Should You Outsource Your HR to an ASO or PEO?

One of the most frustrating aspects of working in HR can be the repetitive and sometimes tedious nature of the role. Research from isolved finds that 42% of HR leaders are spending between 4 – 10 hours a day answering repetitive questions from employees (e.g., how much PTO do I have, when am I scheduled).

That’s over half of their day, so it’s no wonder HR teams are struggling with burnout and fatigue more often than other departments. In fact, 98% of HR professionals say they’ve felt burned out at work in the last six months and 88% have dreaded work.

One solution? Employee self-service, which many organizations are encouraging as a way to give HR leaders more time back in their day. Today’s tech-savvy workers generally prefer a high level of self-service anyway, especially those who are accustomed to using these tools in their everyday lives.

However, sometimes self-service isn’t enough — and that’s where outsourcing comes in. Isolved’s research found that nearly 2 out of 3 leaders (64%) feel they could benefit from outsourcing HR tasks, and 58% plan to do so this year. Benefits administration and employee relations support top the list of tasks that HR leaders say they’re most likely to outsource.

There are several different approaches to outsourcing, but many companies choose to work with either an administrative service organization (ASO) or a professional employer organization (PEO). In fact, 74% of organizations currently work with an ASO and 59% work with a PEO.

If you’re just beginning to look into your options for outsourcing, then these terms may not be familiar to you. In today’s article I’ll discuss the key differences between these two types of HR service providers, summarize the benefits and disadvantages of each, and describe how they work with your organization and your HR team. Let’s take a look.

What is an ASO versus a PEO?

An ASO (administrative services organization) is a service provider that assists businesses with certain HR functions while allowing the company to maintain control over strategic decisions. ASOs typically handle administrative tasks such as payroll processing, benefits administration, compliance, and sometimes recruiting and onboarding. By outsourcing these administrative responsibilities, businesses can focus on core operations and strategy. The company remains the employer of record for its employees, meaning it retains legal and tax responsibilities.

A PEO (professional employer organization) is also an HR service provider but operates in a slightly different way compared to an ASO. In a PEO arrangement, the PEO becomes the employer of record for the client company's employees. This means the PEO handles various HR functions, including payroll, benefits administration, HR compliance, risk management, and sometimes even recruiting, training, and development. The PEO essentially co-employs the client company's workers, which allows the PEO to pool together multiple clients and leverage economies of scale for benefits and insurance purchasing.

What are the advantages and disadvantages of ASOs vs. PEOs?

It's crucial to carefully evaluate the advantages and disadvantages of both ASO and PEO models to determine which one aligns better with your organization's needs, resources, and long-term HR strategy. While they have some similarities, they also have distinct differences. Here are some of the benefits of ASOs and PEOs to consider:

Advantages of ASOs:

1. Flexibility: ASOs offer more flexibility in choosing specific HR services that suit your organization's needs. You can select and pay for individual services rather than bundling them all together.
2. Cost control: With an ASO, you have more control over your HR costs. You can opt for specific services as required, which can be more cost-effective compared to a comprehensive PEO package.
3. Retention of HR function: An ASO allows you to retain control over strategic HR decisions, such as hiring, firing, and performance management. It provides support and expertise while keeping the final decision-making authority with your organization.
4. Compliance assistance: ASOs can provide guidance and support to ensure compliance with labor laws, regulations, and HR best practices. They help you navigate complex legal requirements, reducing the risk of penalties or legal issues.

Advantages of PEOs:

1. Comprehensive HR solutions: PEOs offer a comprehensive suite of HR services, including payroll, benefits administration, workers' compensation, compliance, and more. This comprehensive approach can be beneficial for small and medium-sized businesses without an established HR department.
2. Cost savings: PEOs often have better bargaining power when it comes to employee benefits, insurance, and other HR-related costs. By pooling together multiple client companies, they can negotiate better rates and potentially offer more affordable benefits packages.
3. Reduced administrative burden: PEOs handle time-consuming administrative tasks, such as payroll processing, tax filings, and benefits administration. This allows your organization to focus on core business functions and strategic initiatives.
4. Expertise and support: PEOs provide HR expertise and guidance, particularly in complex areas like compliance and risk management. They can help you stay up-to-date with changing regulations and navigate HR challenges effectively.

While ASOs and PEOs each offer several benefits, they also have their respective disadvantages to consider. Here are some of the disadvantages of these models:

Disadvantages of ASOs:

1. Limited service scope: ASOs typically offer a narrower range of services compared to PEOs. They may not provide comprehensive solutions like payroll processing, benefits administration, or workers’ compensation, which could require you to manage multiple vendors for different HR functions.
2. More administrative responsibility: With an ASO, your organization retains more administrative responsibilities, such as payroll processing and tax filings. This can be challenging if you lack the necessary expertise or dedicated HR staff to handle these tasks efficiently.
3. Higher costs for specific services: While ASOs can be cost-effective for specific services you require, they may not provide the same economies of scale as PEOs. If you require a comprehensive set of HR services, it might be more expensive to individually purchase these services from an ASO compared to a bundled package from a PEO.

Disadvantages of PEOs:

1. Loss of control: By partnering with a PEO, you are entering into a co-employment relationship where the PEO becomes the employer of record for certain HR functions. This means you may have less control over certain HR decisions, such as employee benefits or vendor selection.
2. Potential for conflicts of interest: PEOs often have their preferred vendors for services like insurance or retirement plans. While this can provide convenience, it may limit your ability to select providers that best align with your organization's specific needs or preferences.
3. Long-term commitments: PEO contracts typically involve long-term commitments, often ranging from one to three years. If you decide to terminate the contract before its completion, it could result in significant financial penalties.
4. Complexity of transition: Moving from a PEO to another HR solution or bringing HR functions in-house can be complex and time-consuming. The transition process may involve transferring employee data, establishing new HR systems, and ensuring compliance with legal requirements.

Ultimately, the choice between ASO and PEO depends on your organization's specific needs, preferences, and existing HR infrastructure. Consider factors such as the level of control desired, the services required, and the size of your company to determine which option aligns best with your goals. And look for providers that have invested in scalable and secure product suites and partners, for example the isolved Network and the isolved People Cloud.

Thanks for reading — be sure to join the conversation on LinkedIn and let me know your thoughts on this topic!

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