So if they have a lot of hiring to do, then they’re either going to give it to the managers to do, or they may say they will outsource hiring.

I do have some consulting peers that might work for an organization one or two days a week. So it’s outsourced, because it’s an independent contractor. Those companies know that they have regular needs, but they still don’t want to pay for a full-time HR person.

“If small and medium-sized manufacturers outsource certain HR functions, they don’t have to worry about health care reform for the most part. The task of trying to figure out how to integrate these new laws and regulations is left up to someone else.” —Arlene Vernon, Human Resources ConsultantThermal

FAB: What are the main motivations for a manufacturer to seek outside HR help?

Vernon: Benefits are the first thing to be outsourced, because you want to hire a benefits broker to select and help you design your plan. Then they will typically recommend, very wisely, to administer your COBRA, because you should not be self-administering COBRA. It’s a liability that isn’t worth the cost. Administration of COBRA costs are really small, but liability can be $100,000 for a claim. Health savings accounts and flexible savings accounts—that kind of benefits administration is outsourced. Retirement plan administration also is outsourced.

So the only thing that may be left, if you’re not outsourcing that too, would be premium payment. These are the adds, drops, and reconciliations associated with these types of plans. But that activity is doable by a trained person internally.

FAB: How about training? Can that part of HR be outsourced as well?

Vernon: If it’s job skills training, they may have someone in-house who can do that. Some companies might hire someone to develop the training in partnership with their experts. So the in-house expert is paired with the training expert, and they come up with an appropriate program. This is especially useful if a company is in a high-turnover setting.

FAB: What is the major threat to a company that doesn’t employ or have access to an HR professional?

Vernon: There is so much legislation that keeps coming at everybody that it’s hard to keep up. Here in Minnesota, this summer they changed seven laws related to pregnancy, pay, protected classification, and confidentiality. When you read about this, the average business owner or administrator wonders how the new laws apply to his or her organization. What do I need to do differently? What do my managers need to do differently? What do my employees need to know? What policies do I have to change? That’s really where the DIY approach typically doesn’t work because it becomes too intricate.

FAB: Is that the No. 1 unintended benefit of such an outsourced relationship?

Vernon: Yes. What are these small and medium-sized companies going to do? If they outsource certain HR functions, they don’t have to worry about health care reform for the most part. The task of trying to figure out how to integrate these new laws and regulations is left up to someone else.

Here’s an example of where HR expertise—even in an outsourced scenario—can make a difference. I tell my clients that probably the best thing that they can do is to buy employment practice liability insurance. You get it from the same people you buy your liability and property and casualty from. It protects you from being sued. You create your deductible. You want a $10,000 risk? Then that’s your deductible. You want a $5,000 risk? You pay more a month, but then your out-of-pocket is only $5,000 if you get sued. This insurance covers your legal expenses, court fees, and any damages.

FAB: Do manufacturers face unique HR challenges when compared to your clients in other industries?

Vernon: My manufacturing clients are struggling to find employees because we are educating our kids that hands-on work is not good. You know, why on earth would you want to do that?

That might be where HR could help them more. How do you market yourself? How do you find the right people? Do you institute training programs?

I have one large manufacturing client, a multinational company with about 400 employees in the U.S., that is initiating a whole internship trainee program with one of the local community colleges. They interviewed heavily, conducted psychological and personality assessments, and picked five people. They needed to find people to go out and fix their equipment. So they are putting them through a two-year training program, paying for their school, and developing these technical people who can go out and work on sophisticated equipment.

That HR person has the time to create those relationships and to work with the leaders to put the systems in place that retain the people. You just can’t afford to lose your people nowadays. You need to hire smart, which is tough because not everyone’s workplace is as easy to work in as another.

Even in small organizations, because that struggle to attract and retain is becoming harder and harder, I think that’s when HR becomes more important.

FAB: What advice do you have for a manufacturer looking to find an HR expert who is a good fit?

Vernon: I would first see if any industry peers are using anyone. Certain organizations partner with manufacturers. That would be a place to start.

When you find someone, you really want to click with the individual. Don’t select someone based on price alone. That’s an important thing.

There are a lot of people who lose their job and say, “OK, I’m going to be a consultant.” They find a few gigs, but then they get a job, because making a full-time income as an independent consultant takes a lot of time.

What’s most important is finding someone who is going to be honest with you. Find someone who will be direct and who understands your business. That someone really needs to be a true partner for you.

FAB: Are there any caution flags to watch out for?

Vernon: Well, I wouldn’t go with someone who is inexperienced. For example, I was working for a nonprofit organization that didn’t have any money, so we hired somebody very inexpensive. She claimed to know all these things, but when I ended up auditing her work, it wasn’t right. Your readers are not in a position to know what’s right and what’s wrong. So you really want to be sure you get consulting references, not just work references. You also want to make sure they haven’t done just one job or a couple of jobs that aren’t as broad as what your needs are.

Then test them out. See if they problem-solve the same way you do.

FAB: Any final advice?

Vernon: I think we all don’t ask for help enough.

I recently met with a company owner who said to me, “I hate this stuff.” I said, “I know, that’s why I have a business.”

His job is to grow his business and to have the vision to move it forward. His job is not to make sure he has a handbook and job descriptions. If he were doing that, his business would fail.

People should recognize their expertise, tap into that, be successful, and grow their business with their expertise. Then they can bring in the experts to do what they do best, so that the business owner can succeed. I think that’s really what it comes down to: Don’t be afraid to ask for help.

About the Author
The Fabricator

Dan Davis

Editor-in-Chief

2135 Point Blvd.

Elgin, IL 60123

815-227-8281

Dan Davis is editor-in-chief of The Fabricator, the industry's most widely circulated metal fabricating magazine, and its sister publications, The Tube & Pipe Journal and The Welder. He has been with the publications since April 2002.